UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)



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

For the quarterly period ended September 30, ~~2019~~2020



☐			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
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

1110 W. Commercial Blvd., Fort Lauderdale,, Florida33309

(Address of principal executive offices) (Zip Code)

(~~954~~) (954) 958-1200

(Registrant’s telephone number, including area code)

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, $0.01 Par Value	UVE	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller 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 is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: ~~33,211,481~~31,334,080 shares of common stock, par value $0.01 per share, outstanding on October ~~29, 2019.~~

26, 2020.

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UNIVERSAL INSURANCE HOLDINGS, INC.

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PART I – FINANCIAL INFORMATION
		Page No.
Item 1.	Financial Statements:	4
	Condensed Consolidated Balance Sheets as of September 30, ~~2019~~2020 and December 31, ~~2018~~2019 (unaudited)	4
	Condensed Consolidated Statements of Income for the three and ~~nine-month~~nine -month periods ended September 30, 2020 and 2019 ~~and 2018~~ (unaudited)	5
	Condensed Consolidated Statements of Comprehensive Income for the three and ~~nine-month~~nine -month periods ended September 30, 2020 and 2019 ~~and 2018~~ (unaudited)	5
	Condensed Consolidated Statements of Stockholders’ Equity for the ~~nine-month~~nine -month periods ended September 30, 2020 and 2019 ~~and 2018~~ (unaudited)	6
	Condensed Consolidated Statements of Cash Flows for the ~~nine-month~~nine -month periods ended September 30, 2020 and 2019 ~~and 2018~~ (unaudited)	8
	Notes to Condensed Consolidated Financial Statements (unaudited)	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2931
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	4351
Item 4.	Controls and Procedures	4553
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	4553
Item 1A.	Risk Factors	4553
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	4553
Item 6.	Exhibits	4755
Signatures		4856

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To ~~The~~the Board of Directors and Stockholders of

Universal Insurance Holdings, Inc. and Subsidiaries

Fort Lauderdale, Florida

RESULTS OF REVIEW OF INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

We have reviewed the accompanying condensed consolidated balance sheet of Universal Insurance Holdings, Inc. and its wholly-owned subsidiaries (the “Company”) as of September 30, ~~2019~~2020 and the related condensed consolidated statements of income, and comprehensive income for the three-month and nine-month periods ended September 30, ~~2019~~2020 and ~~2018~~2019 and the related condensed consolidated ~~statements~~statement of stockholders’ equity and statement of cash flows for the nine-month periods ended September 30, ~~2019~~2020 and ~~2018. These~~2019. Based on our review, we are not aware of any material modifications that should be made to the accompanying interim financial statements ~~are~~for them to be in conformity with accounting principles generally accepted in the ~~responsibility~~United States of ~~the Company’s management.~~America.

We ~~conducted our review~~have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States). (“PCAOB”), the consolidated balance sheet of Universal Insurance Holdings, Inc. and Subsidiaries as of December 31, 2019 and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for the year then ended (not presented herein) and we expressed an unqualified audit opinion on those consolidated financial statements in our report dated March 2, 2020. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2019, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

BASIS FOR REVIEW RESULTS

These interim financial statements are the responsibility of the Company’s management. We conducted our review in accordance with the standards of the PCAOB. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the ~~Public Company Accounting Oversight Board (United States),~~PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

~~Based on our review, we~~

We are ~~not aware of any material modifications that should~~a public accounting firm registered with the PCAOB and are required to be ~~made~~independent with respect to the ~~accompanying interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.~~

~~We have previously audited,~~Company in accordance with the ~~standards~~U.S. federal securities laws and the applicable rules and regulations of the ~~Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Universal Insurance Holdings, Inc.~~Securities and ~~Subsidiaries as of December 31, 2018~~Exchange Commission and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for the year then ended (not presented herein) and we expressed an unqualified audit opinion on those consolidated financial statements in our report dated March 1, 2019. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2018, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.PCAOB.

/s/ Plante & Moran, PLLC

Chicago, Illinois

~~November 4, 2019~~October 30, 2020

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PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

(in thousands, except per share data)


	As of
	September 30,		December 31,
	2020		2019
ASSETS
Available-for-sale debt securities, at fair value, net of allowance for credit loss of $470 (amortized cost: $840,646 and $828,336)	$	842,574	$	855,284

Equity securities, at fair value (cost: $54,668 and $43,523)	52,700		43,717
Investment real estate, net	15,280		15,585
Total invested assets	910,554		914,586

Cash and cash equivalents	405,132		182,109
Restricted cash and cash equivalents	21,115		2,635
Prepaid reinsurance premiums	333,062		175,208
Reinsurance recoverable	95,078		193,236

Premiums receivable, net	76,800		63,883
Property and equipment, net	52,300		41,351
Deferred policy acquisition costs	111,295		91,882
Income taxes recoverable	26,383		34,283
Deferred income tax asset, net	1,473		3,351
Other assets	16,992		17,328
Total assets	$	2,050,184	$	1,719,852
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Unpaid losses and loss adjustment expenses	$	202,720	$	267,760
Unearned premiums	789,137		661,279
Advance premium	55,334		30,975
Payable for securities purchased	98,177		0
Book overdraft	0		90,401
Reinsurance payable, net	351,255		122,581


Other liabilities and accrued expenses	69,975		43,029
Long-term debt	8,823		9,926
Total liabilities	1,575,421		1,225,951

Commitments and Contingencies (Note 12)

STOCKHOLDERS’ EQUITY:
Cumulative convertible preferred stock, $0.01 par value	0		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, $0.01 par value	468		467
Authorized shares - 55,000
Issued shares - 46,821 and 46,707
Outstanding shares - 31,334 and 32,638
Treasury shares, at cost - 15,487 and 14,069	(223,086)		(196,585)
Additional paid-in capital	101,438		96,036
Accumulated other comprehensive income, net of taxes	1,662		20,364
Retained earnings	594,281		573,619
Total stockholders’ equity	474,763		493,901
Total liabilities and stockholders’ equity	$	2,050,184	$	1,719,852

As of
September 30,
2019 December 31,
2018
ASSETS
Available-for-sale debt securities, at fair value (amortized cost: $850,658 and $831,127) $ 878,567
$ 820,438
Equity securities, at fair value (amortized cost: $43,772 and $86,271) 43,141
63,277
Investment real estate, net 15,688
24,439
Total invested assets 937,396
908,154

Cash and cash equivalents 159,638
166,428
Restricted cash and cash equivalents 2,635
2,635
Prepaid reinsurance premiums 280,297
142,750
Reinsurance recoverable 217,301
418,603
Premium receivable, net 70,388
59,858
Property and equipment, net 41,016
34,991
Deferred policy acquisition costs 94,820
84,686
Income taxes recoverable 9,860
11,159
Deferred income tax asset, net —
14,586
Other assets 15,927
14,540
Total assets $ 1,829,278
$ 1,858,390
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Unpaid losses and loss adjustment expenses $ 166,342
$ 472,829
Unearned premiums 680,195
601,679
Advance premium 40,669
26,222
Accounts payable 3,396
3,059
Book overdraft 1,692
102,843
Reinsurance payable, net 300,094
93,306
Deferred income tax liability, net 2,571
—
Other liabilities and accrued expenses 55,044
45,422
Long-term debt 10,294
11,397
Total liabilities 1,260,297
1,356,757

Commitments and Contingencies (Note 12)

STOCKHOLDERS’ EQUITY:
Cumulative convertible preferred stock, $.01 par value —
—
Authorized shares - 1,000
Issued shares - 10 and 10
Outstanding shares - 10 and 10
Minimum liquidation preference, $9.99 and $9.99 per share
Common stock, $.01 par value 467
465
Authorized shares - 55,000
Issued shares - 46,713 and 46,514
Outstanding shares - 33,211 and 34,783
Treasury shares, at cost - 13,502 and 11,731 (180,331 ) (130,399 )
Additional paid-in capital 93,546
86,353
Accumulated other comprehensive income (loss), net of taxes 21,089
(8,010 )
Retained earnings 634,210
553,224
Total stockholders’ equity 568,981
501,633
Total liabilities and stockholders’ equity $ 1,829,278
$ 1,858,390

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

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UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited)

(in thousands, except per share data)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
PREMIUMS EARNED AND OTHER REVENUES
Direct premiums written	$	409,418	$	342,872	$	1,148,656	$	990,066
Change in unearned premium	(52,210)		(29,807)		(127,858)		(78,516)
Direct premium earned	357,208		313,065		1,020,798		911,550
Ceded premium earned	(123,017)		(106,466)		(339,408)		(284,867)
Premiums earned, net	234,191		206,599		681,390		626,683
Net investment income	4,557		7,613		17,570		23,165
Net realized gains (losses) on investments	53,827		(22)		54,294		(13,152)
Net change in unrealized gains (losses) of equity securities	1,991		573		(2,162)		22,364
Commission revenue	8,997		7,380		23,770		18,933
Policy fees	6,167		5,569		18,253		16,587
Other revenue	1,935		1,929		6,529		5,369
Total premiums earned and other revenues	311,665		229,641		799,644		699,949
OPERATING COSTS AND EXPENSES
Losses and loss adjustment expenses	238,477		132,571		524,870		358,961
General and administrative expenses	76,980		69,174		223,544		208,418
Total operating costs and expenses	315,457		201,745		748,414		567,379
INCOME (LOSS) BEFORE INCOME TAXES	(3,792)		27,896		51,230		132,570
Income tax expense (benefit)	(623)		7,750		14,450		34,983
NET INCOME (LOSS)	$	(3,169)	$	20,146	$	36,780	$	97,587
Basic earnings (loss) per common share	$	(0.10)	$	0.60	$	1.14	$	2.85
Weighted average common shares outstanding - Basic	31,659		33,649		32,116		34,230
Diluted earnings (loss) per common share	$	(0.10)	$	0.59	$	1.14	$	2.82
Weighted average common shares outstanding - Diluted	31,659		33,930		32,202		34,565
Cash dividend declared per common share	$	0.16	$	0.16	$	0.48	$	0.48

Three Months Ended
September 30, Nine Months Ended
September 30,
2019 2018 2019 2018
PREMIUMS EARNED AND OTHER REVENUES
Direct premiums written $ 342,872
$ 309,176
$ 990,066
$ 921,941
Change in unearned premium (29,807 ) (20,772 ) (78,516 ) (97,249 )
Direct premium earned 313,065
288,404
911,550
824,692
Ceded premium earned (106,466 ) (99,466 ) (284,867 ) (260,905 )
Premiums earned, net 206,599
188,938
626,683
563,787
Net investment income 7,613
6,642
23,165
17,213
Net realized gains (losses) on investments (22 ) 403
(13,152 ) (2,093 )
Net change in unrealized gains (losses) of equity securities 573
(2,473 ) 22,364
(9,103 )
Commission revenue 7,380
5,658
18,933
16,638
Policy fees 5,569
5,204
16,587
15,743
Other revenue 1,929
1,783
5,369
5,258
Total premiums earned and other revenues 229,641
206,155
699,949
607,443
OPERATING COSTS AND EXPENSES

Losses and loss adjustment expenses 132,571
85,947
358,961
251,715
General and administrative expenses 69,174
69,041
208,418
191,614
Total operating costs and expenses 201,745
154,988
567,379
443,329
INCOME BEFORE INCOME TAXES 27,896
51,167
132,570
164,114
Income tax expense 7,750
13,787
34,983
40,595
NET INCOME $ 20,146
$ 37,380
$ 97,587
$ 123,519
Basic earnings per common share $ 0.60
$ 1.07
$ 2.85
$ 3.54
Weighted average common shares outstanding - Basic 33,649
34,861
34,230
34,870
Diluted earnings per common share $ 0.59
$ 1.04
$ 2.82
$ 3.45
Weighted average common shares outstanding - Diluted 33,930
35,919
34,565
35,754
Cash dividend declared per common share $ 0.16
$ 0.16
$ 0.48
$ 0.44

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

Three Months Ended
September 30, Nine Months Ended
September 30,
2019 2018 2019 2018
Net income $ 20,146
$ 37,380
$ 97,587
$ 123,519
Other comprehensive income (loss), net of taxes 5,160
(737 ) 29,099
(6,636 )
Comprehensive income $ 25,306
$ 36,643
$ 126,686
$ 116,883


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Net income (loss)	$	(3,169)	$	20,146	$	36,780	$	97,587
Other comprehensive income (loss), net of taxes	(36,421)		5,160		(19,299)		29,099
Comprehensive income (loss)	$	(39,590)	$	25,306	$	17,481	$	126,686

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

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UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, ~~2019~~2020 AND ~~2018~~2019 (unaudited)

(in thousands, except per share data)


																												Treasury Shares		Common Shares Issued	Preferred Shares Issued	Common Stock Amount		Preferred Stock Amount		Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Treasury Shares, at Cost		Total Stockholders’ Equity
Balance, December 31, 2019																											Balance, December 31, 2019	(14,069)		46,707	10	$	467	$	—	$	96,036	$	573,619	$	20,364	$	(196,585)	$	493,901
Cumulative effect of changes in accounting principle (ASU 2016-13)																											Cumulative effect of changes in accounting principle (ASU 2016-13)	—		—	—	—		—		—		(597)		597		—		0
Balance, January 1, 2020																											Balance, January 1, 2020	(14,069)		46,707	10	467		—		96,036		573,022		20,961		(196,585)		493,901
Vesting of performance share units																											Vesting of performance share units	(25)	(1)	83	—	1		—		(1)		—		—		(646)		(646)
Grant and issue of stock award																											Grant and issue of stock award	—		1	—	—		—		30		—		—		—		30
	Treasury Shares			Common Shares Issued		Preferred Shares Issued	Common Stock Amount			Preferred Stock Amount		Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Shares, at Cost			Total Stockholders’ Equity
Balance, December 31, 2018	(11,731	)		46,514		10	$	465		$	—	$	86,353		$	553,224		$	(8,010	)	$	(130,399	)	$	501,633
Vesting of performance share units	(56	)	⁽¹⁾	148		—	2			—		(2		)	—			—			(2,069		)	(2,069		)
Grants and vesting of restricted stock	(5	)	⁽¹⁾	25		—	—			—		—			—			—			(166		)	(166		)
Stock option exercises	(36	)	⁽¹⁾	84		—	1			—		1,438			—			—			(1,367		)	72
Retirement of treasury shares	97			(97	)	—	(1		)	—		(3,601		)	—			—			3,602			—			Retirement of treasury shares	25	(1)	(25)	—	—		—		(646)		—		—		646		0
Purchases of treasury stock	(321	)		—		—	—			—		—			—			—			(10,117		)	(10,117		)	Purchases of treasury stock	(312)		—	—	—		—		—		—		—		(6,587)		(6,587)
Share-based compensation	—			—		—	—			—		3,140			—			—			—			3,140			Share-based compensation	—		—	—	—		—		1,691		—		—		—		1,691
Net income	—			—		—	—			—		—			40,148			—			—			40,148			Net income	—		—	—	—		—		—		20,067		—		—		20,067
Change in net unrealized gains (losses), net of taxes	—			—		—	—			—		—			—			11,984			—			11,984
Other comprehensive loss, net of taxes																											Other comprehensive loss, net of taxes	—		—	—	—		—		—		—		(8,946)		—		(8,946)
Declaration of dividends ($0.16 per common share and $0.25 per preferred share)	—			—		—	—			—		—			(5,575		)	—			—			(5,575		)	Declaration of dividends ($0.16 per common share and $0.25 per preferred share)	—		—	—	—		—		—		(5,222)		—		—		(5,222)
Balance, March 31, 2019	(12,052	)		46,674		10	467			—		87,328			587,797			3,974			(140,516		)	539,050
Grants and vesting of restricted stock	(14	)	⁽¹⁾	25		—	—			—		—			—			—			(402		)	(402		)
Stock option exercises	(14	)	⁽¹⁾	27		—	—			—		403			—			—			(414		)	(11		)
Balance, March 31, 2020																											Balance, March 31, 2020	(14,381)		46,766	10	468		—		97,110		587,867		12,015		(203,172)		494,288
Vesting of restricted stock units																											Vesting of restricted stock units	(25)	(1)	65	—	—		—		—		—		—		(424)		(424)

Retirement of treasury shares	28			(28	)	—	—			—		(816		)	—			—			816			—			Retirement of treasury shares	25	(1)	(25)	—	—		—		(424)		—		—		424		0
Purchases of treasury stock	(486	)		—		—	—			—		—			—			—			(14,107		)	(14,107		)	Purchases of treasury stock	(572)		—	—	—		—		—		—		—		(10,029)		(10,029)
Share-based compensation	—			—		—	—			—		3,311			—			—			—			3,311			Share-based compensation	—		—	—	—		—		3,082		—		—		—		3,082
Net income	—			—		—	—			—		—			37,293			—			—			37,293			Net income	—		—	—	—		—		—		19,882		—		—		19,882
Change in net unrealized gains (losses), net of taxes	—			—		—	—			—		—			—			11,955			—			11,955
Declaration of dividends for second quarter ($0.16 per common share and $0.25 per preferred share)	—			—		—	—			—		—			(5,547		)	—			—			(5,547		)
Declaration of dividends for third quarter ($0.16 per common share)	—			—		—	—			—		—			(5,476		)	—			—			(5,476		)
Balance, June 30, 2019	(12,538	)		46,698		10	467			—		90,226			614,067			15,929			(154,623		)	566,066
Other comprehensive income, net of taxes																											Other comprehensive income, net of taxes	—		—	—	—		—		—		—		26,068		—		26,068
Declaration of dividends ($0.16 per common share and $0.25 per preferred share)																											Declaration of dividends ($0.16 per common share and $0.25 per preferred share)	—		—	—	—		—		—		(5,166)		—		—		(5,166)

Balance, June 30, 2020																											Balance, June 30, 2020	(14,953)		46,806	10	468		—		99,768		602,583		38,083		(213,201)		527,701
Vesting of restricted stock units	(10	)	⁽¹⁾	25		—	—			—		—			—			—			(259		)	(259		)	Vesting of restricted stock units	(10)	(1)	25	—	—		—		—		—		—		(184)		(184)
Stock option exercises	(2	)	⁽¹⁾	2		—	—			—		54			—			—			(59		)	(5		)

Retirement of treasury shares	12			(12	)	—	—			—		(318		)	—			—			318			—			Retirement of treasury shares	10	(1)	(10)	—	—		—		(184)		—		—		184		0
Purchases of treasury stock	(964	)		—		—	—			—		—			—			—			(25,708		)	(25,708		)	Purchases of treasury stock	(534)		—	—	—		—		—		—		—		(9,885)		(9,885)
Share-based compensation	—			—		—	—			—		3,584			—			—			—			3,584			Share-based compensation	—		—	—	—		—		1,854		—		—		—		1,854
Net income	—			—		—	—			—		—			20,146			—			—			20,146
Change in net unrealized gains (losses), net of taxes	—			—		—	—			—		—			—			5,160			—			5,160
Declaration of dividends ($0.25 per preferred share)	—			—		—	—			—		—			(3		)	—			—			(3		)
Balance, September 30, 2019	(13,502	)		46,713		10	$	467		$	—	$	93,546		$	634,210		$	21,089		$	(180,331	)	$	568,981
Net loss																											Net loss	—		—	—	—		—		—		(3,169)		—		—		(3,169)
Other comprehensive loss , net of taxes																											Other comprehensive loss , net of taxes	—		—	—	—		—		—		—		(36,421)		—		(36,421)
Declaration of dividends ($0.16 per common share and $0.25 per preferred share)																											Declaration of dividends ($0.16 per common share and $0.25 per preferred share)	—		—	—	—		—		—		(5,133)		—		—		(5,133)
Balance, September 30, 2020																											Balance, September 30, 2020	(15,487)		46,821	10	$	468	$	—	$	101,438	$	594,281	$	1,662	$	(223,086)	$	474,763

(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, performance share units vested or restricted stock units vested. These shares have been cancelled by the Company.

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

~~Table of Contents~~

~~UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES~~

~~CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (continued)~~

~~(in thousands, except per share data)~~

Treasury Shares
Common
Shares
Issued

Preferred
Shares
Issued

Common
Stock
Amount

Preferred
Stock
Amount

Additional
Paid-In
Capital

Retained
Earnings

Accumulated
Other
Comprehensive
Income (Loss)

Treasury
Shares,
at Cost

Total
Stockholders’
Equity
Balance, 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)
—
—
—
—
—
—
(3,601 ) 3,601
—
—
Balance January 1, 2018 (11,043 ) 45,778
10
458
—
86,186
461,147
(2,680 ) (105,123 ) 439,988
Vesting of performance share units (43 )
⁽¹⁾
127
—
1
—
(1 ) —
—
(1,273 ) (1,273 )
Grants and vesting of restricted stock —
50
—
—
—
—
—
—
—
—
Stock option exercises (568 )
⁽¹⁾
804
—
8
—
15,195
—
—
(18,723 ) (3,520 )
Retirement of treasury shares 611
(611 ) —
(6 ) —
(19,990 ) —
—
19,996
—
Purchases of treasury stock (93 ) —
—
—
—
—
—
—
(2,746 ) (2,746 )
Share-based compensation —
—
—
—
—
2,904
—
—
—
2,904
Net income —
—
—
—
—
—
40,055
—
—
40,055
Change in net unrealized gains (losses), net of taxes —
—
—
—
—
—
—
(4,050 ) —
(4,050 )
Reclassification of income taxes upon adoption of
ASU 2018-02
—
—
—
—
—
—
582
(582 ) —
—
Declaration of dividends
($0.14 per common share and
$0.25 per preferred share) —
—
—
—
—
—
(4,906 ) —
—
(4,906 )
Balance, March 31, 2018 (11,136 ) 46,148
10
461
—
84,294
496,878
(7,312 ) (107,869 ) 466,452
Stock option exercises (244 )
⁽¹⁾
353
—
4
—
6,295
—
—
(8,015 ) (1,716 )
Retirement of treasury shares 244
(244 ) —
(2 ) —
(8,013 ) —
—
8,015
—
Purchases of treasury stock (249 ) —
—
—
—
—
—
—
(8,370 ) (8,370 )
Share-based compensation —
—
—
—
—
3,349
—
—
—
3,349
Net income —
—
—
—
—
—
46,084
—
—
46,084
Change in net unrealized gains (losses), net of taxes —
—
—
—
—
—
—
(1,849 ) —
(1,849 )
Declaration of dividends for second quarter
($0.14 per common share and
$0.25 per preferred share) —
—
—
—
—
—
(4,923 ) —
—
(4,923 )
Declaration of dividends for third quarter
($0.16 per common share) —
—
—
—
—
—
(5,596 ) —
—
(5,596 )
Balance, June 30, 2018 (11,385 ) 46,257
10
463
—
85,925
532,443
(9,161 ) (116,239 ) 493,431
Stock option exercises (108 )
⁽¹⁾
169
—
1
—
3,804
—
—
(4,744 ) (939 )
Retirement of treasury shares 108
(108 ) —
(1 ) —
(4,743 ) —
—
4,744
—
Share-based compensation —
—
—
—
—
3,245
—
—
—
3,245
Net income —
—
—
—
—
—
37,380
—
—
37,380
Change in net unrealized gains (losses), net of taxes —
—
—
—
—
—
—
(737 ) —
(737 )
Declaration of dividends
($0.25 per preferred share) (3 ) (3 )
Other —
—
—
—
—
—
5
—
—
5
Balance, September 30, 2018 (11,385 ) 46,318
10
$ 463
$ —
$ 88,231
$ 569,825
$ (9,898 ) $ (116,239 ) $ 532,382



(1) 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, performance share units vested, or restricted stock units vested. These shares have been cancelled by the Company.

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

Table of Contents

UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (continued)

(in thousands, except per share data)


	Treasury Shares		Common Shares Issued	Preferred Shares Issued	Common Stock Amount		Preferred Stock Amount		Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Treasury Shares, at Cost		Total Stockholders’ Equity


Balance, December 31, 2018	(11,731)		46,514	10	$	465	$	—	$	86,353	$	553,224	$	(8,010)	$	(130,399)	$	501,633
Vesting of performance share units	(56)	(1)	148	—	2		—		(2)		—		—		(2,069)		(2,069)
Grants and vesting of restricted stock	(5)	(1)	25	—	—		—		—		—		—		(166)		(166)
Stock option exercises	(36)	(1)	84	—	1		—		1,438		—		—		(1,367)		72
Retirement of treasury shares	97	(1)	(97)	—	(1)		—		(3,601)		—		—		3,602		0
Purchases of treasury stock	(321)		—	—	—		—		—		—		—		(10,117)		(10,117)
Share-based compensation	—		—	—	—		—		3,140		—		—		—		3,140
Net income	—		—	—	—		—		—		40,148		—		—		40,148
Other comprehensive income, net of taxes	—		—	—	—		—		—		—		11,984		—		11,984

Declaration of dividends ($0.16 per common share and $0.25 per preferred share)	—		—	—	—		—		—		(5,575)		—		—		(5,575)
Balance, March 31, 2019	(12,052)		46,674	10	467		—		87,328		587,797		3,974		(140,516)		539,050
Grants and vesting of restricted stock	(14)	(1)	25	—	—		—		—		—		—		(402)		(402)
Stock option exercises	(14)	(1)	27	—	—		—		403		—		—		(414)		(11)
Retirement of treasury shares	28	(1)	(28)	—	—		—		(816)		—		—		816		0
Purchases of treasury stock	(486)		—	—	—		—		—		—		—		(14,107)		(14,107)
Share-based compensation	—		—	—	—		—		3,311		—		—		—		3,311
Net income	—		—	—	—		—		—		37,293		—		—		37,293
Other comprehensive income, net of taxes	—		—	—	—		—		—		—		11,955		—		11,955
Declaration of dividends ($0.16 per common share and $0.25 per preferred share)	—		—	—	—		—		—		(5,547)		—		—		(5,547)
Declaration of dividends ($0.16 per common share)	—		—	—	—		—		—		(5,476)		—		—		(5,476)
Balance, June 30, 2019	(12,538)		46,698	10	467		—		90,226		614,067		15,929		(154,623)		566,066
Vesting of restricted stock units	(10)	(1)	25	—	—		—		—		—		—		(259)		(259)
Stock option exercises	(2)	(1)	2	—	—		—		54		—		—		(59)		(5)
Retirement of treasury shares	12	(1)	(12)	—	—		—		(318)		—		—		318		0
Purchases of treasury stock	(964)		—	—	—		—		—		—		—		(25,708)		(25,708)
Share-based compensation	—		—	—	—		—		3,584		—		—		—		3,584
Net income	—		—	—	—		—		—		20,146		—		—		20,146
Other comprehensive income, net of taxes	—		—	—	—		—		—		—		5,160		—		5,160
Declaration of dividends ($0.25 per preferred share)	—		—	—	—		—		—		(3)		—		—		(3)
Balance, September 30, 2019	(13,502)		46,713	10	$	467	$	—	$	93,546	$	634,210	$	21,089	$	(180,331)	$	568,981


(1) 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, performance share units vested, or restricted stock units vested. These shares have been cancelled by the Company.

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

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UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(in thousands)


	Nine Months Ended							Nine Months Ended
	September 30,							September 30,
	2019			2018				2020		2019
Cash flows from operating activities:							Cash flows from operating activities:
Net cash provided by (used in) operating activities	$	56,589		$	224,454
Net cash provided by operating activities							Net cash provided by operating activities	$	173,545	$	56,589
Cash flows from investing activities:							Cash flows from investing activities:
Proceeds from sale of property and equipment	27			30			Proceeds from sale of property and equipment	141		27
Purchases of property and equipment	(9,723		)	(6,141		)	Purchases of property and equipment	(14,580)		(9,723)
Purchases of equity securities	(1,091		)	(23,568		)	Purchases of equity securities	(11,145)		(1,091)
Purchases of available-for-sale debt securities	(194,228		)	(349,617		)	Purchases of available-for-sale debt securities	(735,426)		(194,228)
Purchases of investment real estate, net	(883		)	(5,553		)	Purchases of investment real estate, net	(6)		(883)
Proceeds from sales of equity securities	29,137			8,285			Proceeds from sales of equity securities	0		29,137
Proceeds from sales of available-for-sale debt securities	73,041			132,801			Proceeds from sales of available-for-sale debt securities	757,812		73,041
Proceeds from sales of investment real estate	10,537			—			Proceeds from sales of investment real estate	0		10,537
Maturities of available-for-sale debt securities	100,304			83,188			Maturities of available-for-sale debt securities	115,543		100,304
Maturities of available-for-sale short-term investments	—			10,000
Net cash provided by (used in) investing activities	7,121			(150,575		)

Net cash provided by investing activities							Net cash provided by investing activities	112,339		7,121
Cash flows from financing activities:							Cash flows from financing activities:
Preferred stock dividend	(8		)	(8		)	Preferred stock dividend	(8)		(8)
Common stock dividend	(16,618		)	(15,400		)	Common stock dividend	(15,516)		(16,618)
Issuance of common stock for stock option exercises	239			102			Issuance of common stock for stock option exercises	0		239
Purchase of treasury stock	(49,932		)	(11,116		)	Purchase of treasury stock	(26,501)		(49,932)
Payments related to tax withholding for share-based compensation	(3,078		)	(7,551		)	Payments related to tax withholding for share-based compensation	(1,253)		(3,078)
Repayment of debt	(1,103		)	(1,103		)	Repayment of debt	(1,103)		(1,103)
Net cash provided by (used in) financing activities	(70,500		)	(35,076		)	Net cash provided by (used in) financing activities	(44,381)		(70,500)
Cash and cash equivalents, and restricted cash and cash equivalents:							Cash and cash equivalents, and restricted cash and cash equivalents:
Net increase (decrease) during the period	(6,790		)	38,803			Net increase (decrease) during the period	241,503		(6,790)
Balance, beginning of period	169,063			216,121			Balance, beginning of period	184,744		169,063
Balance, end of period	$	162,273		$	254,924		Balance, end of period	$	426,247	$	162,273

The following table summarizes our cash and cash equivalents and restricted cash and cash equivalents within the Condensed Consolidated Balance Sheets (in thousands):


	September 30,		December 31,
	2020		2019
Cash and cash equivalents	$	405,132	$	182,109
Restricted cash and cash equivalents (1)	21,115		2,635
Total cash and cash equivalents and restricted cash and cash equivalents	$	426,247	$	184,744

September 30, December 31,
2019 2018
Cash and cash equivalents $ 159,638
$ 166,428
Restricted cash and cash equivalents (1) 2,635
2,635
Total cash and cash equivalents and restricted cash and cash equivalents $ 162,273
$ 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 14 (Variable Interest Entities)” for a discussion of restricted cash held in a trust account.


~~(1)~~	~~See “—Note 5 (Insurance Operations),” for a discussion of the nature of the restrictions for restricted cash and cash equivalents.~~

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

Table of Contents

UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. Nature of Operations and Basis of Presentation

Nature of Operations

Universal Insurance Holdings, Inc. ~~(together~~(“UVE”, and together with its wholly-owned subsidiaries, “the Company”) is a Delaware corporation incorporated in 1990. 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 with UPCIC, the “Insurance 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 18 states as of September 30, ~~2019,~~2020, including Florida, which comprises the majority of the Company’s 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 ~~invests~~investment 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 our wholly-owned managing general agent subsidiary and payment plan fees charged to policyholders who choose to pay their premiums in installments. Our 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 Condensed Consolidated Financial Statements as an adjustment to losses and loss adjustment ~~expense.~~expense (“LAE”).

Basis of Presentation

The Company has prepared the accompanying unaudited Condensed Consolidated Financial Statements (“Financial Statements”) in accordance with the rules and regulations of the United States Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, the Financial Statements do not include all of the information and footnotes required by United States Generally Accepted Accounting Principles (“U.S. GAAP”) for annual financial statements. Therefore, the Financial Statements should be read in conjunction with the audited Consolidated Financial Statements contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, ~~2018,~~2019, filed with the SEC on March ~~1, 2019.~~2, 2020. The ~~condensed consolidated balance sheet~~Condensed Consolidated Balance Sheet at December 31, ~~2018~~2019 was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation have been included in the Financial Statements. The results for interim periods do not necessarily indicate the results that may be expected for any other interim period or for the full year.

To conform to the current period presentation, certain amounts in the prior periods’ condensed 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.

The Financial Statements include the accounts of the Company 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.

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

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2. Significant Accounting Policies

The Company reported Significant Accounting Policies in its Annual Report on Form 10-K for the year ended December 31, ~~2018. There~~2019. The following are no new or revised disclosures or disclosures required on a quarterly basis.

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

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 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.

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 in the face of the Condensed Consolidated Balance Sheet. See “—Note 5 (Insurance Operations)” and “—Note 14 (Variable Interest Entities)” for discussions on the nature of the restrictions.

Investment, Securities Available-for-Sale: The Company’s investments in debt securities and short-term investments are classified as available-for-sale with maturities of greater than three months. Available-for-sale debt securities and short-term investments are recorded at fair value in the Condensed 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 and 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. Gains and losses realized on the disposition of available-for-sale debt securities are determined on the first-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.

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 decline in fair value has resulted from credit losses or other factors.In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by rating agencies, market sentiment and trends and adverse conditions specifically related to the security, among other quantitative and qualitative factors utilized at establishing an estimate for credit losses.If the assessment 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 at September 30, 2020 and is evaluated in the estimate for credit losses. Accrued interest receivable is included under Other Assets in the Condensed Consolidated Balance Sheet.

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Investment, Equity Securities. The Company’s investments in equity securities are recorded at fair value in the Condensed Consolidated Balance Sheet with changes in the fair value of equity securities reported in current period earnings (loss) in the Condensed Consolidated Statements of Income within net change in unrealized gains (losses) of equity securities as they occur.

Premiums Receivable. Generally, premiums are collected prior to or during the policy period as permitted under the Insurance Entities’ payment plans. Credit risk is minimized through the effective administration of policy payment plans whereby the rules governing policy cancellation minimize circumstances in which the Company extends insurance coverage without having received the corresponding premiums. The Company performs a policy-level evaluation to determine the extent the premiums receivable balance exceeds the unearned premiums balance. Under ASC 326 and given the short-term nature of these receivables, the Company employed the aging method to estimate credit losses by pooling receivables based on the levels of delinquency and evaluating current conditions and reasonable and supportable forecasts. As of September 30, 2020 and December 31, 2019, the Company recorded an estimate of credit losses of $0.6 million and an allowance for doubtful accounts of $0.7 million, respectively.

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. Under 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 September 30, 2020 established under ASC 326 and the Company did not have an allowance for uncollectible amounts due from reinsurers as of December 31, 2019.

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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 amortized cost and fair value of available-for-sale debt securities ~~available for sale~~ as of the dates presented (in thousands):


	September 30, 2019										September 30, 2020
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value			Amortized Cost		Allowance for Expected Credit Losses		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Debt Securities:										Debt Securities:
U.S. government obligations and agencies	$	71,696	$	1,096	$	(206	)	$	72,586	U.S. government obligations and agencies	$	135,087	$	0	$	247	$	(6)	$	135,328
Corporate bonds	450,868		18,628		(198		)	469,298		Corporate bonds	436,033		(412)		2,014		(1,937)		435,698
Mortgage-backed and asset-backed securities	313,001		8,642		(509		)	321,134		Mortgage-backed and asset-backed securities	251,199		0		2,299		(496)		253,002
Municipal bonds	3,399		148		(5		)	3,542		Municipal bonds	7,086		0		53		0		7,139
Redeemable preferred stock	11,694		395		(82		)	12,007		Redeemable preferred stock	11,241		(58)		301		(77)		11,407
Total	$	850,658	$	28,909	$	(1,000	)	$	878,567	Total	$	840,646	$	(470)	$	4,914	$	(2,516)	$	842,574


	December 31, 2018										December 31, 2019
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value			Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Debt Securities:										Debt Securities:
U.S. government obligations and agencies	$	67,435	$	241	$	(1,039	)	$	66,637	U.S. government obligations and agencies	$	53,688	$	864	$	(188)	$	54,364
Corporate bonds	434,887		714		(6,736		)	428,865		Corporate bonds	457,180		19,179		(141)		476,218
Mortgage-backed and asset-backed securities	312,840		912		(4,155		)	309,597		Mortgage-backed and asset-backed securities	304,285		7,400		(606)		311,079
Municipal bonds	3,405		—		(43		)	3,362		Municipal bonds	3,397		103		(4)		3,496
Redeemable preferred stock	12,560		55		(638		)	11,977		Redeemable preferred stock	9,786		427		(86)		10,127
Total	$	831,127	$	1,922	$	(12,611	)	$	820,438	Total	$	828,336	$	27,973	$	(1,025)	$	855,284

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


	September 30, 2019				December 31, 2018					September 30, 2020				December 31, 2019
Equivalent S&P Credit Ratings	Fair Value		% of Total Fair Value		Fair Value		% of Total Fair Value		Equivalent S&P Credit Ratings	Fair Value		% of Total Fair Value		Fair Value		% of Total Fair Value
AAA	$	406,441	46.3	%	$	388,672	47.4	%	AAA	$	368,845	43.8	%	$	372,442	43.6	%
AA	93,687		10.7	%	100,791		12.3	%	AA	74,964		8.9	%	99,103		11.6	%
A	232,352		26.4	%	214,503		26.1	%	A	223,658		26.6	%	238,766		27.9	%
BBB	141,837		16.1	%	112,613		13.7	%	BBB	172,916		20.5	%	143,889		16.8	%
BB and Below	—		—		494		0.1	%	BB and Below	1,198		0.1	%	0		0
No Rating Available	4,250		0.5	%	3,365		0.4	%	No Rating Available	993		0.1	%	1,084		0.1	%
Total	$	878,567	100.0	%	$	820,438	100.0	%	Total	$	842,574	100.0	%	$	855,284	100.0	%

The table above includes 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.

Table of Contents

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

~~Table of Contents~~

September 30, 2019 December 31, 2018
Amortized
Cost Fair Value Amortized
Cost Fair Value
Mortgage-backed Securities:
Agency $ 147,245
$ 148,465
$ 139,418
$ 136,291
Non-agency 73,119
78,794
61,689
61,933
Asset-backed Securities:
Auto loan receivables 43,681
44,103
53,449
53,341
Credit card receivables 21,147
21,538
29,594
29,366
Other receivables 27,809
28,234
28,690
28,666
Total $ 313,001
$ 321,134
$ 312,840
$ 309,597


	September 30, 2020				December 31, 2019
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Mortgage-backed Securities:
Agency	$	166,418	$	168,027	$	143,723	$	144,729
Non-agency	28,090		28,259		71,140		75,896
Asset-backed Securities:
Auto loan receivables	31,811		31,938		42,767		43,127
Credit card receivables	6,712		6,712		21,145		21,487
Other receivables	18,168		18,066		25,510		25,840
Total	$	251,199	$	253,002	$	304,285	$	311,079

The following ~~table summarizes the fair value and gross unrealized losses on~~tables summarize available-for-sale debt securities, aggregated by major ~~investment category~~security 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):

September 30, 2019
Less Than 12 Months 12 Months or Longer
Number of
Issues Fair Value Unrealized
Losses Number of
Issues Fair Value Unrealized
Losses
Debt Securities:
U.S. government obligations and agencies 2
$ 3,907
$ (38 ) 6
$ 41,419
$ (168 )
Corporate bonds 24
24,357
(115 ) 22
19,923
(83 )
Mortgage-backed and asset-backed securities 26
30,609
(139 ) 38
53,895
(370 )
Municipal bonds —
—
—
1
275
(5 )
Redeemable preferred stock 8
1,116
(12 ) 8
2,094
(70 )
Total 60
$ 59,989
$ (304 ) 75
$ 117,606
$ (696 )

December 31, 2018
Less Than 12 Months 12 Months or Longer
Number of
Issues Fair Value Unrealized
Losses Number of
Issues Fair Value Unrealized
Losses
Debt Securities:
U.S. government obligations and agencies —
$ —
$ —
13
$ 56,531
$ (1,039 )
Corporate bonds 228
210,152
(3,318 ) 160
131,225
(3,418 )
Mortgage-backed and asset-backed securities 36
57,487
(196 ) 103
148,436
(3,959 )
Municipal bonds 6
3,362
(43 ) —
—
—
Redeemable preferred stock 61
8,092
(506 ) 5
1,034
(132 )
Total 331
$ 279,093
$ (4,063 ) 281
$ 337,226
$ (8,548 )

~~Evaluating Investments for Other Than Temporary Impairment~~


	September 30, 2020
	Less Than 12 Months					12 Months or Longer
	Number of Issues	Fair Value		Unrealized Losses		Number of Issues	Fair Value		Unrealized Losses
Debt Securities:
U.S. government obligations and agencies	5	$	32,211	$	(6)	0	$	0	$	0
Corporate bonds	120	223,864		(1,329)		0	0		0
Mortgage-backed and asset-backed securities	45	115,570		(495)		0	0		0
Municipal bonds	1	3,000		(1)		0	0		0
Redeemable preferred stock	0	0		0		0	0		0
Total	171	$	374,645	$	(1,831)	0	$	0	$	0


	December 31, 2019
	Less Than 12 Months					12 Months or Longer
	Number of Issues	Fair Value		Unrealized Losses		Number of Issues	Fair Value		Unrealized Losses
Debt Securities:
U.S. government obligations and agencies	2	$	3,836	$	(108)	4	$	23,186	$	(80)
Corporate bonds	18	16,808		(107)		7	5,866		(34)
Mortgage-backed and asset-backed securities	42	58,023		(245)		26	34,985		(361)
Municipal bonds	0	0		0		1	276		(4)
Redeemable preferred stock	6	630		(8)		4	1,489		(78)
Total	68	$	79,297	$	(468)	42	$	65,802	$	(557)

Unrealized losses on available-for-sale debt securities in the above table as of September 30, ~~2019,~~2020 have not been recognized into income as credit losses because the Company held available-for-sale debt securities that were in an unrealized loss position as presented in the table above. For available-for-sale debt securities with significant declines in value, the Company performs a quarterly fundamental credit analysis on a security-by-security basis, which includes considerationissuers are of high credit quality (rated AA or higher), management does not intend to sell and ~~credit ratings, review of relevant industry analyst reports~~it is likely management will not be required to sell the securities prior to their anticipated recovery, and ~~other available market data. For available-for-sale debt securities,~~ the Company considers whether it has the intent and ability to hold the available-for-sale debt securities for a period of time sufficient to recover its cost basis. Where 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 ~~considered~~largely due to changes in interest rates and other ~~than temporary~~market conditions. There were no material 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 bonds. The fair value is ~~recorded~~expected to recover as the bonds approach maturity.

Results for reporting periods occurring before January 1, 2020 continue to be reported in ~~earnings. Based~~accordance with previously applicable U.S. GAAP and not presented under ASC 326, which was adopted by the Company on ~~our analysis, our fixed income portfolio is~~January 1, 2020.

Table of ~~high quality~~Contents

The following table presents a reconciliation of the beginning and ~~we believe that we will recover the amortized cost basis of our available-for-sale debt securities. We continually monitor the~~ending balances for expected credit ~~quality of our investments in~~losses on available-for-sale debt securities (in thousands):


	Corporate Bonds		Redeemable Preferred Stock		Total
Balance, December 31, 2019	$	0	$	0	$	0
Cumulative effect adjustment as of January 1, 2020	665		126		791
Increase (decrease)	(253)		(68)		(321)
Balance, September 30, 2020	$	412	$	58	$	470

See “—Note 2 (Significant Accounting Policies — Recently Adopted Accounting Pronouncements)” for more information about the methodology and significant inputs used to ~~assess if it is probable that we will receive our contractual or estimated cash flows in~~measure the ~~form of principal and interest. Additionally, the Company considers management’s intent and ability~~amount related to ~~hold the~~expected credit losses on available-for-sale debt ~~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 of the available-for-sale debt securities as of September 30, 2019 are other than temporary.~~

~~Table of Contents~~

The following table presents the amortized cost and fair value of investments with maturities as of the date presented (in thousands):


	September 30, 2020
	Amortized Cost		Fair Value
Due in one year or less	$	75,023	$	75,416
Due after one year through five years	469,895		471,884
Due after five years through ten years	235,351		235,383
Due after ten years	58,212		57,709
Perpetual maturity securities	2,165		2,182
Total	$	840,646	$	842,574

September 30, 2019
Amortized Cost Fair Value
Due in one year or less $ 122,700
$ 122,907
Due after one year through five years 427,470
436,026
Due after five years through ten years 288,021
306,986
Due after ten years 12,040
12,173
Perpetual maturity securities 427
475
Total $ 850,658
$ 878,567

All securities, except those with perpetual maturities, were 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 maturity dates.

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Proceeds from sales and maturities (fair value):
Available-for-sale debt securities	$	773,673	$	61,615	$	873,355	$	173,345
Equity securities	$	0	$	0	$	0	$	29,137
Gross realized gains on sale of securities:
Available-for-sale debt securities	$	53,893	$	65	$	54,779	$	364
Equity securities	$	0	$	0	$	0	$	335
Gross realized losses on sale of securities:
Available-for-sale debt securities	$	(66)	$	(87)	$	(485)	$	(277)
Equity securities	$	0	$	0	$	0	$	(14,787)
Realized gains on sales of investment real estate	$	0	$	0	$	0	$	1,213

Three Months Ended
September 30, Nine Months Ended
September 30,
2019 2018 2019 2018
Proceeds from sales and maturities (fair value):
  Available-for-sale debt securities $ 61,615
$ 32,287
$ 173,345
$ 225,989
  Equity securities $ —
$ 4,158
$ 29,137
$ 8,285
Gross realized gains on sale of securities:
  Available-for-sale debt securities $ 65
$ 1
$ 364
$ 318
  Equity securities $ —
$ 413
$ 335
$ 714
Gross realized losses on sale of securities:
  Available-for-sale debt securities $ (87 ) $ (11 ) $ (277 ) $ (3,125 )
  Equity securities $ —
$ —
$ (14,787 ) $ —
Realized gains on sales of investment real estate $ —
$ —
$ 1,213
$ —

In the third quarter, 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.

Table of Contents

The following table presents the components of net investment income, comprised primarily of interest and dividends, for the periods presented (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Available-for-sale debt securities	$	4,394	$	6,316	$	16,425	$	18,508
Equity securities	583		487		1,732		2,091

Cash and cash equivalents (1)	49		1,374		935		4,066
Other (2)	268		243		782		754
Total investment income	5,294		8,420		19,874		25,419
Less: Investment expenses (3)	(737)		(807)		(2,304)		(2,254)
Net investment income	$	4,557	$	7,613	$	17,570	$	23,165

Three Months Ended
September 30, Nine Months Ended
September 30,
2019 2018 2019 2018
Available-for-sale debt securities $ 6,316
$ 4,595
$ 18,508
$ 12,390
Equity securities 487
722
2,091
2,016
Available-for-sale short-term investments —
—
—
145
Cash and cash equivalents (1) 1,374
1,854
4,066
4,100
Other (2) 243
252
754
665
Total investment income 8,420
7,423
25,419
19,316
Less: Investment expenses (3) (807 ) (781 ) (2,254 ) (2,103 )
Net investment income $ 7,613
$ 6,642
$ 23,165
$ 17,213



(1(1)	)	Includes interest earned on restricted cash and cash equivalents.
(2(2)	)	Includes investment income earned on real estate investments.
(3(3)	)	Includes custodial fees, investment accounting and advisory fees, and expenses associated with real estate investments.

~~Table of Contents~~

Equity Securities

The following table provides the unrealized gains and losses ~~recorded~~recognized during the periods presented on equity securities still held at the end of the ~~reporting~~reported period (in thousands):

Three Months Ended
September 30, Nine Months Ended
September 30,
2019 2018 2019 2018
Unrealized gains and (losses) recognized during the reporting
period on equity securities still held at the reporting period
$ 573
$ (2,473 ) $ 3,339
$ (9,103 )


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Unrealized gains (losses) recognized during the reported period on equity securities still held at the end of the reported period	$	1,991	$	573	$	(2,162)	$	3,339

Investment Real Estate

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


	September 30,		December 31,
	2020		2019
Income Producing:
Investment real estate	$	14,685	$	14,679
Less: Accumulated depreciation	(1,595)		(1,284)
	13,090		13,395
Non-Income Producing:
Investment real estate	2,190		2,190
Investment real estate, net	$	15,280	$	15,585

September 30,
2019 December 31,
2018
Income Producing:
Investment real estate $ 14,679
$ 14,619
Less: Accumulated depreciation (1,181 ) (870 )
13,498
13,749
Non-Income Producing:

Investment real estate 2,190
10,690
Investment real estate, net $ 15,688
$ 24,439

During the nine months ended September 30, 2019, the Company completed the sale of an investment real ~~estate.~~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 onin the Condensed Consolidated Statements of Income for the nine months ended September 30, 2019.

Depreciation expense related to investment real estate for the periods presented (in thousands):

Three Months Ended
September 30, Nine Months Ended
September 30,
2019 2018 2019 2018
Depreciation expense on investment real estate $ 104
$ 103
$ 311
$ 307


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Depreciation expense on investment real estate	$	103	$	104	$	311	$	311

Table of Contents

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~~1st of each year. The Company’s current reinsurance programs consist principally of catastrophe excess of loss reinsurance, subject to the terms and conditions of the applicable agreements. ~~The~~Notwithstanding the purchase of such reinsurance, the Company is responsible for certain retained loss amounts before reinsurance attaches and for insured losses related to catastrophes and other events that exceed coverage provided by the reinsurance programs. The Company remains responsible for the settlement of insured losses irrespective of whether any of the reinsurers fail to make payments otherwise due.

Amounts recoverable from reinsurers are estimated in a manner consistent with the provisions of the reinsurance ~~agreements~~contracts and consistent with the establishment of the gross liability for losses, ~~loss adjustment expenses (“LAE”)~~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.

To reduce credit risk for amounts due from reinsurers, the Insurance Entities seek to do business with financially sound reinsurance companies and regularly evaluate the financial strength of all reinsurers used.

The following table presents ratings from rating agencies and the unsecured amounts due from the reinsurers whose aggregate ~~balances~~balance exceeded 3% of the Company’s stockholders’ equity as of the dates presented (in thousands):


	Ratings as of September 30, 2019			Due from as of					Ratings as of September 30, 2020			Due from as of
Reinsurer	AM Best Company	Standard and Poor’s Rating Services, Inc.	Moody’s Investors Service, Inc.	September 30, 2019		December 31, 2018		Reinsurer	AM Best Company	Standard and Poor’s Rating Services, Inc.	Moody’s Investors Service, Inc.	September 30, 2020		December 31, 2019
Florida Hurricane Catastrophe Fund (1)	n/a	n/a	n/a	$	123,037	$	165,022	Florida Hurricane Catastrophe Fund (1)	n/a	n/a	n/a	$	65,883	$	199,647
Allianz Risk Transfer	A+	AA	Aa3	28,088		139,565		Allianz Risk Transfer	—	—	—	0		19,269
Renaissance Reinsurance Ltd	n/a	n/a	n/a	—		39,459
Chubb Tempest Reinsurance Ltd	n/a	n/a	n/a	—		16,208

Total (2)				$	151,125	$	360,254	Total (2)				$	65,883	$	218,916


~~(1)~~	~~No rating is available, because the fund is not rated.~~


~~(2)~~	~~Amounts represent prepaid reinsurance premiums, reinsurance receivables and net recoverables for paid and unpaid losses, including incurred but not reported reserves, and loss adjustment expenses.~~

(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.

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

Three Months Ended September 30,
2019 2018
Premiums
Written Premiums
Earned Losses and Loss
Adjustment
Expenses Premiums
Written Premiums
Earned Losses and Loss
Adjustment
Expenses
Direct $ 342,872
$ 313,065
$ 334,440
$ 309,176
$ 288,404
$ 270,158
Ceded (4,781 ) (106,466 ) (201,869 ) (17,256 ) (99,466 ) (184,211 )
Net $ 338,091
$ 206,599
$ 132,571
$ 291,920
$ 188,938
$ 85,947

Nine Months Ended September 30,
2019 2018
Premiums
Written Premiums
Earned Losses and Loss
Adjustment
Expenses Premiums
Written Premiums
Earned Losses and Loss
Adjustment
Expenses
Direct $ 990,066
$ 911,550
$ 663,768
$ 921,941
$ 824,692
$ 593,419
Ceded (422,414 ) (284,867 ) (304,807 ) (356,507 ) (260,905 ) (341,704 )
Net $ 567,652
$ 626,683
$ 358,961
$ 565,434
$ 563,787
$ 251,715


	Three Months Ended September 30,
	2020						2019
	Premiums Written		Premiums Earned		Losses and Loss Adjustment Expenses		Premiums Written		Premiums Earned		Losses and Loss Adjustment Expenses
Direct	$	409,418	$	357,208	$	347,207	$	342,872	$	313,065	$	334,440
Ceded	(3,062)		(123,017)		(108,730)		(4,781)		(106,466)		(201,869)
Net	$	406,356	$	234,191	$	238,477	$	338,091	$	206,599	$	132,571



	Nine Months Ended September 30,
	2020						2019
	Premiums Written		Premiums Earned		Losses and Loss Adjustment Expenses		Premiums Written		Premiums Earned		Losses and Loss Adjustment Expenses
Direct	$	1,148,656	$	1,020,798	$	682,896	$	990,066	$	911,550	$	663,768
Ceded	(497,263)		(339,408)		(158,026)		(422,414)		(284,867)		(304,807)
Net	$	651,393	$	681,390	$	524,870	$	567,652	$	626,683	$	358,961

Table of Contents

The following prepaid reinsurance premiums and reinsurance recoverable are reflected in the Condensed Consolidated Balance Sheets as of the dates presented (in thousands):


	September 30,		December 31,
	2020		2019
Prepaid reinsurance premiums	$	333,062	$	175,208
Reinsurance recoverable on paid losses and LAE	$	35,749	$	70,015
Reinsurance recoverable on unpaid losses and LAE	59,329		123,221

Reinsurance recoverable	$	95,078	$	193,236

September 30, December 31,
2019 2018
Prepaid reinsurance premiums $ 280,297
$ 142,750
Reinsurance recoverable on paid losses and LAE $ 106,988
$ 25,238
Reinsurance recoverable on unpaid losses and LAE 110,313
393,365
Reinsurance recoverable $ 217,301
$ 418,603

Table of Contents

5. Insurance Operations

Deferred Policy Acquisition Costs

The Company defers certain costs ~~relating to~~in connection with written premium, called Deferred Policy Acquisition Costs (“DPAC”). DPAC is amortized over the effective period of the related insurance policies.

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

Three Months Ended
September 30, Nine Months Ended
September 30,
2019 2018 2019 2018
DPAC, beginning of period $ 90,530
$ 88,756
$ 84,686
$ 73,059
Capitalized Costs 48,783
44,389
140,998
136,758
Amortization of DPAC (44,493 ) (42,502 ) (130,864 ) (119,174 )
DPAC, end of period $ 94,820
$ 90,643
$ 94,820
$ 90,643


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
DPAC, beginning of period	$	103,527	$	90,530	$	91,882	$	84,686
Capitalized Costs	58,727		48,783		164,700		140,998
Amortization of DPAC	(50,959)		(44,493)		(145,287)		(130,864)
DPAC, end of period	$	111,295	$	94,820	$	111,295	$	94,820

Regulatory Requirements and Restrictions

The Insurance Entities are subject to regulations and standards of the Florida Office of Insurance Regulation (“FLOIR”). ~~UPCIC~~The Insurance Entities are also is subject to regulations and standards of regulatory authorities in other states where ~~it is~~they are licensed, although as a Florida-domiciled ~~insurer, its~~insurers, their principal regulatory authority is the FLOIR. These standards ~~require~~and 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 APPCIC~~the Insurance Entities to their immediate parent company, Protection Solutions, Inc. (“PSI”, formerly known as Universal Insurance Holding Company of Florida), without prior regulatory approval is limited by the provisions of the Florida Insurance Code. These dividends are referred to as “ordinary dividends.” However, if the dividend, together with other dividends paid within the preceding twelve months, exceeds this statutory limit or is paid from sources other than earned surplus, the entire dividend is generally considered an “extraordinary dividend” and must receive prior regulatory approval.

In accordance with Florida Insurance Code, and based on the calculations performed by the Company as of December 31, ~~2018,~~2019, UPCIC has the capacity to pay ordinary dividends of ~~$14.0~~$12.1 million during ~~2019.~~2020. APPCIC, ~~did not meet the~~based on its accumulated earnings ~~or surplus regulatory requirements~~ as of December 31, ~~2018~~2019, is unable to pay any ordinary dividends during ~~2019.~~2020. For the three and nine months ended September 30, ~~2019, no~~2020, 0 dividends were paid from ~~UPCIC or APPCIC~~the Insurance Entities to PSI.

The Florida Insurance Code requires an insurance ~~companies~~company to maintain capitalization equivalent to the greater of 10 percent of the insurer’s total liabilities or $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 APPCIC~~the Insurance Entities as of the dates presented (in thousands):


	September 30, 2020		December 31, 2019
Statutory capital and surplus
UPCIC	$	300,597	$	301,120
APPCIC	$	16,171	$	16,433
Ten percent of total liabilities
UPCIC	$	126,227	$	99,228
APPCIC	$	820	$	621

September 30, 2019 December 31, 2018
Ten percent of total liabilities
  UPCIC $ 105,485
$ 90,610
  APPCIC $ 594
$ 489
Statutory capital and surplus
  UPCIC $ 343,803
$ 291,438
  APPCIC $ 16,055
$ 15,973

As of the dates in the table above, ~~both UPCIC and APPCIC~~the Insurance Entities each exceeded the minimum statutory capitalization requirement. Statutory capital and surplus for UPCIC ~~also met~~at December 31, 2019 includes a $30 million capital contribution funded in February 2020 by UVE through PSI, the ~~capitalization requirements~~Insurance Entities’ parent company, which was permitted to be included in UPCIC’s statutory capital and surplus at December 31, 2019 with the permission of the ~~other states in which it is licensed as of~~FLOIR under statutory accounting principles. This contribution was not recognized on a U.S. GAAP basis at December 31, 2019. Statutory capital and surplus for UPCIC at September 30, ~~2019. UPCIC and APPCIC are also required to adhere to prescribed premium-to-capital surplus ratios and have met those requirements at such dates.~~2020 includes a $44.0 million capital contribution funded in September 2020 by UVE through PSI, the Insurance Entities’ parent company.

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Through PSI, UVE recorded contributions for the periods presented (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Capital contributions	$	44,000	$	0	$	74,000	$	0

The following table summarizes combined net income (loss) for ~~UPCIC and APPCIC~~the Insurance Entities determined in accordance with statutory accounting practices for the periods presented (in thousands):

Three Months Ended
September 30, Nine Months Ended
September 30,
2019 2018 2019 2018
Combined net income (loss) $ (5,486 ) $ 5,468
$ 28,854
$ 49,190

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	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Combined net income (loss)	$	(41,436)	$	(5,486)	$	(37,034)	$	28,854

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):


	September 30, 2020		December 31, 2019
Restricted cash and cash equivalents	$	2,635	$	2,635
Investments	$	3,564	$	3,419

September 30, 2019 December 31, 2018
Restricted cash and cash equivalents $ 2,635
$ 2,635
Investments $ 3,434
$ 3,876

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6. Liability for Unpaid Losses and Loss Adjustment Expenses

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Balance at beginning of period	$	147,659	$	288,296	$	267,760	$	472,829
Less: Reinsurance recoverable	(26,107)		(197,117)		(123,221)		(393,365)
Net balance at beginning of period	121,552		91,179		144,539		79,464
Incurred related to:
Current year	208,392		129,353		489,966		355,258
Prior years	30,085		3,218		34,904		3,703
Total incurred	238,477		132,571		524,870		358,961
Paid related to:
Current year	172,977		137,313		355,479		260,955
Prior years	43,661		30,408		170,539		121,441
Total paid	216,638		167,721		526,018		382,396
Net balance at end of period	143,391		56,029		143,391		56,029
Plus: Reinsurance recoverable	59,329		110,313		59,329		110,313
Balance at end of period	$	202,720	$	166,342	$	202,720	$	166,342

Three Months Ended
September 30, Nine Months Ended
September 30,
2019 2018 2019 2018
Balance at beginning of period $ 288,296
$ 151,916
$ 472,829
$ 248,425
Less: Reinsurance recoverable (197,117 ) (96,733 ) (393,365 ) (182,405 )
Net balance at beginning of period 91,179
55,183
79,464
66,020
Incurred (recovered) related to:

Current year 129,353
85,986
355,258
249,488
Prior years 3,218
(39 ) 3,703
2,227
Total incurred 132,571
85,947
358,961
251,715
Paid related to:

Current year 137,313
72,034
260,955
140,013
Prior years 30,408
38,372
121,441
146,998
Total paid 167,721
110,406
382,396
287,011
Net balance at end of period 56,029
30,724
56,029
30,724
Plus: Reinsurance recoverable 110,313
127,943
110,313
127,943
Balance at end of period $ 166,342
$ 158,667
$ 166,342
$ 158,667

For the three months ended September 30, 2020, there was adverse prior year’s reserve development of $136.7 million gross, less $106.7 million ceded, resulting in $30.1 million net. The net prior year’s reserve development for the quarter ended September 30, 2020 was principally due to increased ultimate losses and LAE for Hurricane Irma not recoverable from the Florida Hurricane Catastrophe Fund (”FHCF”) and increased prior year’s companion claims in the run up to the expiration of the statute of limitations for Hurricane Irma.

For the nine months ended September 30, 2020, there was adverse prior year’s reserve development of $190.8 million gross, less $155.9 million ceded, resulting in $34.9 million net. The direct and net prior year’s reserve development for the nine months ended September 30, 2020 was principally due to increased ultimate losses and LAE for Hurricane Irma not recoverable from the FHCF and increased prior year’s companion claims in the run up to the expiration of the statute of limitations for Hurricane Irma.

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.

During the nine months ended September 30, 2019, there was adverse prior ~~year~~year’s reserve development of $305.3 million gross, less $301.6 million ceded, resulting in $3.7 million net. Gross prior ~~year~~year’s reserve development was principally the result of an increase in estimated losses and LAE for Hurricane Irma claims, which were fully ceded. Net prior ~~year adverse~~year’s reserve development of $3.7 million principally resulted from a change in the allocation of estimated Hurricane Michael losses and LAE recoveries from the Non-Florida reinsurance coverage to the All States reinsurance coverage. There was no change to gross Hurricane Michael losses. 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. There was no change to gross Hurricane Michael losses. For the nine months ended September 30, 2018, there was $311.7 million gross, less $309.5 million ceded, resulting in $2.2 million net of prior year reserve development principally reflecting an increase in estimated Hurricane Irma claims.

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7. Long-Term Debt

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

September 30, December 31,
2019 2018
Surplus note $ 10,294
$ 11,397


	September 30,		December 31,
	2020		2019
Surplus note	$	8,823	$	9,926

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 surplus note has a twenty-year term and accrues interest, adjusted quarterly based on the 10-year Constant Maturity Treasury Index. Principal and interest are paid periodically pursuant to terms of the surplus note.

UPCIC was in compliance with the terms of the surplus note as of September 30, ~~2019.~~

2020.

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8. Stockholders’ Equity

From time to time, the Company’s Board of Directors ~~authorizes~~may authorize share repurchase programs under which the Company may repurchase shares of the Company’s common stock in the open market. The following table presents repurchases of the Company’s common stock for the periods presented (in thousands, except total number of shares repurchased and per share data):

Total Number of Shares Repurchased During the Nine Months Ended September 30,
Date Authorized Expiration Date Dollar Amount Authorized 2019 2018 Aggregate Purchase Price Average Price Per Share Repurchased Plan Completed
May 6, 2019 December 31, 2020 $ 40,000
1,302,401
— $ 35,419
$ 27.20

December 12, 2018 May 31, 2020 $ 20,000
468,108
— $ 14,513
$ 31.00
May 2019
September 5, 2017 December 31, 2018 $ 20,000
— 342,749
$ 11,116
$ 32.43
December 2018



				Total Number of Shares				Average
				Repurchased During the		Aggregate		Price Per
		Dollar Amount		Nine Months Ended September 30,		Purchase		Share
Date Authorized	Expiration Date	Authorized		2020	2019	Price		Repurchased		Plan Completed
November 6, 2019	December 31, 2021	$	40,000	1,418,087	0	$	26,501	$	18.69
May 6, 2019	December 31, 2020	$	40,000	0	1,302,401	$	35,419	$	27.20	November 2019
December 12, 2018	May 31, 2020	$	20,000	0	468,108	$	14,513	$	31.00	May 2019

See the “Condensed Consolidated Statements of Stockholders’ Equity” for a roll-forward of treasury shares.

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9. Income Taxes

During the three months ended September 30, ~~2019 and 2018,~~2020, the Company recorded approximately ~~$7.8~~$0.6 million ~~and~~ ~~$13.8~~of income tax benefit compared to $7.8 million of income tax expense ~~respectively.~~for the three months ended September 30, 2019. The effective tax rate (“ETR”) for the three months ended September 30, ~~2019~~2020 was ~~27.8%~~16.4% compared to a ~~26.9%~~27.8% ETR for the same period in ~~2018.~~2019.

During the nine months ended September 30, ~~2019~~2020 and ~~2018,~~2019, the Company recorded approximately ~~$35.0~~$14.5 million and ~~$40.6~~$35.0 million of income tax expense, respectively. The ETR for the nine months ended September 30, ~~2019~~2020 was ~~26.4%~~28.2% compared to a ~~24.7%~~26.4% ETR for the same period in ~~2018.~~2019.

In calculating these rates, the Company considered a variety of factors including the forecasted full year pre-tax results, the U.S. federal tax rate, expected non-deductible expenses and estimated state income taxes. The Company’s final ETR for the full year will be dependent on the level of pre-tax income, discrete items, the apportionment of taxable income among state tax jurisdictions and the extent of non-deductible expenses in relation to pre-tax income.

The Company’s income tax provision reflects an estimated annual ETR of ~~27.1%~~28.4% for ~~2019,~~2020, calculated before the impact of discrete items. The ~~statutory tax rate consists~~effect of reporting discrete items through September 30, 2020 amounts to a decrease to the annual estimated ETR of 20 basis points, resulting in a total annual estimated ETR of 28.2%. The annual estimated ETR includes a federal income tax rate of 21% and a state income tax rate, net of federal benefit, of ~~3.6%~~3.7%.

Deferred tax assets and liabilities are recorded based on the difference between the financial statement and tax ~~bases~~basis of assets and liabilities at the enacted tax rates. ~~We review our~~The Company reviews its deferred tax assets regularly for recoverability. AsManagement has reviewed all available evidence, both positive and negative, in determining the need for a valuation allowance with respect to the gross deferred tax assets. In reviewing the gross deferred tax assets, management has concluded that the likelihood for utilization of ~~September 30, 2019, we~~these deferred tax assets is certain (greater than 50%) and determined that ~~we did not need~~ a valuation allowance on ~~our gross deferred tax assets. Although realization~~any of the deferred tax assets is not ~~assured, management believes that it is more likely than not~~required. Management will continue to analyze the gross deferred tax assets ~~will be realized based~~ on ~~our expectation that we will be able~~a quarterly basis to ~~fully utilize~~determine whether there is a need for a valuation allowance in the ~~deductions that are ultimately recognized for tax purposes.~~future.

The Company files its tax returns as prescribed by the tax laws of the jurisdictions in which it operates. As of September 30, ~~2019,~~2020, the Company’s ~~2016~~2017 through ~~2018~~2019 tax years are still subject to examination by the Internal Revenue Service and various tax years remain open to examination in certain state jurisdictions.

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10. Earnings Per Share

Basic earnings (loss) 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 ~~the~~ exercises of stock options, vesting of ~~restricted stock,~~performance share units, vesting of ~~performance share units,~~restricted stock, vesting of restricted stock units, and conversion of preferred stock.

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


	Three Months Ended September 30,						Nine Months Ended September 30,							Three Months Ended September 30,				Nine Months Ended September 30,
	2019			2018			2019			2018				2020		2019		2020		2019
Numerator for EPS:													Numerator for EPS:
Net income	$	20,146		$	37,380		$	97,587		$	123,519
Net income (loss)													Net income (loss)	$	(3,169)	$	20,146	$	36,780	$	97,587
Less: Preferred stock dividends	(3		)	(3		)	(8		)	(8		)	Less: Preferred stock dividends	(3)		(3)		(8)		(8)
Income available to common stockholders	$	20,143		$	37,377		$	97,579		$	123,511
Income (loss) available to common stockholders													Income (loss) available to common stockholders	$	(3,172)	$	20,143	$	36,772	$	97,579
Denominator for EPS:													Denominator for EPS:
Weighted average common shares outstanding	33,649			34,861			34,230			34,870			Weighted average common shares outstanding	31,659		33,649		32,116		34,230
Plus: Assumed conversion of share-based compensation (1)	256			1,033			310			859			Plus: Assumed conversion of share-based compensation (1)	0		256		61		310
Assumed conversion of preferred stock	25			25			25			25			Assumed conversion of preferred stock	0		25		25		25
Weighted average diluted common shares outstanding	33,930			35,919			34,565			35,754			Weighted average diluted common shares outstanding	31,659		33,930		32,202		34,565
Basic earnings per common share	$	0.60		$	1.07		$	2.85		$	3.54
Diluted earnings per common share	$	0.59		$	1.04		$	2.82		$	3.45
Basic earnings (loss) per common share													Basic earnings (loss) per common share	$	(0.10)	$	0.60	$	1.14	$	2.85
Diluted earnings (loss) per common share													Diluted earnings (loss) per common share	$	(0.10)	$	0.59	$	1.14	$	2.82



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

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11. Other Comprehensive Income (Loss)

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

Three Months Ended September 30,
2019 2018
Pre-tax Tax After-tax Pre-tax Tax After-tax
Net changes related to available-for-sale securities:
Unrealized holding gains (losses) arising during the period $ 6,815
$ 1,671
$ 5,144
$ (989 ) $ (244 ) $ (745 )
Less: Reclassification adjustments for (gains) losses realized
in net income
22
6
16
10
2
8
Other comprehensive income (loss) $ 6,837
$ 1,677
$ 5,160
$ (979 ) $ (242 ) $ (737 )

Nine Months Ended September 30,
2019 2018
Pre-tax Tax After-tax Pre-tax Tax After-tax
Net changes related to available-for-sale securities:
Unrealized holding gains (losses) arising during the period $ 38,685
$ 9,520
$ 29,165
$ (11,511 ) $ (2,751 ) $ (8,760 )
Less: Reclassification adjustments for (gains) losses realized
in net income
(87 ) (21 ) (66 ) 2,807
683
2,124
Other comprehensive income (loss) $ 38,598
$ 9,499
$ 29,099
$ (8,704 ) $ (2,068 ) $ (6,636 )


	Three Months Ended September 30,
	2020						2019
	Pre-tax		Tax		After-tax		Pre-tax		Tax		After-tax
Net changes related to available-for-sale securities:
Unrealized holding gains arising during the period	$	5,518	$	1,359	$	4,159	$	6,815	$	1,671	$	5,144
Less: Reclassification adjustments for (gains) losses realized in net income (loss)	(53,827)		(13,247)		(40,580)		22		6		16
Other comprehensive income (loss)	$	(48,309)	$	(11,888)	$	(36,421)	$	6,837	$	1,677	$	5,160



	Nine Months Ended September 30,
	2020						2019
	Pre-tax		Tax		After-tax		Pre-tax		Tax		After-tax
Net changes related to available-for-sale securities:
Unrealized holding gains arising during the period	$	28,953	$	7,320	$	21,633	$	38,685	$	9,520	$	29,165
Less: Reclassification adjustments for (gains) losses realized in net income (loss)	(54,294)		(13,362)		(40,932)		(87)		(21)		(66)
Other comprehensive income (loss)	$	(25,341)	$	(6,042)	$	(19,299)	$	38,598	$	9,499	$	29,099
Reclassification adjustment to retained earnings (1)	791		194		597		—		—		—
Change in accumulated other comprehensive income	$	(24,550)	$	(5,848)	$	(18,702)	$	38,598	$	9,499	$	29,099

(1)This amount represents reclassifications to retained earnings associated with the allowance for expected credit losses within accumulated other comprehensive income relating to available-for-sale debt security investments. See “—Note 2 (Significant Accounting Policies—Recently Adopted Accounting Pronouncements)” for more information.

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

Details about Accumulated
Other Comprehensive
Income (Loss) Components

Amount Reclassified from Accumulated
Other Comprehensive Income (Loss)

Affected Line Item in the Statement
Where Net Income is Presented
Three Months Ended
September 30, Nine Months Ended
September 30,
2019 2018 2019 2018
Unrealized gains (losses) on
available-for-sale debt securities

$ (22 ) $ (10 ) $ 87
$ (2,807 ) Net realized gains (losses) on sale of securities
6
2
(21 ) 683
Income taxes
Total reclassification for the period $ (16 ) $ (8 ) $ 66
$ (2,124 ) Net of tax


Details about Accumulated Other Comprehensive Income (Loss) Components	Amount Reclassified from Accumulated Other Comprehensive Income (Loss)								Affected Line Item in the Statement Where Net Income is Presented
	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Unrealized gains (losses) on available-for-sale debt securities
	$	53,827	$	(22)	$	54,294	$	87	Net realized gains (losses) on sale of securities
	(13,247)		6		(13,362)		(21)		Income taxes
Total reclassification for the period	$	40,580	$	(16)	$	40,932	$	66	Net of tax

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12. 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. ~~Reinsurance~~Our reinsurance commitments run from June 1st of the current year to May 31st of the following year. Certain of ~~the Company’s~~our 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”~~Payable, net” in the ~~financial statements.~~Condensed 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) ~~$117.6~~$128.3 million in ~~2020~~2021 and (2) ~~$83.6~~$71.3 million in ~~2021.~~2022.

Litigation

Lawsuits are filed against the Company from time to time. Many of these lawsuits involve claims under policies that ~~we underwrite~~the Company underwrites and ~~reserve~~reserves for as an insurer. ~~We are~~The Company is also involved in various other legal proceedings and litigation unrelated to claims under our policies that arise in the ordinary course of business operations. Management believes that any liabilities that may arise as a result of these legal matters will not have a material adverse effect on our financial condition or results of operations. The Company contests liability and/or the amount of damages as appropriate in each pending matter.

In accordance with applicable accounting guidance, the Company establishes an accrued liability for legal matters when those matters present loss contingencies that are both probable and estimable.

Legal proceedings are subject to many uncertain factors that generally cannot be predicted with ~~assurance,~~certainty, and the Company may be exposed to losses in excess of any amounts accrued. The Company currently estimates that the reasonably possible losses for legal proceedings, whether in excess of a related accrued liability or where there is no accrued liability, and for which the Company is able to estimate a possible loss, are immaterial. This represents management’s estimate of possible loss with respect to these matters and is based on currently available information. These estimates of possible loss do not represent our maximum loss exposure, and actual results may vary significantly from current estimates.

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13. 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.

•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 Techniques for Assets Measured at Fair Value on a 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 income~~debt 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.

Municipal bonds: Comprise ~~fixed income~~debt 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.

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.

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

Fair Value Measurements
September 30, 2019
Level 1 Level 2 Level 3 Total
Available-For-Sale Debt Securities:

  U.S. government obligations and agencies $ —
$ 72,586
$ —
$ 72,586
  Corporate bonds —
469,298
—
469,298
  Mortgage-backed and asset-backed securities —
321,134
—
321,134
  Municipal bonds —
3,542
—
3,542
  Redeemable preferred stock —
12,007
—
12,007
Equity Securities:
  Common stock 2,678
—
—
2,678
  Mutual funds 40,463
—
—
40,463
Total assets accounted for at fair value $ 43,141
$ 878,567
$ —
$ 921,708

Fair Value Measurements
December 31, 2018
Level 1 Level 2 Level 3 Total
Available-For-Sale Debt Securities:
  U.S. government obligations and agencies $ —
$ 66,637
$ —
$ 66,637
  Corporate bonds —
428,865
—
428,865
  Mortgage-backed and asset-backed securities —
309,597
—
309,597
  Municipal bonds —
3,362
—
3,362
  Redeemable preferred stock —
11,977
—
11,977
Equity Securities:
  Common stock 15,564
—
—
15,564
  Mutual funds 47,713
—
—
47,713
Total assets accounted for at fair value $ 63,277
$ 820,438
$ —
$ 883,715


	Fair Value Measurements
	September 30, 2020
	Level 1		Level 2		Level 3		Total
Available-For-Sale Debt Securities:
U.S. government obligations and agencies	$	—	$	135,328	$	—	$	135,328
Corporate bonds	—		435,698		—		435,698
Mortgage-backed and asset-backed securities	—		253,002		—		253,002
Municipal bonds	—		7,139		—		7,139
Redeemable preferred stock	—		11,407		—		11,407
Equity Securities:
Common stock	2,240		—		—		2,240
Mutual funds	50,460		—		—		50,460
Total assets accounted for at fair value	$	52,700	$	842,574	$	—	$	895,274


	Fair Value Measurements
	December 31, 2019
	Level 1		Level 2		Level 3		Total
Available-For-Sale Debt Securities:
U.S. government obligations and agencies	$	—	$	54,364	$	—	$	54,364
Corporate bonds	—		476,218		—		476,218
Mortgage-backed and asset-backed securities	—		311,079		—		311,079
Municipal bonds	—		3,496		—		3,496
Redeemable preferred stock	—		10,127		—		10,127
Equity Securities:
Common stock	2,377		—		—		2,377
Mutual funds	41,340		—		—		41,340

Total assets accounted for at fair value	$	43,717	$	855,284	$	—	$	899,001

The Company utilizes third-party independent pricing services that provide a price quote for each available-for-sale debt security and 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 available-for-sale debt security or equity ~~securities~~security included in the tables above.

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

September 30, 2019 December 31, 2018
Carrying Value (Level 3) Estimated Fair Value Carrying Value (Level 3) Estimated Fair Value
Liabilities (debt):
Surplus note $ 10,294
$ 9,584
$ 11,397
$ 10,125


	September 30, 2020				December 31, 2019
	Carrying Value		(Level 3) Estimated Fair Value		Carrying Value		(Level 3) Estimated Fair Value
Liabilities (debt):
Surplus note	$	8,823	$	8,650	$	9,926	$	9,365

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.

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14. Variable Interest Entities

~~14.~~

The Company entered into a reinsurance captive arrangement with a VIE in the normal course of business and consolidated the VIE since the Company is the primary beneficiary. See “—Note 2 (Significant Accounting Policies—Recently Adopted Accounting Pronouncements)” for more information.

On a consolidated basis, the balance sheet classification and exposure is comprised of $18.4 million of restricted cash held in a reinsurance trust account, which can be used only to settle specific reinsurance obligations of that VIE.

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15. Subsequent Events

The Company performed an evaluation of subsequent events through the date the ~~Financial Statements~~financial statements were issued and determined there were no recognized or unrecognized subsequent events that would require an adjustment or additional disclosure in the ~~Financial Statements~~condensed consolidated financial statements as of September 30, ~~2019.~~2020.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Unless the context otherwise requires, all references to “we,” “us,” “our,” and “Company” refer to Universal Insurance Holdings, Inc. and its wholly-owned subsidiaries. You should read the following discussion together with our unaudited condensed consolidated financial statements (“Financial Statements”) and the related notes thereto included in “Part I, Item 1—Financial ~~Statements”,~~Statements,” and our audited condensed consolidated financial statements and the related notes thereto included in “Part II, Item 8—Financial Statements and Supplementary Data” in our Annual Report on Form 10-K for the year ended December 31, ~~2018.~~2019. Operating results for any one quarter are not necessarily indicative of results to be expected for any other quarter or for the year.

Cautionary Note Regarding Forward-Looking Statements

In addition to historical information, this report may contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The forward-looking statements anticipate results based on our estimates, assumptions and plans that are subject to uncertainty. These forward-looking statements may be identified by their use of words like “plans,” “seeks,” “expects,” “will,” “should,” “anticipates,” “estimates,” “intends,” “believes,” “likely,” ~~“targets”~~“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 as a result of the risks set forth below, which are a summary of those set forth in our Annual Report on Form 10-K for the year ended December 31, ~~2018.~~2019, as supplemented in our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.

Risks and uncertainties that may affect, or have affected, our financial condition and operating results include, but are not limited to, the following:

•Unanticipated increases in the severity or frequency of claims, including those relating to catastrophes, severe weather events and changing climate conditions, which, in some instances, have exceeded, and in the future may exceed our ~~current~~ reserves established for claims;

•Failure of our risk mitigation strategies, including failure to accurately and adequately price the risks we underwrite and to ~~write~~include effective exclusions and other loss limitation methods in our insurance policies;

•Loss of independent insurance agents and inability to attract new independent agents;

•Reliance on models, which are inherently uncertain, as a tool to evaluate risks;

•The continued availability of reinsurance at current levels and prices, and our ability to collect payments due from our reinsurers;

•Changes in industry trends, including changes due to the cyclical nature of the industry and increased competition;

•Geographic concentration of our business in Florida and the effectiveness of our growth and diversification strategy in new markets;

•Loss of key personnel and inability to attract and retain talented employees;

•Failure to comply with existing and future guidelines, policies and legal and regulatory standards;

•The ability of our claims professionals to effectively manage claims;

•Litigation or regulatory actions that could result in significant damages, fines or penalties;

•A downgrade in our Financial Stability Rating® and its impact on our competitive position, the marketability of our product offerings, our liquidity and profitability;

•The impact on our business and reputation of data and security breaches due to cyber-attacks or our inability to effectively adapt to changes in technology;

•Our dependence on the returns of our investment portfolio, which are subject to market risk;

•Legal, regulatory or tax changes that increase our operating costs and decrease our profitability, such as limitations on rate changes or requirements to participate in loss sharing;

•Our dependence on dividends and permissible payments from our subsidiaries; ~~and~~

•The ability of our Insurance Entities to comply with statutory capital and surplus minimums and other regulatory and licensing ~~requirements.~~requirements; and

•The ongoing impact of the COVID-19 pandemic on our business and the economy in general.

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OVERVIEW

We are a vertically integrated holding company offering property and casualty ~~(“P&C”)~~ insurance and value-added insurance services. We develop, market and underwrite insurance products for consumers predominantly in the personal residential homeowners line of business and perform substantially all other insurance-related services for our primary insurance entities, including risk management, claims management, and distribution. Our primary insurance entities, Universal Property & Casualty Insurance Company (“UPCIC”) and American Platinum Property and Casualty Insurance Company (“APPCIC” and together with UPCIC, the “Insurance Entities”), currently offer insurance products through both our appointed independent agent network and our online distribution channels across 1819 states (primarily in Florida), with licenses to write insurance in antwo additional ~~two~~states. In the second quarter, we surrendered our license in West Virginia, a state in which we did not write any premium. Also during the second quarter, we received a Certificate of Authority in Wisconsin, approving UPCIC as a licensed insurance company in Wisconsin. The Insurance Entities seek to produce an underwriting profit ~~over the long term~~ (defined as earned premium less losses, loss adjustment expense (“LAE”), policy acquisition costs and other operating costs); over the long term; maintain a ~~strong~~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 exceeding short-term operating needs.~~assets.

The following Management’s Discussion and Analysis (“MD&A”) is intended to assist in an understanding of our financial condition and results of operations. This MD&A should be read in conjunction with our Financial Statements and accompanying Notes appearing elsewhere in this Report (the “Notes”). In addition, reference should be made to our audited Consolidated Financial Statements and accompanying Notes to Consolidated Financial Statements and “Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, ~~2018.~~2019. 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.”

~~RESULTS OF OPERATIONS AND ANALYSIS OF FINANCIAL CONDITION~~Trends - Impact of COVID-19

~~Highlights~~

~~Results~~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, in advance of governmental mandates, to help reduce the spread of COVID-19 by directing substantially all employees with the ability to do so to immediately self-quarantine by working at 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 ~~for~~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 ensure that all employees remained 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. Through the third quarter of ~~fiscal 2019,~~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 yet 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 during the nine months ended September 30, 2020 was strong and outperformed the same period in the prior year. We are cautiously optimistic in our belief that our customers 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 production and/or collection of premiums, we intend to take measures to maintain liquidity while continuing to protect our capital and policyholders. See “—Liquidity and Capital Resources.”

KEY PERFORMANCE INDICATORS

The Company considers several of 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 1—Note 2 (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 condensed 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 ~~case compared~~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.

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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 ~~third quarter~~impact of ~~fiscal 2018 (unless otherwise specified), include:~~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 year’s 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.

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 those spend items to overall ~~grew~~profitability.

Losses and Loss Adjustment Expense Ratio or Loss and LAE Ratio ― a measure of the cost of claims and claim settlement expenses incurred in a reporting period as a percentage of premiums earned in that same reporting period. Losses and LAE incurred in a reporting period includes both amounts related to the current accident year and prior accident years, if any, referred to as development. Ultimate losses and LAE are based on actuarial estimates with changes in those estimates recognized in the period the estimates are revised. Losses and LAE consist of claim costs arising from claims occurring and settling in the current period, an estimate of claim costs for reported but unpaid claims, an estimate of unpaid claim costs for incurred-but-not-reported claims and an estimate of claim settlement expenses associated with reported and unreported claims which occurred during the reporting period. The loss and LAE ratio can be measured on a direct basis, which includes losses and LAE divided by ~~$33.7 million,~~direct earned premiums, or ~~10.9%~~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 ~~$342.9 million.~~the effect of reinsurance. Trends in the net loss and LAE ratio are an indication to management of current and future profitability.

~~In Florida,~~

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.

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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 ~~written grew~~corresponding to the time period remaining on an insurance policy and available to future earning by ~~$20.1 million,~~the Company. Trends in unearned premiums generally indicate expansion, if growing, or ~~7.7%, and~~contraction, if reducing, which are important indicators to management. Inherent seasonality in our ~~other states, direct premiums written grew by $13.6 million, or 27.6%.~~business makes this measure more useful when comparing each quarter’s balance to the same quarter in prior years.

~~Net earned premiums grew by $17.7 million, or 9.3%, to $206.6 million.~~

~~Total revenues increased by $23.5 million, or 11.4%, to $229.6 million.~~

~~Diluted earnings per share (“EPS”)~~Weather events― an estimate of ~~$0.59 compared to $1.04.~~

~~Book value per share increased by $2.71, or 18.8%, to $17.13 at September 30, 2019~~losses and LAE from ~~$14.42 at December 31, 2018.~~

~~Paid dividends of $0.16 per share in the third quarter of 2019.~~

~~Repurchased 964,127 shares~~weather events occurring during the ~~quarter at an aggregate purchase price~~current accident year that exceed initial estimates of ~~$25.7 million.~~expected weather events when establishing the core loss ratio for each accident year. This metric informs management of factors impacting overall current year profitability.

~~Reinsurance~~REINSURANCE

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~~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 Florida Hurricane Catastrophe Fund (“FHCF”). The Florida Office of Insurance Regulation (“FLOIR”) requires the Insurance Entities, like all residential property insurance companies doing business in Florida, to have a certain amount of capital and reinsurance coverage in order to cover losses upon the occurrence of a single catastrophic event and a series of catastrophic events occurring in the same hurricane season. The Insurance Entities’ ~~2019-2020~~respective 2020-2021 reinsurance programs meet the FLOIR’s requirements, which are based on, among other things, successfully demonstrating a cohesive and comprehensive reinsurance ~~program~~programs that ~~protects~~protect the policyholders of our Insurance Entities, as well as satisfying a series of stress test catastrophe loss scenarios based on past historical events.

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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 ~~v17.0~~v18.1 (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. Furthermore, as part of our operational excellence initiatives, we continually look to enable new technology to refine our data intelligence on catastrophe risk modeling.

Effective June 1, ~~2019,~~2020, the Insurance Entities entered into multiple reinsurance agreements comprising our ~~2019-2020~~2020-2021 reinsurance program. See “Item 1—Note 4 (Reinsurance).”

UPCIC’s ~~2019-2020~~2020-2021 Reinsurance Program

•First event All States retention of $43 million; First event Non-Florida retention of ~~$10~~$15 million.

•All States first event tower ~~expanded~~extends to ~~$3.32~~$3.38 billion ~~an increase~~with no co-participation in any of ~~$170 million over~~ the ~~final 2018-2019 program.~~layers, no limitations on loss adjustment expenses and no accelerated deposit premiums.

•Assuming a first event completely exhausts the ~~$3.32~~$3.38 billion tower, the second event exhaustion point would be ~~$1.3 billion, an increase of $262 million over the final 2018-2019 program on the same assumptions.~~$1.343 billion.

•Full reinstatement available for all private market first event catastrophe layers for guaranteed second event coverage. For all layers purchased ~~below~~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.

~~Private market reinsurance coverage continues~~•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 ~~be structured into layers. This structure utilizes a cascading feature such that any~~pay for the premium necessary for the reinstatement of all catastrophe layers ~~above a $111~~between $45 million ~~attachment point are excess of loss over~~and 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.~~projected FHCF retention.

•Specific ~~3rd~~3rd and ~~4th~~4th event private market catastrophe excess of loss coverage of $76 million in excess of $35 million provides ~~robust~~ frequency protection for a multiple event storm season.

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•For the FHCF Reimbursement Contracts effective June 1, ~~2019,~~2020, UPCIC has continued the election of the 90% coverage level. ~~The~~We estimate the total mandatory FHCF layer ~~is estimated to~~will provide approximately ~~$2.017~~$2.034 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.

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:

Reinsurer

A.M. Best

S&P

Allianz Risk Transfer

A+

AA-

Arch Reinsurance Limited

A+

Chubb Tempest Reinsurance Ltd.

A++

Munich Re

A+

AA-

Renaissance Re

A+

Various Lloyd’s of London Syndicates

A+

Florida Hurricane Catastrophe Fund (1)

N/A

(1)No rating is available, because the fund is not rated.

APPCIC’s ~~2019-2020~~2020-2021 Reinsurance Program

•First event All States retention of $2$3 million.

•All States first event tower of ~~$30.5 million.~~$43.9 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 ~~below~~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 ~~has~~ purchased enough RPP limit to pay the premium necessary for the reinstatement of this coverage.

Private market reinsurance coverage continues to be structured into layers. This structure utilizes a cascading feature such that any layers above the $2 million attachment point are excess of loss over the immediately preceding layer. If the aggregate limit of the preceding layer is exhausted, the next layer cascades down in its place for future events.

•APPCIC also purchases extensive multiple line excess per risk reinsurance with various reinsurers due to the high-value risks it insures in both the personal residential and commercial multiple peril lines of business. Under this multiple line excess per risk contract, APPCIC has coverage of $8.5 million in excess of ~~$500 thousand~~$0.5 million ultimate net loss for each risk and each property loss, and $1 million in excess of $0.3 million for each casualty loss. A $19.5 million aggregate limit applies to the term of the contract for property-related losses and a ~~$2.0~~$2 million aggregate limit applies to the term of the contract for casualty-related losses. This contract also contains a profit-sharing feature if specific performance measures are met.

•For the FHCF Reimbursement Contracts effective June 1, ~~2019,~~2020, APPCIC has continued the election of the 90% coverage level. The total mandatory FHCF layer is estimated to provide approximately ~~$14.7~~$22.77 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:

Reinsurer

A.M. Best

S&P

Chubb Tempest Reinsurance Ltd.

A++

Lancashire Insurance Company Limited

A-

Various Lloyd’s of London Syndicates

A+

Florida Hurricane Catastrophe Fund (1)

N/A

(1)No rating is available, because the fund is not rated.

The total cost of the ~~2019-2020~~2020-2021 reinsurance programs for UPCIC and APPCIC is projected to be ~~$420~~$494 million, representing approximately ~~33.5%~~34.6% of estimated direct premium earned for the 12-month treaty period.

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RESULTS OF OPERATIONS AND ANALYSIS OF FINANCIAL CONDITION

Highlights

Results of ~~Operations - Three Months Ended September 30, 2019 Compared to Three Months Ended September 30, 2018~~

~~Net income was $20.1 million~~operations for the ~~three months ended September 30,~~third quarter of fiscal 2020, in each case compared with the third quarter of fiscal 2019 (unless otherwise specified), include:

•Direct premiums written overall grew by $66.5 million, or 19.4%, to $409.4 million.

•In Florida, direct premiums written grew by $54.8 million, or 19.6%, and in our other states, direct premiums written grew by $11.8 million, or 18.8%.

•Premiums earned, net, grew by $27.6 million, or 13.4%, to $234.2 million.

•Net realized gains of $53.8 million from sales of available-for-sale securities and net unrealized gains of $2.0 million from the change in the fair market value of equity securities.

•In May 2020, the FLOIR approved an overall 12.4% rate increase on Florida personal residential homeowners line of business, effective May 2020 for new business and July 2020 for renewals.

•Total revenues increased by $82.0 million, or 35.7%, to $311.7 million.

•Two catastrophic events, Hurricanes Sally and Isaias, occurred during the quarter, resulting in $58 million impact after reinsurance.

•Net loss and LAE ratio was 101.8% as compared to ~~$37.4 million for the three months ended September 30, 2018, a decrease~~64.3%, driven by an increase in severe weather and prior year’s reserve development.

•Diluted earnings (loss) per common share (“EPS”) of ~~$17.2 million or 46.1%. Diluted EPS for the current quarter was $0.59~~$(0.10) compared to ~~$1.04 in 2018, a decrease of $0.45 or 43.3%.~~ $0.59.

•Weighted average diluted common shares outstanding were lower by ~~5.5%~~6.7% to 31.7 million shares compared to 33.9 million ~~shares from 35.9 million shares~~shares.

•Book value per common share increased by $0.02, or 0.1%, to $15.15 at September 30, ~~2018.~~2020 from $15.13 at December 31, 2019.

•Declared and paid dividends of $5.1 million, or $0.16 per common share, in the third quarter of 2020.

•Repurchased 533,912 shares at an average price of $18.52 for an aggregate purchase price of $9.9 million during the third quarter of 2020.

•Contributed $44 million of capital to UPCIC.

•Received Certificate of Authority from Tennessee.

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Results of Operations — Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019

Net loss was $3.2 million for the three months ended September 30, 2020, compared to net income of $20.1 million for the same period in 2019. Benefiting the quarter were increases in premiums earned, net, ~~earned premium, net investment income,~~realized gains on investments, net change in unrealized gains from an increase in the fair value of equity securities, commission revenue, policy fees and ~~commission~~other revenue, offset by a decrease in net investment income, and increased total operating costs ~~for losses~~ and ~~LAE.~~expenses. Direct premium earned and ~~net~~premiums earned, ~~premium~~net were up ~~8.6%~~14.1% and ~~9.3%~~13.4%, respectively, due to growth in all states in which we are licensed and writing during the past 12 ~~months.~~months and rate increases implemented during 2020, offset by higher costs for reinsurance flowing through to premiums earned, net. Increases in losses and LAE were the result ~~of:~~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) a higher level of unexpected~~year, (2) premium growth and change in mix between Florida and other states and (3) increased adverse weather events ~~this year;~~ and ~~(5) a higher level of~~ prior ~~year adverse~~year’s reserve development ~~compared to the prior year. Income tax expense was lower than the prior year primarily as a result of lower pre-tax income.~~in 2020.

A detailed discussion of our results of operations follows the table below (in thousands, except per share data).


	Three Months Ended September 30,						Change						Three Months Ended September 30,				Change
	2019			2018			$			%			2020		2019		$		%
PREMIUMS EARNED AND OTHER REVENUES												PREMIUMS EARNED AND OTHER REVENUES
Direct premiums written	$	342,872		$	309,176		$	33,696		10.9	%	Direct premiums written	$	409,418	$	342,872	$	66,546	19.4	%
Change in unearned premium	(29,807		)	(20,772		)	(9,035		)	43.5	%	Change in unearned premium	(52,210)		(29,807)		(22,403)		75.2	%
Direct premium earned	313,065			288,404			24,661			8.6	%	Direct premium earned	357,208		313,065		44,143		14.1	%
Ceded premium earned	(106,466		)	(99,466		)	(7,000		)	7.0	%	Ceded premium earned	(123,017)		(106,466)		(16,551)		15.5	%
Premiums earned, net	206,599			188,938			17,661			9.3	%	Premiums earned, net	234,191		206,599		27,592		13.4	%
Net investment income	7,613			6,642			971			14.6	%	Net investment income	4,557		7,613		(3,056)		(40.1)	%
Net realized gains (losses) on investments	(22		)	403			(425		)	NM		Net realized gains (losses) on investments	53,827		(22)		53,849		NM
Net change in unrealized gains (losses) of equity securities	573			(2,473		)	3,046			NM		Net change in unrealized gains (losses) of equity securities	1,991		573		1,418		247.5	%
Commission revenue	7,380			5,658			1,722			30.4	%	Commission revenue	8,997		7,380		1,617		21.9	%
Policy fees	5,569			5,204			365			7.0	%	Policy fees	6,167		5,569		598		10.7	%
Other revenue	1,929			1,783			146			8.2	%	Other revenue	1,935		1,929		6		0.3	%
Total premiums earned and other revenues	229,641			206,155			23,486			11.4	%	Total premiums earned and other revenues	311,665		229,641		82,024		35.7	%
OPERATING COSTS AND EXPENSES												OPERATING COSTS AND EXPENSES
Losses and loss adjustment expenses	132,571			85,947			46,624			54.2	%	Losses and loss adjustment expenses	238,477		132,571		105,906		79.9	%
General and administrative expenses	69,174			69,041			133			0.2	%	General and administrative expenses	76,980		69,174		7,806		11.3	%
Total operating costs and expenses	201,745			154,988			46,757			30.2	%	Total operating costs and expenses	315,457		201,745		113,712		56.4	%
INCOME BEFORE INCOME TAXES	27,896			51,167			(23,271		)	(45.5	)%
Income tax expense	7,750			13,787			(6,037		)	(43.8	)%
NET INCOME	$	20,146		$	37,380		$	(17,234	)	(46.1	)%
INCOME (LOSS) BEFORE INCOME TAXES												INCOME (LOSS) BEFORE INCOME TAXES	(3,792)		27,896		(31,688)		NM
Income tax (benefit) expense												Income tax (benefit) expense	(623)		7,750		(8,373)		NM
NET INCOME (LOSS)												NET INCOME (LOSS)	$	(3,169)	$	20,146	$	(23,315)	NM
Other comprehensive income (loss), net of taxes	5,160			(737		)	5,897			NM		Other comprehensive income (loss), net of taxes	(36,421)		5,160		(41,581)		NM
COMPREHENSIVE INCOME	$	25,306		$	36,643		$	(11,337	)	(30.9	)%
DILUTED EARNINGS PER SHARE DATA:
Diluted earnings per common share	$	0.59		$	1.04		$	(0.45	)	(43.3	)%
COMPREHENSIVE INCOME (LOSS)												COMPREHENSIVE INCOME (LOSS)	$	(39,590)	$	25,306	$	(64,896)	NM
DILUTED EARNINGS (LOSS) PER SHARE DATA:												DILUTED EARNINGS (LOSS) PER SHARE DATA:
Diluted earnings (loss) per common share												Diluted earnings (loss) per common share	$	(0.10)	$	0.59	$	(0.69)	NM
Weighted average diluted common shares outstanding	33,930			35,919			(1,989		)	(5.5	)%	Weighted average diluted common shares outstanding	31,659		33,930		(2,271)		(6.7)	%

NM – Not Meaningful												NM – Not Meaningful

~~Policy count, premium in force and total insured value increased at September 30, 2019 when compared to September 30, 2018.~~ Direct premiums written increased by ~~$33.7~~$66.5 million, or ~~10.9%~~19.4%, for the quarter ended September 30, ~~2019,~~2020, driven by growth within our Florida business of ~~$20.1~~$54.8 million, or ~~7.7%~~19.6%, and growth in our other states business of ~~$13.6~~$11.8 million, or ~~27.6%~~18.8%, as compared to the same period of the prior year. Rate increases in Florida and in certain other states along with slightly improved retention ~~were~~ also ~~a source of~~contributed to the premium growth. As discussed below in losses and LAE, we implemented new guidelines during the first quarter of 2019 on new business to address emerging loss trends that have impacted the rate of growth in Florida. PremiumsPremium in force increased in every state in which we are writing at September 30, 2020 compared to ~~the prior year. In early March~~September 30, 2019. We actively wrote policies in 18 states during 2019 ~~we commenced writing in Illinois,~~and 2020 and we ~~are now actively writing~~wrote multiple policies in ~~17 states outside our home state~~Iowa subsequent to the third quarter of ~~Florida.~~2020. In addition, we are authorized to do business in Tennessee and Wisconsin and are proceeding with product filings in those states. Policies in force, premium in force and total insured value all increased as of September 30, 2020 when compared to September 30, 2019.

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The following table provides direct premiums written for Florida and Other States for the three months ended September 30, ~~2019~~2020 and ~~2018~~2019 (dollars in thousands):


	For the Three Months Ended
	September 30, 2020				September 30, 2019				Growth year over year
State	Direct Premiums Written		%		Direct Premiums Written		%		$		%
Florida	$	334,916	81.8	%	$	280,141	81.7	%	$	54,775	19.6	%
Other states	74,502		18.2	%	62,731		18.3	%	11,771		18.8	%
Total	$	409,418	100.0	%	$	342,872	100.0	%	$	66,546	19.4	%

For the Three Months Ended
September 30, 2019 September 30, 2018
Growth
year over year
State
Direct Premiums
Written
%
Direct Premiums
Written
% $ %
Florida $ 280,141
81.7 % $ 260,024
84.1 % $ 20,117
7.7 %
Other states 62,731
18.3 % 49,152
15.9 % 13,579
27.6 %
Total $ 342,872
100.0 % $ 309,176
100.0 % $ 33,696
10.9 %
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.

Direct premium earned increased by ~~$24.7~~$44.1 million, or ~~8.6%~~14.1%, for the quarter ended September 30, ~~2019,~~2020, reflecting the earning of premiums written over the past 12 months and changes in rates and ~~policy count~~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 ~~by $7.0~~$16.6 million, or ~~7.0%~~15.5%, for the quarter ended September 30, ~~2019.~~2020, as compared to the same period of the prior year. The increase in reinsurance costs reflects both an increase in costs associated with the increase in exposures we insure and increased pricing when compared to the expired reinsurance program. Reinsurance costs, as a percentage of direct premium earned, ~~decreased~~increased from ~~34.5% to~~ 34.0%, reflecting a lower level of additional costs from ceded earned reinstatement premiums of $1.1 million in 2019 compared to $13.5 million in 2018 relating to additional reinsurance costs from Hurricane Irma. Excluding reinstatement premiums, ceded premiums earned were 33.6% of direct premiums earned in 2019 compared to 29.8% in 2018. The increase is a result of costs for the ~~Company’s 2019-2020 reinsurance program compared~~three months ended September 30, 2019 to 34.4% for the ~~expired program. The increased~~three months ended September 30, 2020. Reinsurance costs associated with ~~the 2019-2020~~each year’s reinsurance program ~~will be~~are earned over the June 1 ~~2019~~st to May 31 ~~2020~~st twelve-month coverage period. See the discussion above for the ~~new 2019-2020~~Insurance Entities’ 2020-2021 reinsurance ~~program~~programs and “Item 1—Note 4 (Reinsurance).”

Premiums earned, net of ceded premium earned, grew by ~~9.3%~~13.4%, or ~~$17.7~~$27.6 million, to ~~$206.6~~$234.2 million for the three months ended September 30, ~~2019,~~2020, reflecting an increase in direct ~~premiums~~premium earned offset by increased ~~cost~~costs for reinsurance.

Net investment income was ~~$7.6~~$4.6 million for the three months ended September 30, ~~2019,~~2020, compared to ~~$6.6~~$7.6 million for the same period in ~~2018, an increase~~2019, a decrease of ~~$1.0~~$3.1 million, or ~~14.6%~~40.1%. The ~~increase~~decrease is driven by ~~the combination of growth~~lower trends in ~~cash and invested assets compared to the prior year and benefits from higher yielding assets, offset by a lower trend in yields on cash and short term investments during 2019.~~market yields. Total invested assets were ~~$937.4~~$910.6 million as of September 30, ~~2019~~2020 compared to ~~$908.2~~$914.6 million as of December 31, ~~2018. The credit rating on our fixed income securities was A+ as of September 30, 2019~~2019. Cash and ~~December 31, 2018. The duration of fixed income securities was 2.63 years~~cash equivalents were $405.1 million at September 30, ~~2019~~2020 compared to ~~2.79 years~~$182.1 million at December 31, ~~2018.~~2019, an increase of 122.5%. 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 toby our investment advisors.

Yields from cash and cash equivalents, short-term investments and the ~~fixed income~~available-for-sale portfolio are dependent on future market forces, monetary policy and interest rate policy from the Federal Reserve. ~~During 2019, the~~The Federal Reserve has broadly been lowering and maintaining lower interest rates, which has impacted the effective yields on new ~~fixed income~~available-for-sale portfolio and overnight cash ~~purchases.~~purchases and short-term investments. The ~~impact from this~~overall trend ~~in 2019~~ has been ~~somewhat limited as investments mature~~lower interest rates on new purchases of securities over ~~many~~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 ~~years~~portfolio returns will reflect lower book yields based on ~~the effective maturity of the portfolio, subjecting only the~~ current year redemptions to the lower interest rate environment. The Company’s investment strategy is to invest in assets with multi-year effective maturities, locking in book yields for future years which dampers the impact that market ~~fluctuations have on current investment income.~~conditions.

We sell ~~securities~~investments from our investment portfolio from time to time to meet our investment ~~objectives.~~objectives or take advantage of market opportunities. During the three months ended September 30, 2020, sales of available-for-sale debt securities resulted in net realized gains of $53.8 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 which accounts for the temporary increase in cash and cash equivalents at September 30, 2020. As a result of the sales and future reinvestment of available-for-sale debt securities, it is expected that future portfolio investment income will reflect current market rates which are below the book yield of the securities sold. During the three months ended September 30, 2019, sales of available-for-sale debt securities resulted in a net realized ~~loss~~losses of $22 thousand. ~~We sold securities during the three months ended September 30, 2018, generating net realized gain of $0.4 million.~~ See “Item 1—(Note 3 ~~Investments)~~(Investments).”

There was a ~~$0.6~~$2.0 million favorable net unrealized gain in equity securities during the three months ended September 30, ~~2019~~2020 compared to a ~~$2.5~~$0.6 million ~~unfavorable~~favorable net unrealized ~~loss~~gain during the three months ended September 30, ~~2018.~~2019. Unrealized gains or losses reflected on the income statement are the result of changes in the fair market value of our equity securities during the period for securities still held and the reversal of unrealized gains or losses for securities sold during the period. See “Item 1—(Note 3 ~~Investments)~~(Investments).”

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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 three months ended September 30, ~~2019,~~2020, commission revenue was ~~$7.4~~$9.0 million, compared to ~~$5.7~~$7.4 million for the three months ended September 30, ~~2018.~~2019. The increase in commission revenue of ~~$1.7~~$1.6 million, or ~~30.4%~~21.9%, for the three months ended September 30, ~~2019~~2020 was primarily ~~from~~due to increased commissions from third-party reinsurers earned on increased reinsurance premiums due to growth in our exposures, as well as the difference in pricing and structure associated with our reinsurance program when compared to the ~~new reinsurance program.~~prior year.

Policy fees for the three months ended September 30, ~~2019~~2020 were ~~$5.6~~$6.2 million compared to ~~$5.2~~$5.6 million for the same period in ~~2018.~~2019. The increase of ~~$0.4~~$0.6 million, or ~~7.0%~~10.7%, was the result of an increase in the total number of new and renewal policies written during the three months ended September 30, ~~2019~~2020 compared to the same period in ~~2018.~~2019.

~~Table of Contents~~

~~Losses~~The following table presents losses and LAE incurred on a direct, ceded and net basis expressed in dollars and as a percent of ~~reinsurance, were $132.6 million~~the respective amounts of premiums earned. These amounts are further categorized as 1) core losses, 2) weather events for the ~~three months ended September 30, 2019, compared to $85.9 million during the same period in 2018 as follows~~current accident year and 3) prior year’s reserve development (dollars in thousands):


	Three Months Ended September 30, 2019													Three Months Ended September 30, 2020
	Direct		Loss Ratio		Ceded		Loss Ratio		Net		Loss Ratio			Direct		Loss Ratio		Ceded		Loss Ratio		Net		Loss Ratio
Premiums earned	$	313,065			$	106,466			$	206,599			Premiums earned	$	357,208			$	123,017			$	234,191

Loss and loss adjustment expenses:													Loss and loss adjustment expenses:
Core losses													Core losses	$	140,470	39.3	%	$	78	0.1	%	$	140,392	59.9	%
Weather events*	$	15,000	4.8	%	$	—	—	%	$	15,000	7.3	%	Weather events*	70,000		19.6	%	2,000		1.6	%	68,000		29.0	%
Prior year adverse/(favorable) reserve development	205,087		65.5	%	201,869		189.6	%	3,218		1.6	%
All other losses and loss adjustment expenses	114,353		36.5	%	—		—		114,353		55.4	%
Prior year’s reserve development													Prior year’s reserve development	136,737		38.3	%	106,652		86.7	%	30,085		12.9	%
Total losses and loss adjustment expenses	$	334,440	106.8	%	$	201,869	189.6	%	$	132,571	64.3	%	Total losses and loss adjustment expenses	$	347,207	97.2	%	$	108,730	88.4	%	$	238,477	101.8	%

*Includes only current year weather events beyond those expected.	*Includes only current year weather events beyond those expected.												*Includes only current year weather events beyond those expected.

Three Months Ended September 30, 2018
Direct Loss Ratio Ceded Loss Ratio Net Loss Ratio
Premiums earned $ 288,404

$ 99,466

$ 188,938

Loss and loss adjustment expenses:

Weather events* $ 41,858
14.5 % $ 34,358
34.5 % $ 7,500
4.0 %
Prior year adverse/(favorable) reserve
development
149,633
51.9 % 149,672
150.5 % (39 ) 0.0 %
All other losses and loss adjustment
expenses
78,667
27.3 % 181
0.2 % 78,486
41.5 %
Total losses and loss adjustment expenses $ 270,158
93.7 % $ 184,211
185.2 % $ 85,947
45.5 %

*Includes only current year weather events beyond those expected.


	Three Months Ended September 30, 2019
	Direct		Loss Ratio		Ceded		Loss Ratio		Net		Loss Ratio
Premiums earned	$	313,065			$	106,466			$	206,599

Loss and loss adjustment expenses:
Core losses	$	114,353	36.5	%	$	—	—	%	$	114,353	55.4	%
Weather events*	15,000		4.8	%	—		—	%	15,000		7.3	%
Prior year’s reserve development	205,087		65.5	%	201,869		189.6	%	3,218		1.6	%
Total losses and loss adjustment expenses	$	334,440	106.8	%	$	201,869	189.6	%	$	132,571	64.3	%

*Includes only current year weather events beyond those expected.

See “Item 1—Note 6 (Liability for Unpaid Losses and Loss Adjustment Expenses)” for change in liability for unpaid losses and LAE.

~~For~~

Management looks at losses and LAE in three areas, as described below and represented in the ~~third quarter~~tables above, each of ~~2019, we experienced $15.0 million~~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 $238.5 million resulting in a 101.8% net loss and LAE ratio for the quarter ended September 30, 2020. This compares to $132.6 million resulting in a 64.3% net loss and LAE ratio for the quarter ended September 30, 2019.

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The factors impacting losses and LAE are as follows:

•Core losses

◦Our core losses consist of all other losses and LAE, excluding weather events beyond those expected ~~principally~~and prior year’s reserve development. Core losses for ~~Hurricane Dorian and other weather-related events. This compares~~2020 are 39.3% of direct premium earned for the quarter ended September 30, 2020 compared to ~~$7.5 million of~~36.5% for the same period in 2019. These losses and ~~LAE~~loss ratios benefit from the profitable impact of ceded claim fees, which are described below, reducing core losses. The increase in core loss ratio for 2020 is principally the result of higher trends in expected costs to settle claims in the Florida market, specifically in response to increased trends in litigated and represented claims. Core losses also increase as premium volume increases year over year.

•Weather events beyond those expected

◦During the three months ended September 30, 2020, there were two hurricanes, Sally and Isaias, and a number of weather events which in the aggregate exceeded core loss ratio expectations. Our initial estimates on Hurricane Sally are gross losses of $45 million and net losses of $43 million after reinsurance. Hurricane Isaias and the other weather events beyond those expected ~~in 2018, primarily related~~totaled $25 million on a direct and net basis as these events do not benefit from our reinsurance program due to ~~Hurricane Florence, Tropical Storm Gordon and other events. All other~~ losses ~~and LAE increased during~~being below our attachment point.

◦During the third quarter ended September 30, 2019, weather events totaled $15.0 million direct and net, principally ~~due~~for Hurricane Dorian and other weather events beyond those expected.

•Prior year’s reserve development

◦Management identifies two drivers which influence amounts recorded as prior year’s reserve development, namely: (i) changes to ~~three key factors: (1)~~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 quarter ended September 30, 2020, prior year’s reserve development totaled $136.7 million of direct losses and $30.1 million of net losses after the benefit of reinsurance.

▪Prior year’s reserve development, excluding hurricanes described above, was $19.6 million direct and $19.3 million net of reinsurance for the quarter ended September 30, 2020, which was the result of increased losses in connection with the growth in our underlying business; (2) increased core loss ratio (as defined below) from 33% in 2018 to 37% in 2019; and (3) reduced level of financial benefits from claim settlement fees ceded to reinsurers as hurricanes claims conclude. In the third quarter of 2019, there was adverse prior year ~~reserve~~companion claims in the run up to the expiration of the statute of limitations for Hurricane Irma.

▪For the quarter ended September 30, 2020, development of ~~$205.1~~direct and net losses on previously reported hurricanes was $117.1 million ~~gross, less $201.9~~direct and $10.8 million ~~ceded, resulting in $3.2 million net. The direct prior year reserve~~net after the benefit of reinsurance. This was principally driven by continued adverse development of previous estimated losses and LAE on Hurricane Irma and, to a lesser extent, Hurricane Michael. Net development for the quarter ended September 30, 2020 principally resulted from an increase in our previously estimated losses and LAE on Hurricane Irma for claims which are not eligible for recovery from the FHCF.

▪Florida law bars new, supplemental or reopened claims for loss caused by the peril of windstorm or hurricane unless notice is provided within three years of the event. In September 2020, the three-year period following Hurricane Irma expired. The Company continues to adjust and settle Hurricane Irma claims that were reported prior to the expiration of the three-year period.

▪For the quarter ended September 30, 2019, direct prior year’s reserve development of $205.1 million was principally due to increased ultimate direct losses and LAE for Hurricane Irma, which were fully ~~ceded. For the three months ended September 30, 2019, there was~~ceded, while net prior ~~year adverse~~year’s reserve development of $3.2 million ~~which~~was principally ~~resulted from~~due to a change in the allocation of estimated reinsurance recoveries on Hurricane Michael losses ~~and LAE recoveries~~ from the 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. ~~There was no change to gross Hurricane Michael losses. Direct and net losses and LAE prior year reserve development for 2018 resulted from increased estimated losses and LAE for Hurricane Irma.~~

The net loss and LAE ratio for the third quarter ended September 30, ~~2019~~2020 was ~~64.3%~~101.8% compared to ~~45.5%~~64.3% in the third quarter of the prior year. The increase of ~~18.8~~37.5 loss ratio points was a result of: (1) ~~reduced~~increased weather (21.7 loss ratio points); (2) increased estimated core losses and LAE ratio for the current year (4.9 loss ratio points, which include 0.4 loss ratio points as a result of higher reinsurance costs); and (3) prior year’s reserve development on prior years’ losses and LAE reserves (11.3 loss ratio points). The increase was partially offset by higher financial benefit from the management of claims, including claims fees ceded to reinsurers ~~(8.3 loss ratio points); (2) increased core loss ratio (5.6 loss ratio points); (3) increased weather (3.3 loss ratio points); and (4) prior year development (1.6~~(0.4 loss ratio points).

~~Table of Contents~~

WeThe Company continues to experience increased ~~our core loss ratio to be in line with recent claim experience, specifically~~costs for losses and LAE in the Florida market ~~as we continue~~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 address: (1) the assignment of benefits issue (“AOB”) described below and increases in the systemic solicitation and representation of claims; and (2) emerging trends impacting the severity and frequency of claims. Claims paid under an AOB often involve unnecessary litigation and as a result cost significantly more than claims settled when an AOB is not involved, with most of the increase going to the attorneys or representatives of insureds. The increase in the ~~underlying core loss~~frequency and ~~LAE ratio also reflects continued geographic expansion into states outside~~severity of personal residential claims in Florida ~~where non-catastrophe loss ratios are generally higher than~~exceeding historical levels and levels seen in ~~Florida. “Core loss ratio” is a common operational metric used in the insurance industry to describe the ratio~~other jurisdictions.

Table of ~~current accident year expected losses to premiums earned.~~Contents

On May 23, 2019, Florida Governor Ron DeSantis signed HB 7065: Insurance Assignment Agreements, which aims to curtail the abuse of AOB. We are evaluating this bill to determine its impact on our business.

~~These~~

The market trends in losses and LAE led us to file in February 2020 for an overall ~~2.6%~~12.4% rate increase in Florida, ~~(effective April 2019~~which was approved effective May 2020 for new business and ~~May 2019~~July 2020 for ~~renewals), make~~renewals. In addition, we implemented changes to certain new business underwriting guidelines and ~~develop~~developed and implemented specialized claims and litigation management efforts to address market trends which we believe are driving up claim costs.

The financial benefit from the management of claims, including ~~claims~~claim fees ceded to reinsurers, was ~~$1.1~~$2.2 million for the ~~third quarter of 2019~~three months ended September 30, 2020, compared to ~~$16.7~~$1.1 million during the ~~third quarter of 2018.~~three months ended September 30, 2019. The benefit was recorded in the condensed consolidated financial statements as a reduction to losses and LAE. ~~This reduction in the third quarter of 2019 reflects a lower volume of hurricane claim costs ceded to reinsurers.~~

General and administrative expenses were ~~$69.2~~$77.0 million for the three months ended September 30, ~~2019,~~2020, compared to ~~$69.0~~$69.2 million during the same period in ~~2018,~~2019, as follows (dollars in thousands):


	Three Months Ended
	September 30,								Change
	2020				2019				$		%
	$		Ratio		$		Ratio
Premiums earned, net	$	234,191			$	206,599			$	27,592	13.4	%
General and administrative expenses:
Policy acquisition costs	51,594		22.1	%	45,131		21.8	%	6,463		14.3	%
Other operating costs (1)	25,386		10.8	%	24,043		11.6	%	1,343		5.6	%

Total general and administrative expenses	$	76,980	32.9	%	$	69,174	33.5	%	$	7,806	11.3	%
(1)Other operating costs includes $16 and $57 of interest expense for the three months ended September 30, 2020 and 2019, respectively.

Three Months Ended
September 30, Change
2019 2018 $ %
$ Ratio $ Ratio
Premiums earned, net $ 206,599

$ 188,938

$ 17,661
9.3 %
General and administrative expenses:

Policy acquisition costs 45,131
21.8 % 42,745
22.6 % 2,386
5.6 %
Other operating costs 24,043
11.6 % 26,296
13.9 % (2,253 ) (8.6 )%
Total general and administrative expenses $ 69,174
33.5 % $ 69,041
36.5 % $ 133
0.2 %

General and administrative ~~costs~~expenses increased by ~~$0.1~~$7.8 million, which was the result of increases in policy acquisition costs of ~~$2.4~~$6.5 million, ~~offset by~~due to commissions associated with increased premium volume and to a ~~decrease~~lesser extent to an increase in other operating costs of ~~$2.3~~$1.3 million. AsThe expense ratio as a percentage of premiums earned, ~~premiums, general and administrative costs~~net decreased from ~~36.5% of earned premiums for the three months ended September 30, 2018 to~~ 33.5% of earned premiums for the same period in 2019. Our underlying policy acquisition costs continued to be driven by increased premium volume and continued geographic expansion into states that typically have higher commission rates as compared to Florida. Other operating costs for the three months ended September 30, 2019 ~~decreased $2.3 million, reflecting lower amounts recorded~~to 32.9% for ~~executive compensation and temporary employee expenses, partially offset by added costs to support~~ the ~~growth~~same period in ~~business.~~2020. Other operating ~~costs~~cost ratio for the three months ended September 30, ~~2019~~2020 was 10.8% compared to 11.6% in the third quarter of 2019, ~~compared to 13.9% in 2018,~~ reflecting lower amounts recorded for executive compensation. Overall, the expense ratio (general and administrative expenses as a percentage of net earned premiums) benefited from the items mentioned above, a lower level of costs from reinstatement premiums impacting premiums earned netshare-based compensation in 2020 and economies of scale as ~~general and administrative expenses~~other operating costs did not increase at the same rate as ~~net~~ premiums ~~earned.~~earned, net.

Income tax benefit was $0.6 million for the quarter ended September 30, 2020 compared to an income tax expense of $7.8 million in 2019. The tax benefit resulted from a pre-tax loss in 2020 as compared to a pre-tax income in 2019. Our effective tax rate (“ETR”) decreased ~~by $6.0 million, or 43.8%,~~to 16.4% for the three months ended September 30, ~~2019, primarily~~2020, as ~~a result of a 45.5% reduction in income before income taxes, when~~ compared ~~with the three months ended September 30, 2018. Our effective tax rate (“ETR”) increased~~ to 27.8% for the three months ended September 30, ~~2019, as compared to 26.9% for the three months ended September 30, 2018.~~2019. The ETR ~~increased by 0.9%~~decreased as a result of a higher ratio of permanent items relative to the amount of income before taxes, principally non-deductible compensation, ~~partially offset by increased~~and a lower level of discrete tax benefits.

Other comprehensive ~~income,~~loss, net of taxes for the three months ended September 30, ~~2019,~~2020, was ~~$5.2~~$36.4 million compared to other comprehensive ~~loss~~income of ~~$0.7~~$5.2 million for the same period in ~~2018.~~2019, reflecting reclassifications out of cumulative other comprehensive income for available-for-sale debt securities sold and after-tax changes in fair value of available-for-sale debt securities held in our investment portfolio. See “Item 1—Note 11 (Other Comprehensive Income (Loss))” for additional information about the amounts comprising other comprehensive income ~~and loss~~ for these periods.

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Results of Operations -— Nine Months Ended September 30, ~~2019~~2020 Compared to Nine Months Ended September 30, ~~2018~~2019

Net income was $36.8 million for the nine months ended September 30, 2020 compared to $97.6 million for the nine months ended September 30, 2019, ~~compared to $123.5 million for the nine months ended September 30, 2018,~~ a decrease of ~~$25.9~~$60.8 million. Diluted EPS for the nine months ended September 30, ~~2019~~2020 was ~~$2.82~~$1.14 compared to ~~$3.45~~$2.82 in ~~2018,~~2019, a decrease of ~~$0.63~~$1.68, or ~~18.3%~~59.6%. Weighted average diluted common shares outstanding for the nine months ended September 30, 2020 were lower by ~~3.3%~~6.8% to 32.2 million shares from 34.6 million shares ~~from 35.8 million shares at September 30, 2018.~~for the same period of the prior year. Benefiting the nine months ended September 30, ~~2019~~2020 were increases in premiums earned, net, ~~earned premium,~~realized gains on investments, commission revenue, policy fees and other revenue, offset by a decrease in net investment income, ~~commission revenue and increases~~a decline in fair value of our equity securities reflected as unrealized losses in the ~~net change in unrealized gains of equity securities, offset by realized losses on investments~~current period, and increased total operating costs ~~for losses~~ and ~~LAE~~expenses. Direct premium earned and ~~general and administrative costs. Direct and~~premiums earned, net ~~earned premium~~ were up ~~10.5%~~12.0% and ~~11.2%~~8.7%, respectively, due to growth in all states in which we are licensed and writing during the past 12 ~~months.~~months and rate increases implemented during 2020, offset by higher costs for reinsurance flowing through to premiums earned, net. Increases in losses and LAE were the result of ~~(1) premium growth and change in mix between Florida and other states, (2) reduced financial benefit from the management of claims~~several factors including ~~claim fees ceded to reinsurers, (3)~~(1) increased estimated core losses and LAE for the current year compared to prior year, (2) premium growth and ~~(4) unexpected~~change in mix between Florida and other states and (3) increased adverse weather events ~~this year. As discussed further below, certain non-recurring items from 2018 impacted the period over period comparison, such as a $6.5 million benefit associated with a premium tax refund~~and prior year’s reserve development in ~~2018 and the decline in the amount of costs related to reinstatement premiums. Income tax expense was lower than prior year as a result of lower pre-tax income.~~2020.

A detailed discussion of our results of operations follows the table below (in thousands, except per share data).


	Nine Months Ended September 30,						Change						Nine Months Ended September 30,				Change
	2019			2018			$			%			2020		2019		$		%
PREMIUMS EARNED AND OTHER REVENUES												PREMIUMS EARNED AND OTHER REVENUES
Direct premiums written	$	990,066		$	921,941		$	68,125		7.4	%	Direct premiums written	$	1,148,656	$	990,066	$	158,590	16.0	%
Change in unearned premium	(78,516		)	(97,249		)	18,733			(19.3	)%	Change in unearned premium	(127,858)		(78,516)		(49,342)		62.8	%
Direct premium earned	911,550			824,692			86,858			10.5	%	Direct premium earned	1,020,798		911,550		109,248		12.0	%
Ceded premium earned	(284,867		)	(260,905		)	(23,962		)	9.2	%	Ceded premium earned	(339,408)		(284,867)		(54,541)		19.1	%
Premiums earned, net	626,683			563,787			62,896			11.2	%	Premiums earned, net	681,390		626,683		54,707		8.7	%
Net investment income	23,165			17,213			5,952			34.6	%	Net investment income	17,570		23,165		(5,595)		(24.2)	%
Net realized gains (losses) on investments	(13,152		)	(2,093		)	(11,059		)	528.4	%	Net realized gains (losses) on investments	54,294		(13,152)		67,446		NM
Net change in unrealized gains (losses) of equity securities	22,364			(9,103		)	31,467			NM		Net change in unrealized gains (losses) of equity securities	(2,162)		22,364		(24,526)		NM
Commission revenue	18,933			16,638			2,295			13.8	%	Commission revenue	23,770		18,933		4,837		25.5	%
Policy fees	16,587			15,743			844			5.4	%	Policy fees	18,253		16,587		1,666		10.0	%
Other revenue	5,369			5,258			111			2.1	%	Other revenue	6,529		5,369		1,160		21.6	%
Total premiums earned and other revenues	699,949			607,443			92,506			15.2	%	Total premiums earned and other revenues	799,644		699,949		99,695		14.2	%
OPERATING COSTS AND EXPENSES												OPERATING COSTS AND EXPENSES
Losses and loss adjustment expenses	358,961			251,715			107,246			42.6	%	Losses and loss adjustment expenses	524,870		358,961		165,909		46.2	%
General and administrative expenses	208,418			191,614			16,804			8.8	%	General and administrative expenses	223,544		208,418		15,126		7.3	%
Total operating costs and expenses	567,379			443,329			124,050			28.0	%	Total operating costs and expenses	748,414		567,379		181,035		31.9	%
INCOME BEFORE INCOME TAXES	132,570			164,114			(31,544		)	(19.2	)%
Income tax expense	34,983			40,595			(5,612		)	(13.8	)%
NET INCOME	$	97,587		$	123,519		$	(25,932	)	(21.0	)%
INCOME (LOSS) BEFORE INCOME TAXES												INCOME (LOSS) BEFORE INCOME TAXES	51,230		132,570		(81,340)		(61.4)	%
Income tax (benefit) expense												Income tax (benefit) expense	14,450		34,983		(20,533)		(58.7)	%
NET INCOME (LOSS)												NET INCOME (LOSS)	$	36,780	$	97,587	$	(60,807)	(62.3)	%
Other comprehensive income (loss), net of taxes	29,099			(6,636		)	35,735			NM		Other comprehensive income (loss), net of taxes	(19,299)		29,099		(48,398)		NM
COMPREHENSIVE INCOME	$	126,686		$	116,883		$	9,803		8.4	%
DILUTED EARNINGS PER SHARE DATA:
Diluted earnings per common share	$	2.82		$	3.45		$	(0.63	)	(18.3	)%
COMPREHENSIVE INCOME (LOSS)												COMPREHENSIVE INCOME (LOSS)	$	17,481	$	126,686	$	(109,205)	(86.2)	%
DILUTED EARNINGS (LOSS) PER SHARE DATA:												DILUTED EARNINGS (LOSS) PER SHARE DATA:
Diluted earnings (loss) per common share												Diluted earnings (loss) per common share	$	1.14	$	2.82	$	(1.68)	(59.6)	%
Weighted average diluted common shares outstanding	34,565			35,754			(1,189		)	(3.3	)%	Weighted average diluted common shares outstanding	32,202		34,565		(2,363)		(6.8)	%

NM – Not Meaningful												NM – Not Meaningful

~~Policy count, premium in force and total insured value~~ i~~ncreased at September 30, 2019 when compared to September 30, 2018.~~ Direct premiums written increased by ~~$68.1~~$158.6 million, or ~~7.4%~~16.0%, for the nine months ended September 30, ~~2019,~~2020, driven by growth within our Florida business of ~~$29.6~~$129.0 million, or ~~3.8%~~15.7%, and growth in our other states business of ~~$38.5~~$29.6 million, or ~~29.1%~~17.3%, as compared to the same period of the prior year. Rate increases in Florida and in certain other states along with slightly improved retention ~~were~~ also ~~a source of~~contributed to the premium growth. Premium in force increased in every state in which we are writing at September 30, 2020 compared to September 30, 2019. We implemented new guidelines during the nine months ended September 30, ~~2019~~2020 on new business to address emerging loss trends that have ~~impacted~~since slowed the rate of growth in Florida. ~~Premiums~~We actively wrote policies in 18 states during 2019 and 2020 and we wrote multiple policies in Iowa subsequent to the third quarter of 2020. In addition, we are authorized to do business in Tennessee and Wisconsin and are proceeding with product filings in those states. During the

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second quarter of 2020 the Company withdrew its application to write business in Connecticut. Policies in force, ~~increased~~premium in ~~every state in which we are writing~~force and total insured value all increased at September 30, 2020 when compared to September 30, ~~2018~~2019.~~. In early March 2019, we commenced writing in Illinois, and we are now actively writing policies in 17 states outside our home state of Florida.~~

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The following table provides direct premiums written for Florida and Other States for the nine months ended September 30, ~~2019~~2020 and ~~2018~~2019 (dollars in thousands):


	For the Nine Months Ended
	September 30, 2020				September 30, 2019				Growth year over year
State	Direct Premiums Written		%		Direct Premiums Written		%		$		%
Florida	$	948,196	82.5	%	$	819,185	82.7	%	$	129,011	15.7	%
Other states	200,460		17.5	%	170,881		17.3	%	29,579		17.3	%
Total	$	1,148,656	100.0	%	$	990,066	100.0	%	$	158,590	16.0	%

For the Nine Months Ended
September 30, 2019 September 30, 2018 Growth year over year
State Direct Premiums Written % Direct Premiums Written % $ %
Florida $ 819,185
82.7 % $ 789,539
85.6 % $ 29,646
3.8 %
Other states 170,881
17.3 % 132,402
14.4 % 38,479
29.1 %
Total $ 990,066
100.0 % $ 921,941
100.0 % $ 68,125
7.4 %

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.

Direct premium earned increased by ~~$86.9~~$109.2 million, or ~~10.5%~~12.0%, for the nine months ended September 30, ~~2019,~~2020, reflecting the earning of premiums written over the past 12 months and changes in rates and ~~policy count~~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 ~~$24.0~~$54.5 million, or ~~9.2%~~19.1%, for the nine months ended September 30, ~~2019.~~2020 as compared to the same period of the prior year. The increase in reinsurance costs reflects both an increase in costs associated with the increase in exposures we insure and increased pricing when compared to the expired reinsurance program. Reinsurance costs, as a percentage of direct premium earned, ~~decreased~~increased from ~~31.6% in 2018 to~~ 31.3% in 2019 ~~reflecting a lower level of additional~~to 33.2% in 2020. Reinsurance costs from ceded earned reinstatement premiums of $2.1 million in 2019, compared to $14.0 million in 2018 relating to additional reinsurance costs from Hurricane Irma. Excluding reinstatement premiums, ceded premiums earned were 31.0% of direct premiums earned in 2019 compared to 30.0% in 2018. The increase in the ratio is a result of costs for the Company’s 2019-2020 reinsurance program, compared to the expired program. Costs associated with each year’s reinsurance program are earned over the June 1st to May 31st twelve-month coverage period. See the discussion above for the ~~new 2019-2020~~Insurance Entities’ 2020-2021 reinsurance program and “Item 1— ~~(Note~~Note 4 ~~Reinsurance)~~(Reinsurance).”

Premiums earned, net of ceded premium earned, grew by ~~11.2%~~8.7%, or ~~$62.9~~$54.7 million, to ~~$626.7~~$681.4 million for the nine months ended September 30, ~~2019,~~2020, reflecting ~~the~~an increase in direct ~~premiums~~premium earned offset by increased costs for reinsurance.

Net investment income was ~~$23.2~~$17.6 million for the nine months ended September 30, ~~2019,~~2020, compared to ~~$17.2~~$23.2 million for the same period in ~~2018, an increase~~2019, a decrease of ~~$6.0~~$5.6 million, or ~~34.6%~~24.2%. The ~~increase~~decrease is driven by ~~the combination of the growth~~lower trends in ~~cash and invested assets compared to the~~market yields. The prior year ~~and~~also included one-time income benefits from ~~higher yielding assets offset by~~ a ~~lower trend~~special dividend received and a one-time reduction in ~~yields on cash and short term investments during 2019.~~investment expenses. Total invested assets were ~~$937.4~~$910.6 million as of September 30, ~~2019~~2020 compared to ~~$908.2~~$914.6 million as of December 31, ~~2018. The credit rating on our fixed income securities was A+ as of September 30, 2019~~2019. Cash and ~~December 31, 2018. The duration of fixed income securities was 2.63 years~~cash equivalents were $405.1 million at September 30, ~~2019~~2020 compared to ~~2.79 years~~$182.1 million at December 31, ~~2018.~~2019, an increase of 122.5%. 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 toby our investment advisors.

Yields from cash and cash equivalents, short-term investments and the ~~fixed income~~available-for-sale debt portfolio are dependent on future market forces, monetary policy and interest rate policy from the Federal Reserve. ~~During 2019, the~~The Federal Reserve has broadly been lowering and maintaining lower interest rates, which has impacted the effective yields on new ~~fixed income~~available-for-sale portfolio and overnight cash ~~purchases.~~purchases and short-term investments. The ~~impact from this~~overall trend ~~in 2019~~ has been ~~somewhat limited as investments mature~~lower interest rates on new purchases of securities over ~~many~~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 ~~years~~portfolio returns will reflect lower book yields based on ~~the effective maturity of the portfolio, subjecting only the~~ current year redemptions to the lower interest rate environment. The Company’s investment strategy is to invest in assets with multi-year effective maturities, locking in book yields for future years which dampers the impact that market ~~fluctuations have on current investment income.~~conditions.

We sell investments from our investment portfolio from time to time to meet our investment ~~objectives.~~objectives or take advantage of market opportunities. During the nine months ended September 30, 2020, sales of available-for-sale debt securities resulted in net realized gain of $54.3 million. We ~~sold~~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 which accounts for the temporary increase in cash and cash equivalents at September 30, 2020. As a result of the sales and future reinvestment of available-for-sale debt securities, it is expected that future portfolio investment ~~real estate during~~income will reflect current market rates which are below the book yield of the securities sold. During the nine months ended September 30, 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 $0.1 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 $13.2 million compared to net realized loss of $2.1 million for the nine months ended September 30, 2018. The realized losses during the nine months ended September 30, 2019 resulted primarily from the sale of equity securities, whereas the realized loss for the nine months ended September 30, 2018 resulted primarily from the sale of municipal securities, which were liquidated in light of their diminished after-tax returns following the enactment of the Tax Act.million. See “Item 1—(Note 3 ~~Investments)~~(Investments).”

There was a ~~$22.4~~$2.2 million ~~favorable~~unfavorable net unrealized ~~gain~~loss in equity securities during the nine months ended September 30, ~~2019~~2020 compared to a ~~$9.1~~$22.4 million ~~unfavorable~~favorable net unrealized ~~loss~~gain during the nine months ended September 30, ~~2018.~~2019. Unrealized gains or losses reflected on the income statement are the result of changes in the fair market value of our equity securities during the

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period for securities still held and the reversal of unrealized gains or losses for securities sold during the period. See “Item 1—(Note 3 ~~Investments)~~(Investments).”

During 2020, the COVID-19 pandemic has disrupted the financial markets. In the first quarter of 2020, our investment portfolio was negatively impacted, but has since substantially recovered during the second and third quarters of 2020. 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 nine months ended September 30, ~~2019,~~2020, commission revenue was ~~$18.9~~$23.8 million, compared to ~~$16.6~~$18.9 million for the nine months ended September 30, ~~2018.~~2019. The increase in commission revenue of ~~$2.3~~$4.8 million, or ~~13.8%~~25.5%, for the nine months ended September 30, ~~2019~~2020 was primarily ~~from~~due to increased commissions from third-party reinsurers earned on increased reinsurance premiums due to growth in our exposures, as well as the difference in pricing and structure associated with our reinsurance ~~program.~~

~~Table of Contents~~program when compared to the prior year.

Policy fees for the nine months ended September 30, ~~2019~~2020 were ~~$16.6~~$18.3 million compared to ~~$15.7~~$16.6 million for the same period in ~~2018.~~2019. The increase of ~~$0.8~~$1.7 million, or ~~5.4%~~10.0%, was the result of an increase in the total number of new and ~~renewed~~renewal policies written during the nine months ended September 30, ~~2019~~2020 compared to the same period in ~~2018.~~2019.

~~Losses~~The following table presents losses and LAE incurred on a direct, ceded and net basis expressed in dollars and as a percent of ~~reinsurance, were $359.0 million~~the respective amounts of earned premium. These amounts are further categorized as 1) core losses, 2) weather events for the ~~nine months ended September 30, 2019, compared to $251.7 million during the same period in 2018, as follows~~current accident year and 3) prior year’s reserve development (dollars in thousands):


	Nine Months Ended September 30, 2020
	Direct		Loss Ratio		Ceded		Loss Ratio		Net		Loss Ratio
Premiums earned	$	1,020,798			$	339,408			$	681,390

Loss and loss adjustment expenses:
Core losses	$	404,092	39.6	%	$	126	—	%	$	403,966	59.3	%
Weather events*	88,000		8.6	%	2,000		0.6	%	86,000		12.6	%
Prior year’s reserve development	190,804		18.7	%	155,900		46.0	%	34,904		5.1	%
Total losses and loss adjustment expenses	$	682,896	66.9	%	$	158,026	46.6	%	$	524,870	77.0	%

*Includes only current year weather events beyond those expected.

Nine Months Ended September 30, 2019
Direct Loss Ratio Ceded Loss Ratio Net Loss Ratio
Premiums earned $ 911,550
$ 284,867
$ 626,683

Loss and loss adjustment expenses:
Weather events* $ 24,917
2.7 % $ 2,917
1.0 % $ 22,000
3.5 %
Prior year adverse/(favorable) reserve
development
305,295
33.5 % 301,592
105.9 % 3,703
0.6 %
All other losses and loss adjustment
expenses
333,556
36.6 % 298
0.1 % 333,258
53.2 %
Total losses and loss adjustment expenses $ 663,768
72.8 % $ 304,807
107.0 % $ 358,961
57.3 %

*Includes only current year weather events beyond those expected.


	Nine Months Ended September 30, 2019
	Direct		Loss Ratio		Ceded		Loss Ratio		Net		Loss Ratio
Premiums earned	$	911,550			$	284,867			$	626,683

Loss and loss adjustment expenses:
Core losses	$	333,556	36.6	%	$	298	0.1	%	$	333,258	53.2	%
Weather events*	24,917		2.7	%	2,917		1.0	%	22,000		3.5	%
Prior year’s reserve development	305,295		33.5	%	301,592		105.9	%	3,703		0.6	%
Total losses and loss adjustment expenses	$	663,768	72.8	%	$	304,807	107.0	%	$	358,961	57.3	%

*Includes only current year weather events beyond those expected.

Nine Months Ended September 30, 2018
Direct Loss Ratio Ceded Loss Ratio Net Loss Ratio
Premiums earned $ 824,692
$ 260,905
$ 563,787

Loss and loss adjustment expenses:
Weather events* $ 46,858
5.7 % $ 34,358
13.2 % $ 12,500
2.2 %
Prior year adverse/(favorable) reserve
development
311,683
37.8 % 309,456
118.6 % 2,227
0.4 %
All other losses and loss adjustment
expenses
234,878
28.5 % (2,110 ) (0.8 )% 236,988
42.0 %
Total losses and loss adjustment expenses $ 593,419
72.0 % $ 341,704
131.0 % $ 251,715
44.6 %

*Includes only current year weather events beyond those expected.

See “Item 1—Note 6 (Liability for Unpaid Losses and Loss Adjustment Expenses)” for change in liability for unpaid losses and LAE.

~~Losses~~Table of Contents

Management looks at 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 $524.9 million resulting in a 77.0% net loss and LAE ratio for the nine months ended September 30, ~~2019 were~~2020.This compares to $359.0 million resulting in a 57.3% net loss and LAE ratio for the nine months ended September 30, 2019.

The factors impacting losses and LAE are as follows:

•Core losses

◦Our core losses consist of all other losses and LAE, excluding weather events beyond those expected and prior year’s reserve development. Core losses for 2020 are 39.6% of direct premium earned for the nine months ended September 30, 2020 compared to ~~$251.7 million in~~36.6% for the same period in ~~2018, an increase of $107.2 million, or 42.6%. All other~~2019. These losses and ~~LAE~~loss ratios benefit from the profitable impact of ceded claim fees, which are described below, reducing core losses. The increase in core loss ratio for 2020 is principally the result of higher trends in expected costs to settle claims in the Florida market, specifically in response to increased ~~during~~trends in litigated and represented claims. Core losses also increase as premium volume increases year over year.

•Weather events beyond those expected

◦During the nine months ended September 30, 2020, there were two hurricanes, Sally and Isaias, and a number of weather events which in the aggregate exceeded core loss ratio expectations. Our initial estimates on Hurricane Sally are gross losses of $45 million and net losses of $43 million after reinsurance. Hurricane Isaias and the other weather events beyond those expected totaled $43 million on a direct and net basis as these events do not benefit from our reinsurance program due to losses being below our attachment point.

◦During the nine months ended September 30, 2019, weather events totaled $24.9 million direct and $22.0 million net, principally ~~due~~for Hurricane Dorian and other weather events beyond those expected.

•Prior year’s reserve development

◦Management identifies two drivers which influence amounts recorded as prior year’s reserve development, namely: (i) changes to ~~three key factors: (1)~~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 nine months ended September 30, 2020, prior year’s reserve development totaled $190.8 million of direct losses and $34.9 million of net losses after the benefit of reinsurance.

▪Prior year’s reserve development, excluding hurricanes described above, was $19.6 million direct and $19.3 million net of reinsurance for the nine months ended September 30, 2020, which was the result of increased prior year companion claims in the run up to the expiration of the statute of limitations for Hurricane Irma.

▪For the nine months ended September 30, 2020, development of direct and net losses ~~in connection with~~on previously reported hurricanes was $171.2 million direct and $15.6 million net after the ~~growth~~benefit of reinsurance. This was principally driven by continued adverse development of previous estimated losses and LAE on Hurricanes Irma, Michael and Matthew. Net development for the nine months ended September 30, 2020 principally resulted from an increase in our ~~underlying business; (2) reduced level~~previously estimated losses and LAE on Hurricane Irma for claims which are not eligible for recovery from the FHCF.

▪Florida law bars new, supplemental or reopened claim for loss caused by the peril of ~~benefits from claim settlement fees ceded~~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 ~~reinsurers as hurricanes~~adjust and settle Hurricane Irma claims ~~conclude and; (3) increased core loss ratio (as defined below) from 33% in 2018~~that were reported prior to ~~37% in 2019.~~ the expiration of the three-year period.

▪For the nine months ended September 30, 2019, ~~there was~~direct prior ~~year adverse~~year’s reserve development of $305.3 million ~~gross, less $301.6 million~~was principally due to increased ultimate direct losses and LAE for Hurricane Irma, which were fully ceded, ~~resulting in $3.7 million net. For 2019,~~while net prior ~~year adverse~~year’s reserve development of $3.7 million was principally ~~resulted from~~due to a change in the allocation of estimated reinsurance recoveries on Hurricane Michael losses ~~and LAE recoveries~~ from the 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. There was no change to gross Hurricane Michael losses. For the nine months ended September 30, 2018, there was $311.7 million gross, less $309.5 million ceded, resulting in $2.2 million net of prior year reserve development principally reflecting an increase in estimated Hurricane Irma claims.The nine months ended September 30, 2019 included net $22.0 million for weather events beyond those expected compared to net $12.5 million in the prior year.

The net loss and LAE ratio for the nine months ended September 30, ~~2019~~2020 was ~~57.3%~~77.0% compared to ~~44.6%~~57.3% for the same period in the prior year. The increase of ~~12.7~~19.7 loss ratio points was a result of: (1) ~~reduced financial benefit from the management of claims, including claims fees ceded to reinsurers (5.8~~increased weather (9.1 loss ratio points); (2) increased estimated core losses and LAE ratio for the current year (6.1 loss ratio ~~(5.4~~points, which include 1.6 loss ratio ~~points); (3) increased weather (1.3 loss ratio points)~~points as a result of higher reinsurance costs); and ~~(4)~~(3) prior ~~year~~year’s reserve development ~~(0.2~~on prior years’ losses and LAE reserves (4.5 loss ratio points).

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WeThe Company continues to experience increased ~~our core loss ratio to be in line with recent claim experience, specifically~~costs for losses and LAE in the Florida market ~~as we continue~~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 address: (1) the AOB issue described below and increases in the systemic solicitation and representation of claims; and (2) emerging trends impacting the severity and frequency of claims. Claims paid under an AOB often involve unnecessary litigation and as a result cost significantly more than claims settled when an AOB is not involved, with most of the increase going to the attorneys or representatives of insureds. The increase in the ~~underlying core loss~~frequency and ~~LAE ratio also reflects continued geographic expansion into states outside~~severity of personal residential claims in Florida ~~where non-catastrophe loss ratios are generally higher than~~exceeding historical levels and levels seen in ~~Florida. “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.~~other jurisdictions.

On May 23, 2019, Florida Governor Ron DeSantis signed HB 7065: Insurance Assignment Agreements which aims to curtail the abuse of AOB. We are evaluating this bill to determine its impact on our business.

~~These~~The market trends in losses and LAE ~~have~~ led us to file in February 2020 for an overall ~~2.6%~~12.4% rate increase in Florida, ~~(effective April 2019~~which was approved effective May 2020 for new business and ~~May 2019~~July 2020 for ~~renewals), make~~renewals.In addition, we implemented changes to certain new business underwriting guidelines and ~~develop~~developed and implemented specialized claims and litigation management efforts to address market trends which we believe are driving up claim costs.

The financial benefit from the management of claims, ~~ceded,~~ including claim fees ceded to reinsurers, was $3.2million for both the nine months ended September 30, ~~2019, compared to $35.5 million during the nine months ended September 30, 2018.~~2020 and 2019. The benefit was recorded in the condensed consolidated financial statements as a reduction to losses and LAE.

General and administrative expenses were ~~$208.4~~$223.5 million for the nine months ended September 30, ~~2019,~~2020, compared to ~~$191.6~~$208.4 million during the same period in ~~2018,~~2019, as follows (dollars in thousands):


															Nine Months Ended
	Nine Months Ended September 30,								Change						September 30,												Change
	2019				2018				$			%			2020						2019						$			%
	$		Ratio		$		Ratio								$			Ratio			$			Ratio
Premiums earned, net	$	626,683			$	563,787			$	62,896		11.2	%	Premiums earned, net	$	681,390					$	626,683					$	54,707		8.7	%
General and administrative expenses:														General and administrative expenses:
Policy acquisition costs	132,863		21.2	%	114,333		20.3	%	18,530			16.2	%	Policy acquisition costs	146,982			21.6	%		132,863			21.2	%		14,119			10.6	%
Other operating costs(1)	75,555		12.1	%	77,281		13.7	%	(1,726		)	(2.2	)%	76,562			11.2	%		75,555			12.1	%		1,007			1.3	%

Total general and administrative expenses	$	208,418	33.3	%	$	191,614	34.0	%	$	16,804		8.8	%	Total general and administrative expenses	$	223,544		32.8	%		$	208,418		33.3	%		$	15,126		7.3	%
(1)Other operating costs includes $85 and $203 of interest expense for the nine months ended September 30, 2020 and 2019, respectively.														(1)Other operating costs includes $85 and $203 of interest expense for the nine months ended September 30, 2020 and 2019, respectively.

General and administrative ~~costs~~expenses increased by ~~$16.8~~$15.1 million, which was ~~primarily~~ the result of increases in policy acquisition costs of ~~$18.5~~$14.1 million due to commissions associated with increased premium volume and ~~a $6.5 million non-recurring audit settlement in 2018 related to premium taxes, offset by a decrease in~~increased other operating costs of ~~$1.7~~$1.0 million. AsThe expense ratio as a percentage of premiums earned, ~~premiums, general and administrative costs~~net decreased from ~~34.0% of earned premiums~~33.3% for the nine months ended September 30, ~~2018~~2019 to ~~33.3% of earned premiums~~32.8% for the same period in ~~2019. The~~2020. Our increase in policy acquisition costs continued to be driven by increased premium volume and continued geographic expansion into states that typically have higher commission rates as compared to Florida. Other operating cost ratio for the nine months ended September 30, ~~2019~~2020 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 1.2 percentage points in 2018. Excluding this benefit in the prior year, the overall total general and administrative expense ratio in 2019 would have improved 1.9 percentage points11.2% compared to ~~the same period~~12.1% in ~~2018 before the impact of the premium tax refund. Other operating costs for~~ the nine months ended September 30, 2019, ~~decreased $1.7 million,~~ reflecting lower ~~amounts recorded for executive~~share-based 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 13.7% of net earned premium for the nine months ended September 30, 2018 compared to 12.1% of net earned premium for the same period in 2019. Overall, the expense ratio for 2019 (general and administrative expenses as a percentage of net premiums earned) benefited from reduced executive compensation, a lower level of costs from reinstatement premiums impacting premiums earned2020 and economies of scale as ~~general and administrative expenses~~other operating costs did not increase at the same rate as ~~revenues when compared to the same period of 2018 excluding the non-recurring premium tax benefit.~~premiums earned, net.

Income tax expense decreased by ~~$5.6~~$20.5 million, or ~~13.8%~~58.7%, for the nine months ended September 30, ~~2019,~~2020, primarily as a result of a ~~19.2%~~61.4% reduction in income before income taxes, when compared with the nine months ended September 30, ~~2018.~~2019. Our ETR increased to 28.2% for the nine months ended September 30, 2020, as compared to 26.4% for the nine months ended September 30, ~~2019, as compared to 24.7% for the nine months ended September 30, 2018.~~2019. The ETR increased ~~slightly~~ as a result of a higher ratio of permanent items relative to the amount of income before taxes, principally non-deductible compensation, ~~offset by~~and a lower level of discrete tax benefits.

Other comprehensive ~~income,~~loss, net of taxes for the nine months ended September 30, ~~2019,~~2020, was ~~$29.1~~$19.3 million compared to other comprehensive ~~loss~~income of ~~$6.6~~$29.1 million for the same period in ~~2018.~~2019, reflecting reclassifications out of cumulative other comprehensive income for available-for-sale debt securities sold and after-tax changes in fair value of available-for-sale debt securities held in our investment portfolio. See “Item 1—Note 11 (Other Comprehensive Income (Loss))” for additional information about the amounts comprising other comprehensive income ~~and loss~~ for these periods.

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Analysis of Financial Condition—As of September 30, ~~2019~~2020 Compared to December 31, ~~2018~~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. We invest amounts considered to be in excess of current working capital requirements.

The following table summarizes, by type, the carrying values of investments as of the dates presented (in thousands):


	As of					As of
	September 30,		December 31,			September 30,		December 31,
Type of Investment	2019		2018		Type of Investment	2020		2019
Available-for-sale debt securities	$	878,567	$	820,438	Available-for-sale debt securities	$	842,574	$	855,284

Equity securities	43,141		63,277		Equity securities	52,700		43,717
Investment real estate, net	15,688		24,439		Investment real estate, net	15,280		15,585
Total	$	937,396	$	908,154	Total	$	910,554	$	914,586

See “Item 1—Condensed Consolidated Statements of Cash Flows” for explanations of changes in investments and “Item 1—Note 3 (Investments).” ~~Investment real estate, net reduced $8.8~~

Restricted cash and cash equivalents increased $18.5 million ~~during 2019~~to $21.1 million as of September 30, 2020 as a result of ~~the sale of two investment properties. The gain on the sale~~collateral held by a reinsurance captive arrangement with one of the ~~two investment properties was $1.2 million.~~Insurance Entities reported as a Variable Interest Entities (“VIE”) in the condensed consolidated financial statements. See “Item 1—Note 14 (Variable Interest Entities)” for more information.

Prepaid reinsurance premiums represent the portion of unearned ceded written premium that will be earned pro-rata over the coverage period of our reinsurance program, which runs from June 1st to May 31st of the following year. The increase of ~~$137.5~~$157.9 million to ~~$280.3~~$333.1 million as of September 30, ~~2019~~2020 was due ~~primarily~~ to additional ceded written premium for the reinsurance costs relating to our ~~2019-2020~~2020-2021 catastrophe reinsurance program beginning June 1, ~~2019,~~2020, less amortization of prepaid reinsurance premiums recorded during ~~2019.~~2020.

Reinsurance recoverable represents the estimated amount of paid and unpaid losses, LAE and other expenses that are expected to be ~~recoverable~~recovered from reinsurers. The decrease of ~~$201.3~~$98.2 million to ~~$217.3~~$95.1 million as of September 30, ~~2019~~2020 was primarily due to the collection of amounts due from reinsurers relating to settled claims from hurricanes and other ~~events.~~events covered by our reinsurance contracts.

Premiums receivable, net, represents amounts receivable from policyholders. The increase in premiums receivable, net, of ~~$10.5~~$12.9 million to ~~$70.4~~$76.8 million as of September 30, ~~2019~~2020 relates to the growth, seasonality and consumer payment behavior of our business. The nature of our business tends to be seasonal during the year, reflecting consumer behaviors in connection with the Florida residential real estate market and the hurricane season. The amount of direct premiums written during a calendar year tends to increase just prior to the second quarter and tends to decrease approaching the fourth quarter.

Property and equipment, net, increased ~~$6.0~~by $10.9 million ~~during 2019~~to $52.3 million as of September 30, 2020, primarily as the result of new spend on capitalized software expenditures and, to a lesser extent, the ~~purchase of~~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~~Company as the business continues to ~~expand.~~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 ~~$10.1~~$19.4 million to ~~$94.8~~$111.3 million as of September 30, ~~2019,~~2020, which is consistent with the underlying premium ~~growth and the seasonality of our business.~~growth. See “Item 1—Note 5 (Insurance Operations)” for a roll-forward in the balance of our DPAC.

Income taxes recoverable represents the difference between estimated tax obligations and tax payments made to taxing authorities. AtAs of September 30, ~~2019,~~2020, the balance recoverable was ~~$9.9~~$26.4 million, representing amounts due from taxing authorities at that date, compared to a balance recoverable of ~~$11.2~~$34.3 million as of December 31, ~~2018.~~2019. Income taxes recoverable as of September 30, 2020 will be applied to future periods to offset future federal and state income taxes obligations.

Deferred income taxes represent the estimated tax asset or tax liability caused by temporary differences between the tax return basis of certain assets and liabilities and amounts recorded in the financial statements. During the nine months ended September 30, ~~2019,~~2020, deferred tax assets decreased by ~~$14.6~~$1.9 million to ~~a deferred tax liability of $2.6~~$1.5 million. ~~The change in these accounts was primarily due to an increase in unrealized gains on investment, prepaid reinsurance premiums and unearned premiums.~~ Deferred income taxes reverse in future years as the temporary differences between book and tax reverse.

See “Item 1—Note 6 (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 decreased by ~~$306.5~~$65.0 million to ~~$166.3~~$202.7 million as of September 30, ~~2019.~~2020. The reduction in unpaid losses and LAE was principally due to the settlement of claims from previous hurricane and storm events, as more claims from those events concluded during the nine months ended September 30, ~~2019.~~2020. Overall unpaid losses and LAE decreased, as claim settlements exceeded new emerging claims. Unpaid losses and LAE are net of estimated subrogation recoveries.

Unearned premiums represent the portion of direct premiums written that will be earned ~~pro rata~~pro-rata in the future. The increase of ~~$78.5~~$127.9 million from December 31, ~~2018~~2019 to ~~$680.2~~$789.1 million as of September 30, ~~2019~~2020 reflects both organic growth and the seasonality of our business, which ~~is the variability~~varies from month to month.

Table of ~~premiums written by month.~~Contents

Advance premium represents premium payments made by policyholders ahead of the effective date of the policies. The increase of ~~$14.4~~$24.4 million to ~~$40.7~~$55.3 million as of September 30, ~~2019~~2020 reflects customer payment behavior, ~~and the~~ organic growth and the seasonality of our business.

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~~The Company excludes any~~We exclude net negative cash balances, if any, from cash and cash equivalents that ~~the Company has~~we have with any single financial ~~institution.~~institution based on aggregating the book balance of all accounts at the institution which have the right of offset. If the aggregation results in a net negative book balance, that balance is reclassified from cash and cash equivalents in our Condensed Consolidated Balance Sheet to book overdraft. These amounts represent outstanding checks or drafts not yet presented to the financial institution ~~and are reclassified to liabilities and presented as book overdraft~~ in excess of amounts on deposit at the ~~Company’s Condensed Consolidated Balance Sheets at each balance sheet date.~~financial institution. We maintain a short-term cash investment strategy sweep to maximize investment returns on cash balances. ~~Due to sweep activities, certain outstanding items are recorded as~~There were no book overdrafts ~~which totaled $1.7 million~~ as of September 30, ~~2019, compared to $102.8~~2020 and there were book overdrafts totaling $90.4 million as of December 31, ~~2018. The decrease of $101.2 million is the result of higher cash balances available for offset as of September 30, 2019 compared to December 31, 2018.~~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.~~reinsurers, if any. On June ~~1st~~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~~1st to May ~~31st.~~31st. The balance increased by ~~$206.8~~$228.7 million to ~~$300.1~~$351.3 million as of September 30, ~~2019~~2020 as a result of the timing of the above items.

Payable for securities purchased represents payables relating to available-for-sale debt securities purchases which settle after September 30, 2020. There were payable for securities purchased totaling $98.2 million as of September 30, 2020 and there were no payable for securities purchased as of December 31, 2019.

Other liabilities and accrued expenses increased by ~~$9.6~~$26.9 million to ~~$55.0~~$70.0 million as of September 30, ~~2019,~~2020, primarily driven by an increase in ~~other liabilities due~~commissions payable as a result of higher direct premiums written for the month of September 30, 2020 when compared to direct premiums written for the month of December 31, 2019. In addition, the annual accrual process builds balances during the year and settles those accrued balances by year end. We record accruals during the year for annual events such as bonuses, vacation accruals and annual company or marketing events. The timing of ~~payments.~~billing from vendors and changes in the payroll accrual based on payroll payment cycles also impacts the level of accrued liabilities.

Capital resources, net, ~~increased~~decreased by ~~$66.2~~$20.2 million ~~during~~for the nine months ended September 30, ~~2019, reflecting increases in stockholders’ equity offset by a reduction in long-term debt.~~2020. The ~~increases~~decrease in stockholders’ equity was principally the result of ~~our 2019 net income, share-based compensation, and after-tax changes in fair value of our investment portfolio unrealized gains in 2019 offset by~~ treasury stock repurchases and dividends to ~~shareholders.~~shareholders offset by our 2020 net income and share-based compensation. In addition, accumulated other comprehensive income, net of taxes decreased by $18.7 million as a result of realized gains on the sale of available-for-sale debt securities during the period. See “Item 1—Condensed Consolidated Statements of Stockholders’ Equity” and “Item 1—Note 8 (Stockholders’ Equity).” for explanation of changes in treasury stock.

The reduction in long-term debt of $1.1 million was the result of principal payments on debt during ~~2019.~~2020. See “—Liquidity and Capital ~~Resources.”~~Resources” for more information.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity

Liquidity is a measure of a company’s ability to generate sufficient cash flows to meet its short and long-term obligations. Funds generated from operations have been sufficient to meet our liquidity ~~requirements and we expect that, in the future, funds from operations~~requirements. We will continue to ~~meet such requirements.~~monitor liquidity as the economic consequences of COVID-19 continue to unfold (see discussion below regarding the COVID-19 pandemic). 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 September 30, ~~2019~~2020 was ~~$159.6~~$405.1 million compared to ~~$166.4~~$182.1 million at December 31, ~~2018.~~2019. See “Item 1—Condensed Consolidated Statements of Cash Flows” for a reconciliation of the balance of cash and cash equivalents between September 30, ~~2019~~2020 and December 31, ~~2018.~~2019. The ~~decrease~~increase in cash and cash equivalents was driven by positive cash flows ~~used in financing~~from operating and investing activities in excess of ~~net cash provided by operating and investing~~those used in financing activities. We ~~maintain~~have not experienced an adverse impact on our liquidity as a ~~short-term~~result of the COVID-19 pandemic. Our investment and cash ~~sweep to maximize~~ investment ~~returns on~~strategy at times includes cash ~~balances. Due to these sweep activities, certain outstanding items are routinely recorded as~~investments in 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 accounts which have the right of offset, and if the aggregation results in ~~the~~a net negative book balance, that balance is reclassified from cash and cash equivalents in our Condensed Consolidated ~~Financial Statements.~~Balance Sheet to book overdraft. Cash and cash equivalents balances are available to settle book overdrafts, and to pay reinsurance premiums, expenses and claims. Reinsurance premiums are paid in installments during the reinsurance policy period, which runs from June 1st to May 31st of the following year. The ~~Florida Hurricane Catastrophe Fund (“FHCF”) is~~FHCF reimbursement premiums are paid in three installments on August 1st, October 1st, and December 1st, and third-party reinsurance is paid in four installments on July 1st, October 1st, January 1st and April 1st, resulting in significant payments at those times. See “Item 1—Note 12 (Commitments and Contingencies)” and “—Contractual Obligations” for more information.

The balance of restricted cash and cash equivalents as of September 30, ~~2019~~2020 and December 31, ~~2018~~2019 represents cash equivalents on deposit with certain regulatory agencies in the various states in which our Insurance Entities do ~~business.~~business 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 $18.5 million as of September 30, 2020. See “Item 1—Note 14 (Variable Interest Entities)” for more information.

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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 to our shareholders, and any future repurchases of our common stock, will be at the discretion of our Board of Directors and will depend upon many factors, including our operating results, financial condition, debt covenants and any regulatory constraints. Principal sources of liquidity for usthe holding company include ~~revenues~~dividends paid by our service entities generated from income earned on fees paid by the Insurance Entities to affiliated companies for general agency, inspections and claims adjusting services. ~~Additional sources of liquidity include~~Dividends are also paid from income earned from brokerage commissions earned on reinsurance contracts placed by our wholly-owned subsidiary, Blue Atlantic Reinsurance Company, and policy ~~fees and remittances from the Insurance Entities for their respective share of income taxes.~~fees. We also maintain high quality investments ~~which are~~in our portfolio as a source of liquidity along with ongoing interest and dividend income ~~and would generate funds upon sale.~~

~~There~~from those investments. As discussed in “Item 1—Note 5 (Insurance Operations),” there are limitations on the dividends the Insurance Entities may pay to their immediate parent company, Protection Solutions, Inc. (“PSI”, formerly known as Universal Insurance Holding Company of Florida).

The maximum amount of dividends that can be paid by Florida insurance companies without prior approval of the FLOIR is subject to restrictions as referenced below and in “Item 1—Note 5 (Insurance Operations).” The maximum dividend that may be paid by the Insurance Entities to PSI 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 nine months ended September 30, ~~2019~~2020 and the year ended December 31, ~~2018,~~2019, the Insurance Entities did not pay dividends to PSI.

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Liquidity for the Insurance Entities is primarily required to cover payments for reinsurance premiums, claims payments including potential payments of catastrophe losses (offset by recovery of any reimbursement amounts under our reinsurance agreements), fees paid to affiliates for managing general agency services, inspections and claims adjusting services, agent commissions, premium and income taxes, regulatory assessments, general operating expenses, and interest and principal payments on debt obligations. The principal source of liquidity for the Insurance Entities consists of the revenue generated from the collection of premiums earned, net, ~~premiums,~~ interest and dividend income from the investment portfolio, the collection of reinsurance recoverable and financing fees.

Our insurance operations provide liquidity as premiums are generally received months or even years before potential losses are paid under the policies written. In the event of catastrophic events, many of our reinsurance agreements provide for “cash advance” whereby reinsurers advance or prepay amounts to us, thereby providing liquidity, which we utilize in the claim settlement process. In addition, the Insurance Entities maintain substantial investments in highly liquid, marketable securities, which would generate funds upon sale. The average credit rating on our available-for-sale securities was A+ as of September 30, 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 3.5 years at September 30, 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 orand retentions before our reinsurance protection commences. Also, the Insurance Entities are responsible for all other losses that otherwise may not be covered by the reinsurance programs and any amounts arising in the event of a reinsurer default. Losses or a default by reinsurers may have a material adverse effect on either of the Insurance Entities, oron our business, financial condition, results of operations and liquidity.

Capital Resources

Capital resources provide protection for policyholders, furnish the financial strength to support the business of underwriting insurance risks and facilitate continued business growth. The following table provides our stockholders’ equity, total long-term debt, total capital resources, debt-to-total capital ratio and debt-to-equity ratio for the periods presented (dollars in thousands):


	As of
	September 30,			December 31,
	2020			2019
Stockholders’ equity	$	474,763		$	493,901
Total long-term debt	8,823			9,926
Total capital resources	$	483,586		$	503,827

Debt-to-total capital ratio	1.8		%	2.0		%
Debt-to-equity ratio	1.9		%	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.

As of
September 30, December 31,
2019 2018
Stockholders’ equity $ 568,981
$ 501,633
Total long-term debt 10,294
11,397
Total capital resources $ 579,275
$ 513,030

Debt-to-total capital ratio 1.8 % 2.2 %
Debt-to-equity ratio 1.8 % 2.3 %

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As described in our Annual Report on Form 10-K for the year ended December 31, ~~2018,~~2019, UPCIC entered into a surplus note with the State Board of Administration of Florida under Florida’s Insurance Capital Build-Up Incentive Program on November 9, 2006. The surplus note has a twenty-year term, with quarterly payments of principal and interest that accrue per the terms of the note agreement. At September 30, ~~2019,~~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 portfolio’s secondary investment objective is to provide a total rate of return with emphasis on investment income. Historically, we have consistently generated funds from operations, allowing our cash and invested assets to grow. We have not had to liquidate investment holdings to fund either operations or financing activities. 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. In the third quarter of 2020, we 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. 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 at September 30, 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 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 yet 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

On November 6, 2019, we announced that our Board of Directors authorized a share repurchase program under which we may repurchase in the open market up to $40 million of outstanding shares of our common stock through December 31, 2021. 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 the nine months ended September 30, 2019, there were two authorized repurchase plans in effect:~~

On December 12, 2018, we announced that our Board of Directors authorized a share repurchase program under which we were authorized to repurchase in the open market up to $20 million of outstanding shares of our common stock through May 31, 2020 (the “May 2020 Share Repurchase Program”), pursuant to which we repurchased 606,342 shares of our common stock at an average price of $32.98 per share. We completed the May 2020 Share Repurchase Program in May 2019.

On May 6, 2019, we announced that our Board of Directors authorized a share repurchase program under which we may repurchase in the open market up to $40 million of outstanding shares of our common stock through December 31, 2020 (the “December 2020 Share Repurchase Program”). Under the December 2020 Share Repurchase Program, we repurchased 1,302,401 shares of our common stock at an average price of $27.19 per share during the nine months ended September 30, 2019 at an aggregate cost of approximately $35.4 million.

During the nine months ended September 30, ~~2019,~~2020, we repurchased an aggregate of ~~1,770,509~~1,418,087 shares of our common stock in the open market at an aggregate purchase price of ~~$49.9~~$26.5 million. Also, see “Part II, Item 2—Unregistered Sales of Equity Securities and Use of Proceeds” for share repurchase activity during the three months ended September 30, ~~2019.~~

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2020.

Cash Dividends

The following table summarizes the dividends declared by us:

2020

Dividend
Declared Date

Shareholders
Record Date

Dividend
Payable Date

Cash Dividend
Per Common Share Amount

First Quarter

February 11, 2020

March 12, 2020

March 19, 2020

0.16

Second Quarter

April 16, 2020

May 14, 2020

May 21, 2020

0.16

Third Quarter

July 6, 2020

July 31, 2020

August 7, 2020

0.16

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2019
Dividend
Declared Date

Shareholders
Record Date

Dividend
Payable Date

Cash Dividend
Per Share Amount
First Quarter January 31, 2019 March 11, 2019 March 25, 2019 $ 0.16
Second Quarter April 10, 2019 May 3, 2019 May 10, 2019 $ 0.16
Third Quarter June 5, 2019 July 3, 2019 July 17, 2019 $ 0.16

CONTRACTUAL OBLIGATIONS

The following table represents our contractual obligations for which cash flows are fixed or determinable as of September 30, ~~2019~~2020 (in thousands):


	Total		Less than 1 year		1-3 years		3-5 years		Over 5 years
Reinsurance payable and multi-year commitments (1)	$	550,873	$	351,255	$	199,618	$	—	$	—
Unpaid losses and LAE, direct (2)	202,720		123,862		58,991		14,596		5,271
Long-term debt	9,000		1,144		4,521		2,967		368
Total contractual obligations	$	762,593	$	476,261	$	263,130	$	17,563	$	5,639

(1)The 1-3 years amount represents the payment of reinsurance premiums payable under multi-year commitments. See “Item 1—–Note 12 (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 September 30, 2020. Unpaid losses and LAE are net of estimated subrogation recoveries. In addition, these balances exclude amounts recoverable from the Company’s reinsurance program. See “Item 1—Note 4 (Reinsurance).”

Arrangements with Variable Interest Entities

Total
Less than
1 year
1-3 years 3-5 years
Over
5 years
Reinsurance payable and multi-year commitments (1) $ 501,253
$ 300,094
$ 201,159
$ —
$ —
Unpaid losses and LAE, direct (2) 166,342
102,966
46,410
12,808
4,158
Long-term debt 11,044
1,253
4,844
3,081
1,866
Total contractual obligations $ 678,639
$ 404,313
$ 252,413
$ 15,889
$ 6,024


~~(1)~~	~~The 1-3 years amount represents the payment of reinsurance premiums payable under multi-year commitments. See “Item 1—–Note 12 (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 September 30, 2019. Unpaid losses and LAE are net of estimated subrogation recoveries. In addition, these balances exclude amounts recoverable from the Company’s reinsurance program. See “Item 1—Note 4 (Reinsurance).”

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 “Item 1—Note 2 (Significant Accounting Policies)” and “Item 1—Note 14 (Variable Interest Entities).”

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

There have been no material changes during the period covered by this Quarterly Report on Form 10-Q to Critical Accounting Policies and Estimates previously disclosed in “Part II, Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, ~~2018.~~2019.

Recent Accounting Pronouncements Not Yet Adopted

In ~~June 2016,~~December 2019, the Financial Accounting Standards Board (“FASB”) revised U.S. GAAP with the issuance of Accounting Standards Update (“ASU”) ~~2016-13,~~2019-12, ~~Financial Instruments-Credit Losses~~Income Taxes (Topic ~~326)~~740)~~, that introduces a new process~~. The amendments in this ASU simplify the accounting 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,~~income taxes by removing certain exceptions and ~~other financial assets measured at amortized cost, (2) loan commitments~~clarifying certain requirements regarding franchise taxes, goodwill, consolidated tax expenses 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.annual effective tax rate calculations. The ASU is effective for ~~fiscal years~~interim and annual periods beginning after December 15, ~~2019, including interim periods within those fiscal years. We are~~2020, with early adoption permitted. The Company is currently ~~evaluating~~assessing the impact ~~that~~of this standard ~~will have~~ on our consolidated financial statements.

~~In August 2018, the FASB revised U.S. GAAP with the issuance of ASU 2018-13,~~ ~~Fair Value Measurement (Topic 820) - Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement~~. The ASU removes, modifies and adds certain disclosure requirements associated with fair value measurements. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. The removed and modified disclosures will be adopted on a retrospective basis and the new disclosures will be adopted on a prospective basis. The adoption of this ASU only affects the presentation of certain disclosures and is not expected to impact our results of operations, financial position or liquidity.

See “Item 1—Note 2 (Significant Accounting Policies)” for more information about recently adopted accounting pronouncements.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Market risk is the potential for economic losses due to adverse changes in fair market value of available-for-sale debt securities, equity securities (“Financial Instruments”) and investment real estate. We carry all of our Financial Instruments at fair market value and investment real estate at net book value in our statement of financial condition. Our investment portfolio as of September 30, ~~2019~~2020 is comprised of available-for-sale debt securities and equity securities, carried at fair market value, which expose us to changing market conditions, specifically interest rates and equity price changes.

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The primary objectives of the investment portfolio are the preservation of capital and providing adequate liquidity for potential claims payments and other cash needs. The portfolio’s secondary investment objective is to provide a total rate of return with an emphasis on investment income. None of our investments in risk-sensitive Financial Instruments were entered into for trading purposes.

See “Item 1—Note 3 (Investments)” for more information about our Financial Instruments.

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Interest Rate Risk

Interest rate risk is the sensitivity of the fair market value of a ~~fixed-rate~~fixed rate Financial Instrument to changes in interest rates. Generally, when interest rates rise, the fair value of our ~~fixed-rate~~fixed rate Financial Instruments ~~declines over the remaining term of the agreement.~~declines.

The following tables provide information about our fixed income Financial Instruments as of September 30, ~~2019~~2020 compared to December 31, ~~2018,~~2019, which are sensitive to changes in interest rates. The tables present the expected cash flows of Financial Instruments based on years to effective maturity using amortized cost compared to fair market value and the related book yield compared to coupon yield (dollars in thousands):


	September 30, 2020
	2020			2021			2022			2023			2024			Thereafter			Other			Total
Amortized cost	$	75,023		$	60,595		$	100,727		$	176,995		$	131,578		$	293,563		$	2,165		$	840,646
Fair market value	$	75,416		$	60,788		$	101,143		$	178,356		$	131,597		$	293,092		$	2,182		$	842,574
Coupon rate	2.14		%	1.72		%	1.95		%	3.24		%	2.63		%	2.34		%	4.16		%	2.47		%
Book yield	1.45		%	0.82		%	0.73		%	1.04		%	1.09		%	1.61		%	4.04		%	1.24		%
* Years to effective maturity - 5.5 years

September 30, 2019
2019 2020 2021 2022 2023 Thereafter Other Total
Amortized cost $ 122,700
$ 113,125
$ 66,160
$ 122,032
$ 126,153
$ 300,061
$ 427
$ 850,658
Fair market value $ 122,907
$ 113,784
$ 67,142
$ 125,963
$ 129,137
$ 319,159
$ 475
$ 878,567
Coupon rate 2.34 % 2.52 % 3.37 % 3.39 % 3.58 % 3.64 % 6.76 % 3.25 %
Book yield 2.29 % 2.40 % 2.88 % 3.23 % 2.88 % 3.58 % 6.24 % 3.03 %
* Years to effective maturity - 3.2 years


	December 31, 2019
	2020			2021			2022			2023			2024			Thereafter			Other			Total
Amortized cost	$	106,961		$	107,705		$	59,350		$	124,596		$	98,477		$	331,082		$	165		$	828,336
Fair market value	$	107,259		$	108,516		$	60,105		$	128,599		$	101,345		$	349,259		$	201		$	855,284
Coupon rate	2.46		%	2.58		%	3.06		%	3.52		%	3.50		%	3.64		%	7.50		%	3.28		%
Book yield	2.46		%	2.44		%	2.77		%	3.27		%	3.03		%	3.47		%	6.31		%	3.08		%
* Years to effective maturity - 4.7 years

December 31, 2018
2019 2020 2021 2022 2023 Thereafter Other Total
Amortized cost $ 123,110
$ 109,690
$ 114,580
$ 55,542
$ 121,363
$ 301,454
$ 5,388
$ 831,127
Fair market value $ 122,333
$ 108,564
$ 112,917
$ 54,309
$ 119,945
$ 297,214
$ 5,156
$ 820,438
Coupon rate 2.04 % 2.35 % 2.63 % 2.99 % 3.32 % 3.90 % 6.15 % 3.11 %
Book yield 1.88 % 2.24 % 2.43 % 2.83 % 3.18 % 3.68 % 5.96 % 2.94 %
* Years to effective maturity - 3.5 years

All securities, except those with perpetual maturities, were categorized in the tables above utilizing years to effective maturity. Effective maturity takes into consideration all forms of potential prepayment, such as call features or prepayment schedules, that shorten the lifespan of contractual maturity dates.

Equity Price Risk

Equity price risk is the potential for loss in fair value of Financial Instruments in common stock and mutual funds from adverse changes in the prices of those Financial Instruments.

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


	September 30, 2019				December 31, 2018					September 30, 2020				December 31, 2019
	Fair Value		Percent		Fair Value		Percent			Fair Value		Percent		Fair Value		Percent
Equity Securities:									Equity Securities:
Common stock	$	2,678	6.2	%	$	15,564	24.6	%	Common stock	$	2,240	4.3	%	$	2,377	5.4	%
Mutual funds	40,463		93.8	%	47,713		75.4	%	Mutual funds	50,460		95.7	%	41,340		94.6	%
Total equity securities	$	43,141	100.0	%	$	63,277	100.0	%	Total equity securities	$	52,700	100.0	%	$	43,717	100.0	%

A hypothetical decrease of 20% in the market prices of each of the equity securities held at September 30, ~~2019~~2020 and December 31, ~~2018~~2019 would have resulted in a decrease of ~~$8.6~~$10.5 million and ~~$12.7~~$8.7 million, respectively, in the fair value of those securities.

The COVID-19 pandemic presents new and emerging uncertainty to the financial markets. See further discussion in “Item 2— Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company carried out an evaluation under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief 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 as of the end of the period covered by this report. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that disclosure controls and procedures were effective as of September 30, ~~2019,~~2020, to ensure that information required to be disclosed by the Company in its reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the ~~SEC’s~~United States Securities and Exchange Commission’s (“SEC”) rules and forms and that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There was no change in the Company’s internal controls over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. 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.

Legal proceedings are subject to many uncertain factors that generally cannot be predicted with assurance, 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 1A. Risk Factors

~~There have been no material changes during the period covered by this Quarterly Report on Form 10-Q~~Please refer to the risk factors previously disclosed in “Part I, Item 1A—Risk Factors,” included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2018.~~2019, as supplemented in “Part II, Item 1A—Risk Factors” of the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The table below presents purchases of our common stock during the three months ended September 30, ~~2019.~~2020.

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)
7/1/2019 - 7/30/2019 —
$ —
—
—
8/1/2019 - 8/31/2019 899,127
$ 26.60
899,127
—
9/1/2019 - 9/30/2019 65,000
$ 27.02
65,000
154,297
Total 964,127
$ 26.63
964,127
154,297


				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)
7/1/2020 - 7/31/2020	—	$	—	—	—
8/1/2020 - 8/31/2020	260,151	$	19.04	260,151	—
9/1/2020 - 9/30/2020	273,761	$	17.95	273,761	135,878
Total	533,912	$	18.49	533,912	135,878

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

(2)Number of shares was calculated based on a closing price at September 30, ~~2019~~2020 of ~~$29.99~~$13.84 per share.

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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 the nine months ended September 30, 2019, there were two authorized repurchase plans in effect:~~

On December 12, 2018, we announced that the Board of Directors authorized the repurchase of up to $20 million of our outstanding shares of common stock through May 31, 2020, pursuant to which we repurchased 606,342 shares of our common stock at an aggregate price of $20.0 million. We completed the May 2020 Share Repurchase Program in May 2019.

~~On May~~November 6, 2019, we announced that ~~the~~our Board of Directors authorized the repurchase of up to $40 million of ~~our~~ outstanding shares of our common stock through December 31, ~~2020.~~2021 (the “December 2021 Share Repurchase Program”). Under the December ~~2020~~2021 Share Repurchase Program, we repurchased ~~1,302,401~~1,821,229 shares of our common stock from ~~May~~November 2019 through September 30, ~~2019~~2020 at an aggregate cost of approximately ~~$35.4~~$38.2 million.

During the nine months ended September 30, 2019, we repurchased 1,770,509 shares of our common stock pursuant to the May 2020 Share Repurchase Program and the December 2020 Share Repurchase Program at an aggregate purchase price of approximately $49.9 million.

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Item 6. Exhibits


Exhibit No.						Exhibit



~~Exhibit No.~~						~~Exhibit~~

~~10.1~~



10.1						~~Stephen Donaghy Restricted Share Unit Award~~Employ ment Agreement, dated August ~~5, 2019 (filed as Exhibit 10.1 to~~17, 2020, between Michael J. Poloskey and the ~~Company’s Current Report on Form 8-K filed on August 7, 2019 and incorporated herein by reference)~~Company †

15.1						Accountants’ Acknowledgment

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 Section 906 of the Sarbanes-Oxley Act of 2002

101.1						The following materials from Universal Insurance Holdings, Inc. Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, ~~2019,~~2020, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Income, (iii) the Condensed Consolidated Statements of Comprehensive Income, (iv) the Condensed Statement of Stockholders’ Equity, (v) the Condensed Consolidated Statements of Cash Flows and (vi) Notes to Condensed Consolidated Financial Statements.
104						The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, ~~2019,~~2020, formatted in Inline XBRL (included in Exhibit 101.1)


† Indicates management contract or compensatory plan or arrangement.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



						UNIVERSAL INSURANCE HOLDINGS, INC.

Date: ~~November 4, 2019~~October 30, 2020						/s/ Stephen J. Donaghy
						Stephen J. Donaghy, Chief Executive Officer and Principal Executive Officer

Date: ~~November 4, 2019~~October 30, 2020						/s/ Frank C. Wilcox
						Frank C. Wilcox, Chief Financial Officer and Principal Accounting Officer



	As of
	September 30, 2019			December 31, 2018
ASSETS
Available-for-sale debt securities, at fair value (amortized cost: $850,658 and $831,127)	$	878,567		$	820,438
Equity securities, at fair value (amortized cost: $43,772 and $86,271)	43,141			63,277
Investment real estate, net	15,688			24,439
Total invested assets	937,396			908,154

Cash and cash equivalents	159,638			166,428
Restricted cash and cash equivalents	2,635			2,635
Prepaid reinsurance premiums	280,297			142,750
Reinsurance recoverable	217,301			418,603
Premium receivable, net	70,388			59,858
Property and equipment, net	41,016			34,991
Deferred policy acquisition costs	94,820			84,686
Income taxes recoverable	9,860			11,159
Deferred income tax asset, net	—			14,586
Other assets	15,927			14,540
Total assets	$	1,829,278		$	1,858,390
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Unpaid losses and loss adjustment expenses	$	166,342		$	472,829
Unearned premiums	680,195			601,679
Advance premium	40,669			26,222
Accounts payable	3,396			3,059
Book overdraft	1,692			102,843
Reinsurance payable, net	300,094			93,306
Deferred income tax liability, net	2,571			—
Other liabilities and accrued expenses	55,044			45,422
Long-term debt	10,294			11,397
Total liabilities	1,260,297			1,356,757

Commitments and Contingencies (Note 12)

STOCKHOLDERS’ EQUITY:
Cumulative convertible preferred stock, $.01 par value	—			—
Authorized shares - 1,000
Issued shares - 10 and 10
Outstanding shares - 10 and 10
Minimum liquidation preference, $9.99 and $9.99 per share
Common stock, $.01 par value	467			465
Authorized shares - 55,000
Issued shares - 46,713 and 46,514
Outstanding shares - 33,211 and 34,783
Treasury shares, at cost - 13,502 and 11,731	(180,331		)	(130,399		)
Additional paid-in capital	93,546			86,353
Accumulated other comprehensive income (loss), net of taxes	21,089			(8,010		)
Retained earnings	634,210			553,224
Total stockholders’ equity	568,981			501,633
Total liabilities and stockholders’ equity	$	1,829,278		$	1,858,390



Details about Accumulated Other Comprehensive Income (Loss) Components	Amount Reclassified from Accumulated Other Comprehensive Income (Loss)												Affected Line Item in the Statement Where Net Income is Presented
	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Unrealized gains (losses) on available-for-sale debt securities
	$	(22	)	$	(10	)	$	87		$	(2,807	)	Net realized gains (losses) on sale of securities
	6			2			(21		)	683			Income taxes
Total reclassification for the period	$	(16	)	$	(8	)	$	66		$	(2,124	)	Net of tax



	For the Three Months Ended
	September 30, 2019				September 30, 2018				Growth year over year
State	Direct Premiums Written		%		Direct Premiums Written		%		$		%
Florida	$	280,141	81.7	%	$	260,024	84.1	%	$	20,117	7.7	%
Other states	62,731		18.3	%	49,152		15.9	%	13,579		27.6	%
Total	$	342,872	100.0	%	$	309,176	100.0	%	$	33,696	10.9	%



	Three Months Ended September 30, 2018
	Direct		Loss Ratio		Ceded		Loss Ratio		Net			Loss Ratio
Premiums earned	$	288,404			$	99,466			$	188,938

Loss and loss adjustment expenses:
Weather events*	$	41,858	14.5	%	$	34,358	34.5	%	$	7,500		4.0	%
Prior year adverse/(favorable) reserve development	149,633		51.9	%	149,672		150.5	%	(39		)	0.0	%
All other losses and loss adjustment expenses	78,667		27.3	%	181		0.2	%	78,486			41.5	%
Total losses and loss adjustment expenses	$	270,158	93.7	%	$	184,211	185.2	%	$	85,947		45.5	%

*Includes only current year weather events beyond those expected.



	Nine Months Ended September 30, 2018
	Direct		Loss Ratio		Ceded			Loss Ratio		Net		Loss Ratio
Premiums earned	$	824,692			$	260,905				$	563,787

Loss and loss adjustment expenses:
Weather events*	$	46,858	5.7	%	$	34,358		13.2	%	$	12,500	2.2	%
Prior year adverse/(favorable) reserve development	311,683		37.8	%	309,456			118.6	%	2,227		0.4	%
All other losses and loss adjustment expenses	234,878		28.5	%	(2,110		)	(0.8	)%	236,988		42.0	%
Total losses and loss adjustment expenses	$	593,419	72.0	%	$	341,704		131.0	%	$	251,715	44.6	%

*Includes only current year weather events beyond those expected.