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,” 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, 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,” 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, 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 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 reserves established for claims;
•Failure of our risk mitigation strategies, including failure to accurately and adequately price the risks we underwrite and to 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;
•The ability of our Insurance Entities to comply with statutory capital and surplus minimums and other regulatory and licensing requirements; and
•The ongoing impact of the COVID-19 pandemic on our business and the economy in general.
OVERVIEW
We are a vertically integrated holding company offering property and casualty insurance and value-added insurance services. We develop, market and underwrite insurance products for consumers predominantly in the personal residential homeowners 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”), offer insurance products through both our appointed independent agent network and our online distribution channels across 18 states (primarily in Florida), with licenses to write insurance in two additional states and an application submitted which is pending in one state. The Insurance Entities seek to produce an underwriting profit (defined as earned premium less losses, loss adjustment expense (“LAE”), policy acquisition costs and other operating costs) over the long term; maintain a conservative balance sheet to prepare for years in which the Insurance Entities are not able to achieve an underwriting profit; and generate investment income on assets.
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, 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.”
Trends - Impact of COVID-19
The global COVID-19 pandemic has had a profound worldwide effect on social interactions and on the global, national and local economies. We took early measures in March, 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 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 second quarter of 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. 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 six months ended June 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 as our customers in hurricane-exposed states prepare for the 2020 hurricane season. 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 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 consolidated financial statements and accompanying notes.
Definitions of Key Performance Indicators
Book Value Per Share ― the ratio of total stockholders’ equity divided by the number of shares outstanding as of a reporting period. Book value per share is the excess of assets over liabilities at a reporting period attributed to each share of stock. Changes in book value per share informs shareholders of retained equity in the company on a per share basis which may assist in understanding market value trends for the company’s stock.
Combined Ratio ― the combined ratio is a measure of underwriting profitability for a reporting period and is calculated by dividing total operating costs and expenses (which is made up of losses and LAE and general and administrative expenses) by premiums earned, net, which is net of ceded premiums earned. The combined ratio and changes to the ratio over time provide management with an understanding of costs to operate its business in relation to net premiums it is earning and the impact of rate, underwriting and other business management actions on underwriting profitability. A combined ratio below 100 indicates underwriting profit; a combined ratio above 100 indicates underwriting losses.
Core Loss Ratio ― a common operational metric used in the insurance industry to describe the ratio of current accident year expected losses and LAE to premiums earned. Core loss ratio is an important measure identifying profitability trends of in-force premiums.
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 period before 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. During 2019, our total direct premiums written was 82.5% in Florida and 17.5% in other states. 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 profitability.
Losses and Loss Adjustment Expense Ratio or Net Loss Ratio ― a measure of the cost of claims and claim settlement expenses incurred in a reporting period as a percentage of earned premium 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 losses and LAE ratio can be measured on a direct basis, which includes losses and LAE divided by direct earned premiums, or on a net basis, which includes losses and LAE after amounts have been ceded to reinsurers divided by net earned premiums (i.e., direct earned premiums less ceded earned premiums). The net losses and LAE ratio is a measure of underwriting profitability after giving consideration to the effect of reinsurance. Trends in the net losses and LAE ratio are an indication to management of current and future profitability.
Monthly Weighted Average Renewal Retention Rate ― measures the monthly average of policyholders that renew their policies over the period of a calendar year. This measure allows management to assess customer retention.
Premiums Earned, Net ― the pro-rata portion of current and previously written premiums that the Company recognizes as earned premium during the reporting period, net of ceded premium earned. Ceded premiums are premiums paid or payable by the Company for reinsurance protection. Written premiums are considered earned and are recognized pro-rata over the policy coverage period. Premiums earned, net is a measure that allows management to identify revenue trends.
Policies in Force ― represents the number of active policies with coverage in effect as of the end of the reporting period. The change in the number of policies in force is a growth measure and provides management with an indication of progress toward achieving strategic objectives. Inherent seasonality in our business makes this measure more useful when comparing each quarter’s balance to the same quarter in prior years.
Premium in Force ― is the amount of the annual direct written premiums previously recorded by the Company for policies which are still active as of the reporting date. This measure assists management in measuring the level of insured exposure and progress toward meeting revenue goals for the current year, and provides an indication of business available for renewal in the next twelve months. Inherent seasonality in our business makes this measure more useful when comparing each quarter’s balance to the same quarter in prior years.
Return on Average Equity (“ROAE”) ― calculated by dividing earnings per share by average book value per share. Average book value per share is computed as the sum of book value per 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 share.
Total Insured Value ― represents the amount of insurance limits available on a policy for a single loss based on all policies active as of the reporting date. This measure assists management in measuring the level of insured exposure.
Unearned Premiums ― represents the portion of direct premiums corresponding to the time period remaining on an insurance policy and available to future earning by the company. Trends in unearned premiums generally indicate expansion, if growing, or contraction, if reducing, which are important indicators to management. Inherent seasonality in our business makes this measure more useful when comparing each quarter’s balance to the same quarter in prior years.
Weather events ― an estimate of losses and LAE from weather events occurring during the current accident year that exceed initial estimates of expected weather events when establishing the core loss ratio for each accident year. This metric informs management of factors impacting overall current year profitability.
REINSURANCE
Reinsurance enables our Insurance Entities to limit potential exposures to catastrophic events. Reinsurance contracts are typically classified as treaty or facultative contracts. Treaty reinsurance provides coverage for all or a portion of a specified group or class of risks ceded by the primary insurer, while facultative reinsurance provides coverage for specific individual risks. Within each classification, reinsurance can be further classified as quota share or excess of loss. Quota-share reinsurance is where the primary insurer and the reinsurer share proportionally or pro-rata in the direct premiums and losses of the insurer. Excess-of-loss reinsurance indemnifies the direct insurer or reinsurer for all or a portion of the loss in excess of an agreed upon amount or retention.
Developing and implementing our reinsurance strategy to adequately protect our balance sheet and Insurance Entities in the event of one or more catastrophes while maintaining efficient reinsurance costs has been a key strategic priority for us. In order to limit the Insurance Entities’ potential exposure to catastrophic events, we purchase significant reinsurance from third-party reinsurers and the 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’ respective 2020-2021 reinsurance programs meet the FLOIR’s requirements, which are based on, among other things, successfully demonstrating cohesive and comprehensive reinsurance programs that protect the policyholders of our Insurance Entities, as well as satisfying a series of stress test catastrophe loss scenarios based on past historical events.
We believe the Insurance Entities’ retentions under their respective reinsurance programs are appropriate and structured to protect policyholders. We test the sufficiency of the reinsurance programs by subjecting the Insurance Entities’ personal residential exposures to statistical testing using a third-party hurricane model, RMS RiskLink v18.1 (Build 1945). This model combines simulations of the natural occurrence patterns and characteristics of hurricanes, tornadoes, earthquakes and other catastrophes with information on property values, construction types and occupancy classes. The model outputs provide information concerning the potential for large losses before they occur, so companies can prepare for their financial impact. Furthermore, as part of our operational excellence initiatives, we continually look to enable new technology to refine our data intelligence on catastrophe risk modeling.
Effective June 1, 2020, the Insurance Entities entered into multiple reinsurance agreements comprising our 2020-2021 reinsurance program. See “Item 1—Note 4 (Reinsurance).”
UPCIC’s 2020-2021 Reinsurance Program
•First event All States retention of $43 million; First event Non-Florida retention of $15 million.
•All States first event tower extends to $3.26 billion with no co-participation in any of the layers, no limitations on loss adjustment expenses and no accelerated deposit premiums.
•Assuming a first event completely exhausts the $3.26 billion tower, the second event exhaustion point would be $1.343 billion.
•Full reinstatement available for all private market first event catastrophe layers for guaranteed second event coverage. For all layers purchased between $90 million and the projected FHCF retention, to the extent that all of our coverage or a portion thereof is exhausted in a catastrophic event and reinstatement premium is due, UPCIC has purchased enough reinstatement premium protection (“RPP”) limit to pay the premium necessary for the reinstatement of these coverages.
•Specific 3rd and 4th event private market catastrophe excess of loss coverage of $76 million in excess of $35 million provides frequency protection for a multiple event storm season.
•For the FHCF Reimbursement Contracts effective June 1, 2020, UPCIC has continued the election of the 90% coverage level. We estimate the total mandatory FHCF layer will provide approximately $1.917 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:
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Reinsurer
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|
A.M. Best
|
|
S&P
|
|
Allianz Risk Transfer
|
|
A+
|
|
A+
|
|
Arch Reinsurance Limited
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|
A+
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|
A+
|
|
Chubb Tempest Reinsurance Ltd.
|
|
A++
|
|
AA
|
|
Munich Re
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|
A+
|
|
AA-
|
|
Renaissance Re
|
|
A+
|
|
A+
|
|
Various Lloyd’s of London Syndicates
|
|
A
|
|
A+
|
|
Florida Hurricane Catastrophe Fund
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|
N/A
|
|
N/A
|
APPCIC’s 2020-2021 Reinsurance Program
•First event All States retention of $3 million.
•All States first event tower of $41.3 million with no co-participation in any of the layers, no limitation on loss adjustment expenses and no accelerated deposit premiums.
•Full reinstatement available for all private market first event catastrophe layers for guaranteed second event coverage. For the layer purchased between $3 million and the projected FHCF retention, to the extent that all coverage or a portion thereof is exhausted in a catastrophic event and reinstatement premium is due, APPCIC purchased enough RPP limit to pay the premium necessary for the reinstatement of this coverage.
•APPCIC also purchases extensive multiple line excess per risk reinsurance with various reinsurers due to the high-value risks it insures in both the personal residential and commercial multiple peril lines of business. Under this multiple line excess per risk contract, APPCIC has coverage of $8.5 million in excess of $0.5 million ultimate net loss for each risk and each property loss, and $1 million in excess of $0.3 million for each casualty loss. A $19.5 million aggregate limit applies to the term of the contract for property-related losses and a $2 million aggregate limit applies to the term of the contract for casualty-related losses. This contract also contains a profit-sharing feature if specific performance measures are met.
•For the FHCF Reimbursement Contracts effective June 1, 2020, APPCIC has continued the election of the 90% coverage level. The total mandatory FHCF layer is estimated to provide approximately $20.25 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:
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Reinsurer
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A.M. Best
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S&P
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Chubb Tempest Reinsurance Ltd.
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A++
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AA
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|
Lancashire Insurance Company Limited
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A
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A-
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Various Lloyd’s of London Syndicates
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A
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A+
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Florida Hurricane Catastrophe Fund
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N/A
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N/A
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The total cost of the 2020-2021 reinsurance programs for UPCIC and APPCIC is projected to be $494 million, representing approximately 34.6% of estimated direct premium earned for the 12-month treaty period.
RESULTS OF OPERATIONS AND ANALYSIS OF FINANCIAL CONDITION
Highlights
Results of operations for the second quarter of fiscal 2020, in each case compared with the second quarter of fiscal 2019 (unless otherwise specified), include:
•COVID-19: Maintained operations and quality standards as workforce continued to work remotely.
•COVID-19: Currently no material impact to our business, our operations, our financial position or our liquidity.
•Direct premiums written overall grew by $46.7 million, or 13.1%, to $404.7 million.
•Increase in fair value of equity securities during the quarter resulted in a $3.9 million net unrealized gain recorded in the income statement, and an increase in fair value of fixed income securities resulted in a $34.5 million net unrealized gain, before a change in credit losses of $0.3 million, recorded in stockholders’ equity. Ending balance of net unrealized gains was $46.3 million at June 30, 2020 compared to $27.1 million at December 31, 2019.
•In Florida, direct premiums written grew by $37.9 million, or 12.8%, and in our other states, direct premiums written grew by $8.9 million, or 14.5%.
•Premiums earned, net, grew by $16.0 million, or 7.6%, to $226.4 million.
•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 $19.0 million, or 8.1%, to $252.7 million.
•Net loss ratio was 66.9% as compared to 53.9%, driven by $17 million of severe weather and by the factors outlined in the following discussion.
•Diluted earnings per share (“EPS”) of $0.62 compared to $1.08.
•Weighted average diluted common shares outstanding were lower by 7.1% to 32.2 million shares compared to 34.6 million shares.
•Book value per share increased by $1.43, or 9.5%, to $16.56 at June 30, 2020 from $15.13 at December 31, 2019.
•Paid dividends of $5.1 million, or $0.16 per share, in the second quarter of 2020.
•Repurchased 572,068 shares at an average price of $17.53 for an aggregate purchase price of $10.0 million during the second quarter of 2020.
•Completed negotiation and execution of contracts representing our 2020 - 2021 reinsurance program.
Results of Operations — Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019
Benefiting the quarter were increases in premiums earned, net, realized gains on investments, net change in unrealized gains from an increase in the fair value of equity securities, commission revenue, policy fees and other revenue, offset by a decrease in net investment income, and increased total operating costs and expenses. A decrease in weighted average diluted common shares outstanding also benefited diluted earnings per share. Direct premium earned and premiums earned, net were up 11.4% and 7.6%, respectively, due to growth in all states in which we are licensed and writing during the past 12 months and rate increases implemented during 2020, offset by higher costs for reinsurance flowing through to premiums earned, net. Increases in losses and LAE were the result of several factors including (1) adverse weather events in 2020, (2) premium growth and change in mix between Florida and other states and (3) increased estimated core losses and LAE for the current year compared to prior year.
A detailed discussion of our results of operations follows the table below (in thousands, except per share data).
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Three Months Ended
June 30,
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Change
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2020
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2019
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$
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%
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PREMIUMS EARNED AND OTHER REVENUES
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|
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Direct premiums written
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$
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404,685
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|
|
$
|
357,960
|
|
|
$
|
46,725
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|
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13.1
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%
|
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Change in unearned premium
|
(67,046)
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|
|
(54,852)
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|
|
(12,194)
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|
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22.2
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%
|
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Direct premium earned
|
337,639
|
|
|
303,108
|
|
|
34,531
|
|
|
11.4
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%
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|
Ceded premium earned
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(111,269)
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|
|
(92,751)
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|
|
(18,518)
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|
|
20.0
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%
|
|
Premiums earned, net
|
226,370
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|
|
210,357
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|
|
16,013
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|
|
7.6
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%
|
|
Net investment income
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6,179
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|
|
7,410
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|
|
(1,231)
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|
|
(16.6)
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%
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Net realized gains (losses) on investments
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168
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|
(1,605)
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1,773
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NM
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Net change in unrealized gains (losses) of equity securities
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3,871
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|
|
3,759
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|
112
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|
|
3.0
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%
|
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Commission revenue
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7,758
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|
6,048
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|
|
1,710
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|
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28.3
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%
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Policy fees
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6,546
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|
|
5,997
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|
|
549
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|
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9.2
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%
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Other revenue
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1,812
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|
|
1,756
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|
|
56
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|
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3.2
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%
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|
Total premiums earned and other revenues
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252,704
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|
|
233,722
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|
|
18,982
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|
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8.1
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%
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OPERATING COSTS AND EXPENSES
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|
|
|
|
|
|
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Losses and loss adjustment expenses
|
151,345
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|
|
113,296
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|
|
38,049
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|
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33.6
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%
|
|
General and administrative expenses
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73,921
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|
|
69,496
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|
|
4,425
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|
|
6.4
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%
|
|
Total operating costs and expenses
|
225,266
|
|
|
182,792
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|
|
42,474
|
|
|
23.2
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%
|
|
INCOME BEFORE INCOME TAXES
|
27,438
|
|
|
50,930
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|
|
(23,492)
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|
|
(46.1)
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%
|
|
Income tax expense
|
7,556
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|
|
13,637
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|
(6,081)
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|
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(44.6)
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%
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NET INCOME
|
$
|
19,882
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|
|
$
|
37,293
|
|
|
$
|
(17,411)
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|
|
(46.7)
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%
|
|
Other comprehensive income, net of taxes
|
26,068
|
|
|
11,955
|
|
|
14,113
|
|
|
118.1
|
%
|
|
COMPREHENSIVE INCOME
|
$
|
45,950
|
|
|
$
|
49,248
|
|
|
$
|
(3,298)
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|
|
(6.7)
|
%
|
|
DILUTED EARNINGS PER SHARE DATA:
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|
Diluted earnings per common share
|
$
|
0.62
|
|
|
$
|
1.08
|
|
|
$
|
(0.46)
|
|
|
(42.6)
|
%
|
|
Weighted average diluted common shares outstanding
|
32,170
|
|
|
34,612
|
|
|
(2,442)
|
|
|
(7.1)
|
%
|
|
|
|
|
|
|
|
|
|
|
NM – Not Meaningful
|
|
|
|
|
|
|
|
Direct premiums written increased by $46.7 million, or 13.1%, for the quarter ended June 30, 2020, driven by growth within our Florida business of $37.9 million, or 12.8%, and growth in our other states business of $8.9 million, or 14.5%, as compared to the same period of the prior year. Rate increases in Florida and in certain other states along with slightly improved retention also contributed to the premium growth. Premium in force increased in every state in which we are writing increased compared to the prior year. We actively wrote policies in 18 states during 2019 and 2020. In addition, we are authorized to do business in Iowa and Wisconsin and are proceeding with product filings in those states. We also have submitted an application which is pending to write policies in Tennessee. During the quarter, the Company withdrew its application to write business in Connecticut. Policies in force, premium in force and total insured value increased at June 30, 2020 when compared to June 30, 2019.
The following table provides direct premiums written for Florida and Other States for the three months ended June 30, 2020 and 2019 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
|
|
June 30, 2019
|
|
|
|
Growth
year over year
|
|
|
|
State
|
Direct
Premiums Written
|
|
%
|
|
Direct
Premiums
Written
|
|
%
|
|
$
|
|
%
|
|
Florida
|
$
|
334,769
|
|
|
82.7
|
%
|
|
$
|
296,896
|
|
|
82.9
|
%
|
|
$
|
37,873
|
|
|
12.8
|
%
|
|
Other states
|
69,916
|
|
|
17.3
|
%
|
|
61,064
|
|
|
17.1
|
%
|
|
8,852
|
|
|
14.5
|
%
|
|
Total
|
$
|
404,685
|
|
|
100.0
|
%
|
|
$
|
357,960
|
|
|
100.0
|
%
|
|
$
|
46,725
|
|
|
13.1
|
%
|
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 $34.5 million, or 11.4%, for the quarter ended June 30, 2020, reflecting the earning of premiums written over the past 12 months and changes in rates and policies in force during that time.
Reinsurance enables our Insurance Entities to limit potential exposures to catastrophic events and other covered events. Ceded premium represents amounts paid to reinsurers for this protection. Ceded premium earned was $111.3 million for the quarter ended June 30, 2020, compared to $92.8 million during the same period in 2019, reflecting both an increase in costs associated with the increase in exposures and insured values and an increase in reinsurance pricing. Reinsurance costs, as a percentage of direct premium earned, increased from 30.6% for the three months ended June 30, 2019 compared to 33.0% for the three months ended June 30, 2020, reflecting new pricing for the cost of reinsurance as our annual reinsurance programs renew each year on June 1st. The increased costs associated with each year’s reinsurance program are earned over the June 1st to May 31st twelve-month coverage period. See the discussion above for the Insurance Entities’ 2020-2021 reinsurance programs and “Item 1—Note 4 (Reinsurance).”
Premiums earned, net of ceded premium earned, grew by 7.6%, or $16.0 million, to $226.4 million for the three months ended June 30, 2020, reflecting an increase in direct premium earned offset by increased costs for reinsurance.
Net investment income was $6.2 million for the three months ended June 30, 2020, compared to $7.4 million for the same period in 2019, a decrease of $1.2 million, or 16.6%. The decrease is driven by lower trends in yields on cash and short term investments during 2020 when compared to 2019. Total invested assets were $934.5 million as of June 30, 2020 compared to $914.6 million as of December 31, 2019. The average credit rating on our fixed income securities was A+ as of June 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 fixed income securities was 3.4 years at June 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. Cash and cash equivalents were $331.7 million at June 30, 2020 compared to $182.1 million at December 31, 2019, an increase of 82.2%. The increase in liquidity was the result of defensive measures taken to support our liquidity needs in the event of a business downturn due to the COVID-19 pandemic, although we have not experienced an adverse impact to our liquidity to date. 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 to investment advisors.
Yields from cash and cash equivalents, short-term investments and the fixed income portfolio are dependent on future market forces, monetary policy and interest rate policy from the Federal Reserve. The Federal Reserve has broadly been lowering and maintaining lower interest rates, which has impacted effective yields on new fixed income and overnight cash purchases and short-term investments. The impact from this trend in 2020 has been somewhat limited to cash and cash equivalents and short-term investments, as our long-term fixed income investments mature over many future years 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 for its fixed income portfolio 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. The overall trend has been lower interest rates on new purchases over the past year and lower returns on investments in cash and cash equivalents and short-term investments.
We sell investments from our investment portfolio from time to time to meet our investment objectives. During the three months ended June 30, 2020, sales of available-for-sale debt securities resulted in a net realized gain of $0.2 million. During the three months ended June 30, 2019, sales of equity securities resulted in net realized losses of $2.8 million, sales of available-for-sale debt securities resulted in net realized losses of $36 thousand and sale of investment real estate resulted in a realized gain of $1.2 million, in total generating net realized loss of $1.6 million. See “Item 1—Note 3 (Investments).”
There was a $3.9 million favorable net unrealized gain in equity securities during the three months ended June 30, 2020 compared to a $3.8 million favorable net unrealized gain during the three months ended June 30, 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).”
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 quarter of 2020. We believe the adverse impact to our investment portfolio has been 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. During March 2020, we saw extreme instability in the fixed-income market, which stabilized as the Federal Reserve provided liquidity to that marketplace in mid-March. Although initially we had a decline in our unrealized gains/losses in the fixed income portfolio, we ended the quarter with an overall increase in our unrealized gains in our fixed income portfolio, which totaled $50.7 million, before credit losses of $0.5 million at June 30, 2020, compared to $26.9 million in unrealized gains at December 31, 2019. Our equity securities were initially negatively impacted by the decline in valuations in the equity market but partially recovered during the quarter with $3.9 million of unrealized gains being recorded in the second quarter of 2020. As a precaution, we have accumulated cash held with our investment advisors as securities mature or are paid down as a defensive measure to support our liquidity needs in the event of a business downturn. We believe the high credit rating and shorter duration foundation of our portfolio, as described above, and portfolio diversification will help us weather these difficult market conditions, thereby limiting the impact of future economic financial market downturns on the portfolio. Although we believe this liquidity strategy is prudent under the present circumstances, net investment income will be lower than it would have been if we had reinvested those dollars. We will continue to monitor the impact of COVID-19 on our portfolio. Significant uncertainties still exist regarding the potential long-term impact of COVID-19 on our investment portfolio, as well as new emerging risks.
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 June 30, 2020, commission revenue was $7.8 million, compared to $6.0 million for the three months ended June 30, 2019. The increase in commission revenue of $1.7 million, or 28.3%, for the three months ended June 30, 2020 was primarily due to increased commissions from third-party reinsurers earned on increased reinsurance premiums, as well as the difference in pricing and structure associated with our reinsurance program when compared to the prior year.
Policy fees for the three months ended June 30, 2020 were $6.5 million compared to $6.0 million for the same period in 2019. The increase of $0.5 million, or 9.2%, was the result of an increase in the total number of new and renewal policies written during the three months ended June 30, 2020 compared to the same period in 2019.
The following table presents losses and LAE incurred on a direct, ceded and net basis expressed in dollars and as a percent of the respective amounts of earned premium. These amounts are further categorized as 1) weather events for the current accident year, 2) prior year development and 3) all other losses and LAE for the current accident year (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
|
|
Loss Ratio
|
|
Ceded
|
|
Loss Ratio
|
|
Net
|
|
Loss Ratio
|
|
Premiums earned
|
$
|
337,639
|
|
|
|
|
$
|
111,269
|
|
|
|
|
$
|
226,370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weather events*
|
$
|
17,000
|
|
|
5.0
|
%
|
|
$
|
—
|
|
|
—
|
%
|
|
$
|
17,000
|
|
|
7.5
|
%
|
Prior year adverse reserve
development
|
11,552
|
|
|
3.4
|
%
|
|
11,074
|
|
|
10.0
|
%
|
|
478
|
|
|
0.2
|
%
|
All other losses and loss adjustment
expenses
|
133,894
|
|
|
39.7
|
%
|
|
27
|
|
|
—
|
%
|
|
133,867
|
|
|
59.2
|
%
|
|
Total losses and loss adjustment expenses
|
$
|
162,446
|
|
|
48.1
|
%
|
|
$
|
11,101
|
|
|
10.0
|
%
|
|
$
|
151,345
|
|
|
66.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*Includes only current year weather events beyond those expected.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
|
|
Loss Ratio
|
|
Ceded
|
|
Loss Ratio
|
|
Net
|
|
Loss Ratio
|
|
Premiums earned
|
$
|
303,108
|
|
|
|
|
$
|
92,751
|
|
|
|
|
$
|
210,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weather events*
|
$
|
4,917
|
|
|
1.6
|
%
|
|
$
|
2,917
|
|
|
3.1
|
%
|
|
$
|
2,000
|
|
|
1.0
|
%
|
Prior year adverse reserve
development
|
98,043
|
|
|
32.4
|
%
|
|
97,373
|
|
|
105.0
|
%
|
|
670
|
|
|
0.3
|
%
|
All other losses and loss adjustment
expenses
|
110,626
|
|
|
36.5
|
%
|
|
—
|
|
|
—
|
%
|
|
110,626
|
|
|
52.6
|
%
|
|
Total losses and loss adjustment expenses
|
$
|
213,586
|
|
|
70.5
|
%
|
|
$
|
100,290
|
|
|
108.1
|
%
|
|
$
|
113,296
|
|
|
53.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*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.
Total losses and LAE, net for the three months ended June 30, 2020 were $151.3 million compared to $113.3 million in the same period in 2019, an increase of $38.0 million, or 33.6%. The increases in total losses and LAE, net, were the result of a higher core loss ratio and increased weather events for 2020 compared to 2019 and slightly offset by a decrease in prior year adverse development in 2020. All other losses and LAE increased during the second quarter ended June 30, 2020 principally due to two key factors: (1) increased losses in connection with the growth in our underlying business; and (2) increased core loss ratio from 37% in 2019 to 40% in 2020. The increase in the core loss ratio primarily reflects costs associated with increased losses and LAE primarily associated with litigated and represented claims in the Florida market. In the second quarter of 2020, there was adverse prior year reserve development of $11.6 million gross, less $11.1 million ceded, resulting in $0.5 million net. For 2020, Hurricane Michael had $9.5 million of gross and ceded prior year development, with principally Hurricane Matthew contributing to the net prior year development during 2020. For 2019, Hurricanes Irma, Florence and Matthew had prior year direct development of $98.0 million and $97.4 million of ceded development, resulting in $0.7 million of net prior year adverse development in 2019. For the second quarter of 2020, we experienced $17.0 million of losses and LAE for weather events beyond those expected. This compares to $2.0 million of losses and LAE for weather events beyond those expected in the second quarter of 2019.
The net loss ratio for the second quarter ended June 30, 2020 was 66.9% compared to 53.9% in the second quarter of the prior year. The increase of 13.0 loss ratio points was a result of: (1) increased weather (6.5 loss ratio points); (2) increased estimated core losses and LAE ratio for the current year (6.3 loss ratio points, which include 1.8 loss ratio points as a result of higher reinsurance costs); and (3) reduced financial benefit from the management of claims, including claims fees ceded to reinsurers (0.3 loss ratio points). The increase was partially offset by lower level of prior year adverse development on prior years’ loss and LAE reserves (0.1 loss ratio points).
The Company continues to experience increased costs for losses and LAE in the Florida market where an industry has developed around the personal residential claims process, resulting in historically high levels of represented claims and inflated claims. Active solicitation of personal residential claims in Florida by policyholder representatives, remediation companies and repair companies has led to a frequency and severity of personal residential claims in the state exceeding historical levels in Florida and levels seen in other jurisdictions.
We have taken steps to implement new claim settlement rules associated with the Florida legislation passed in 2019 designed to reduce the negative effects of claims involving assignments of benefits (“AOB”). An AOB is a document signed by a policyholder that allows a third party to be paid for services performed for an insured homeowner who would normally be reimbursed by the insurance company directly after making a claim. The Company has seen an increase in the use of an AOB subsequently resulting in litigation initiated by vendors rather than policyholders. Claims paid under an AOB often involve efforts by vendors to collect on inflated invoices and ultimately pursue unnecessary litigation, with the Company often times required to pay both its own defense costs and those of the plaintiff. As a result, these claims and the ensuing litigation cost the Company significantly more than claims settled when an AOB is not involved. In 2019, the Florida legislature passed legislation designed to increase consumer protections against AOB abuses and reduce AOB-related litigation. While the Florida legislation addressing abuses associated with AOB may be beneficial in reducing one aspect of the concerns affecting the Florida market, the overall impact of the deterioration in claims-related tactics and behaviors thus far has continued to outpace any benefits arising from the new legislation.
The market trends in losses and LAE led us to file in February 2020 for an overall 12.4% rate increase in Florida, which was approved effective May 2020 for new business and July 2020 for renewals, make changes to certain new business guidelines and develop specialized claims and litigation management efforts to address market trends driving up claim costs.
The financial benefit from the management of claims ceded, including claim fees ceded to reinsurers, was $0.7 million for the three months ended June 30, 2020, compared to $1.0 million during the three months ended June 30, 2019. The benefit was recorded in the condensed consolidated financial statements as a reduction to losses and LAE.
General and administrative expenses were $73.9 million for the three months ended June 30, 2020, compared to $69.5 million during the same period in 2019, as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
Change
|
|
|
|
|
2020
|
|
|
|
2019
|
|
|
|
$
|
|
%
|
|
|
$
|
|
Ratio
|
|
$
|
|
Ratio
|
|
|
|
|
|
Premiums earned, net
|
$
|
226,370
|
|
|
|
|
$
|
210,357
|
|
|
|
|
$
|
16,013
|
|
|
7.6
|
%
|
|
General and administrative expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy acquisition costs
|
48,524
|
|
|
21.5
|
%
|
|
44,221
|
|
|
21.0
|
%
|
|
4,303
|
|
|
9.7
|
%
|
|
Other operating costs
|
25,397
|
|
|
11.2
|
%
|
|
25,275
|
|
|
12.0
|
%
|
|
122
|
|
|
0.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total general and administrative expenses
|
$
|
73,921
|
|
|
32.7
|
%
|
|
$
|
69,496
|
|
|
33.0
|
%
|
|
$
|
4,425
|
|
|
6.4
|
%
|
General and administrative expenses increased by $4.4 million, which was the result of increases in policy acquisition costs of $4.3 million, due to commissions associated with increase premium volume and other operating costs of $0.1 million. The expense ratio as a percentage of premiums earned, net decreased from 33.0% for the three months ended June 30, 2019 to 32.7% for the same period in 2020. Our underlying policy acquisition costs continued to be driven by increased premium volume while other operating costs have increased to support the growth in business. Other operating costs ratio for the three months ended June 30, 2020 was 11.2% compared to 12.0% in the second quarter of 2019, reflecting economies of scale as other operating costs did not increase at the same rate as premiums earned, net.
Income tax expense decreased by $6.1 million, or 44.6%, for the three months ended June 30, 2020, primarily as a result of a 46.1% reduction in income before income taxes, when compared with the three months ended June 30, 2019. Our effective tax rate (“ETR”) increased to 27.5% for the three months ended June 30, 2020, as compared to 26.8% for the three months ended June 30, 2019. The ETR increased by 0.7% as a result of a higher ratio of permanent items relative to the amount of income before taxes, principally non-deductible compensation, and a lower level of discrete tax benefits.
Other comprehensive income, net of taxes for the three months ended June 30, 2020, was $26.1 million compared to other comprehensive income of $12.0 million for the same period in 2019, reflecting after-tax changes in fair value of debt securities available for sale held in our investment portfolio. See “Item 1—Note 11 (Other Comprehensive Income (Loss))” for additional information about the amounts comprising other comprehensive income for these periods.
Results of Operations — Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019
Net income was $39.9 million for the six months ended June 30, 2020 compared to $77.4 million for the six months ended June 30, 2019, a decrease of $37.5 million. Diluted EPS for the six months ended June 30, 2020 was $1.23 compared to $2.22 in 2019, a decrease of $0.99, or 44.6%. Weighted average diluted common shares outstanding were lower by 7.1% to 32.4 million shares from 34.9 million shares for the six months ended June 30, 2020. Benefiting the six months ended June 30, 2020 were increases in premiums earned, net, realized gains on investments, commission revenue, policy fees and other revenue, offset by a decrease in net investment income, a decline in fair value of our equity securities reflected as unrealized losses in the current period, and increased total operating costs and expenses. A decrease in weighted average diluted common shares outstanding also benefited diluted earnings per share. Direct premium earned and premiums earned, net were up 10.9% and 6.5%, respectively, due to growth in all states in which we are licensed and writing during the past 12 months and rate increases implemented during 2020 offset by higher costs for reinsurance flowing through to premiums earned, net. Increases in losses and LAE were the result of (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, and (4) adverse weather events this year.
A detailed discussion of our results of operations follows the table below (in thousands, except per share data).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
Change
|
|
|
|
|
2020
|
|
2019
|
|
$
|
|
%
|
|
PREMIUMS EARNED AND OTHER REVENUES
|
|
|
|
|
|
|
|
|
Direct premiums written
|
$
|
739,238
|
|
|
$
|
647,194
|
|
|
$
|
92,044
|
|
|
14.2
|
%
|
|
Change in unearned premium
|
(75,648)
|
|
|
(48,709)
|
|
|
(26,939)
|
|
|
55.3
|
%
|
|
Direct premium earned
|
663,590
|
|
|
598,485
|
|
|
65,105
|
|
|
10.9
|
%
|
|
Ceded premium earned
|
(216,391)
|
|
|
(178,401)
|
|
|
(37,990)
|
|
|
21.3
|
%
|
|
Premiums earned, net
|
447,199
|
|
|
420,084
|
|
|
27,115
|
|
|
6.5
|
%
|
|
Net investment income
|
13,013
|
|
|
15,552
|
|
|
(2,539)
|
|
|
(16.3)
|
%
|
|
Net realized gains (losses) on investments
|
467
|
|
|
(13,130)
|
|
|
13,597
|
|
|
NM
|
|
Net change in unrealized gains (losses) of equity securities
|
(4,153)
|
|
|
21,791
|
|
|
(25,944)
|
|
|
NM
|
|
Commission revenue
|
14,773
|
|
|
11,553
|
|
|
3,220
|
|
|
27.9
|
%
|
|
Policy fees
|
12,086
|
|
|
11,018
|
|
|
1,068
|
|
|
9.7
|
%
|
|
Other revenue
|
4,594
|
|
|
3,440
|
|
|
1,154
|
|
|
33.5
|
%
|
|
Total premiums earned and other revenues
|
487,979
|
|
|
470,308
|
|
|
17,671
|
|
|
3.8
|
%
|
|
OPERATING COSTS AND EXPENSES
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses
|
286,393
|
|
|
226,390
|
|
|
60,003
|
|
|
26.5
|
%
|
|
General and administrative expenses
|
146,564
|
|
|
139,244
|
|
|
7,320
|
|
|
5.3
|
%
|
|
Total operating costs and expenses
|
432,957
|
|
|
365,634
|
|
|
67,323
|
|
|
18.4
|
%
|
|
INCOME BEFORE INCOME TAXES
|
55,022
|
|
|
104,674
|
|
|
(49,652)
|
|
|
(47.4)
|
%
|
|
Income tax expense
|
15,073
|
|
|
27,233
|
|
|
(12,160)
|
|
|
(44.7)
|
%
|
|
NET INCOME
|
$
|
39,949
|
|
|
$
|
77,441
|
|
|
$
|
(37,492)
|
|
|
(48.4)
|
%
|
|
Other comprehensive income, net of taxes
|
17,122
|
|
|
23,939
|
|
|
(6,817)
|
|
|
(28.5)
|
%
|
|
COMPREHENSIVE INCOME
|
$
|
57,071
|
|
|
$
|
101,380
|
|
|
$
|
(44,309)
|
|
|
(43.7)
|
%
|
|
DILUTED EARNINGS PER SHARE DATA:
|
|
|
|
|
|
|
|
|
Diluted earnings per common share
|
$
|
1.23
|
|
|
$
|
2.22
|
|
|
$
|
(0.99)
|
|
|
(44.6)
|
%
|
|
Weighted average diluted common shares outstanding
|
32,440
|
|
|
34,903
|
|
|
(2,463)
|
|
|
(7.1)
|
%
|
|
|
|
|
|
|
|
|
|
|
NM – Not Meaningful
|
|
|
|
|
|
|
|
Direct premiums written increased by $92.0 million, or 14.2%, for the six months ended June 30, 2020, driven by growth within our Florida business of $74.2 million, or 13.8%, and growth in our other states business of $17.8 million, or 16.5%, as compared to the same period of the prior year. Rate increases in Florida and in certain other states along with slightly improved retention also contributed to the premium growth. Premium in force increased in every state in which we are writing compared to June 30, 2019. We implemented new guidelines during the six months ended June 30, 2020 on new business to address emerging loss trends that have since slowed the rate of growth in Florida. We actively wrote policies in 18 states during 2019 and 2020. In addition, we are authorized to do business in Iowa and Wisconsin and are proceeding with product filings in those states. We also have submitted an application which is pending to write policies in Tennessee. During the quarter the Company withdrew its
application to write business in Connecticut. Policies in force, premium in force and total insured value increased at June 30, 2020 when compared to June 30, 2019.
The following table provides direct premiums written for Florida and Other States for the six months ended June 30, 2020 and 2019 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
|
|
June 30, 2019
|
|
|
|
Growth
year over year
|
|
|
|
State
|
Direct Premiums Written
|
|
%
|
|
Direct Premiums Written
|
|
%
|
|
$
|
|
%
|
|
Florida
|
$
|
613,280
|
|
|
83.0
|
%
|
|
$
|
539,044
|
|
|
83.3
|
%
|
|
$
|
74,236
|
|
|
13.8
|
%
|
|
Other states
|
125,958
|
|
|
17.0
|
%
|
|
108,150
|
|
|
16.7
|
%
|
|
17,808
|
|
|
16.5
|
%
|
|
Total
|
$
|
739,238
|
|
|
100.0
|
%
|
|
$
|
647,194
|
|
|
100.0
|
%
|
|
$
|
92,044
|
|
|
14.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 $65.1 million, or 10.9%, for the six months ended June 30, 2020, reflecting the earning of premiums written over the past 12 months and changes in rates and policies in force during that time.
Reinsurance enables our Insurance Entities to limit potential exposures to catastrophic events and other covered events. Ceded premium represents amounts paid to reinsurers for this protection. Ceded premium earned increased $38.0 million, or 21.3%, for the six months ended June 30, 2020 as compared to the same period of the prior year. Reinsurance costs, as a percentage of direct premium earned, increased from 29.8% in 2019 to 32.6% in 2020. The increase in reinsurance costs reflects an increase in cost associated with the increase in our exposures and insured costs, while the increase in the ratio reflects an increase in reinsurance pricing. Reinsurance costs associated with each year’s reinsurance program are earned over the June 1st to May 31st twelve-month coverage period. See the discussion above for the Insurance Entities’ 2020-2021 reinsurance program and “Item 1— (Note 4 Reinsurance).”
Premiums earned, net of ceded premium earned, grew by 6.5%, or $27.1 million, to $447.2 million for the six months ended June 30, 2020, reflecting an increase in direct premium earned offset by increased costs for reinsurance.
Net investment income was $13.0 million for the six months ended June 30, 2020, compared to $15.6 million for the same period in 2019, a decrease of $2.5 million, or 16.3%. The decrease is driven by a lower trend in yields on cash and short term investments during 2020 when compared to 2019. The prior year also included one-time income benefits from a special dividend received and a one-time reduction in investment expenses. Total invested assets were $934.5 million as of June 30, 2020 compared to $914.6 million as of December 31, 2019. The average credit rating on our fixed income securities was A+ as of June 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 fixed income securities was 3.4 years at June 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. Cash and cash equivalents were $331.7 million at June 30, 2020 compared to $182.1 million at December 31, 2019, an increase of 82.2%. The increase in liquidity was the result of defensive measures taken to support our liquidity needs in the event of a business downturn due to the COVID-19 pandemic, although we have not experienced an adverse impact to our liquidity to date. 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 to investment advisors.
Yields from the fixed income portfolio are dependent on future market forces, monetary policy and interest rate policy from the Federal Reserve. The Federal Reserve has broadly been lowering and maintaining lower interest rates, which impacted the effective yields on new fixed income and overnight cash purchases and short-term investments. The impact from this trend in 2020 has been somewhat limited as investments mature over many future years 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 for its fixed income portfolio 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. The overall trend has been lower interest rates on new purchases over the past year and lower returns on cash and cash equivalents and short-term investments.
We sell investments from our investment portfolio from time to time to meet our investment objectives. During the six months ended June 30, 2020, sales of available-for-sale debt securities resulted in net realized gains of $0.5 million. During the six months ended June 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 sale of investment real estate resulted in a realized gain of $1.2 million, in total generating net realized loss of $13.1 million. See “Item 1—(Note 3 Investments).”
There was a $4.2 million unfavorable net unrealized loss in equity securities during the six months ended June 30, 2020 compared to a $21.8 million favorable net unrealized gain during the six months ended June 30, 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).”
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 quarter of 2020. We believe the adverse impact to our investment portfolio has been 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. During March 2020, we saw extreme instability in the fixed-income market, which stabilized as the Federal Reserve provided liquidity to that marketplace in mid-March. Although initially we had a decline in our unrealized gains/losses in the fixed income portfolio, we ended the quarter with an overall increase in our unrealized gains in our fixed income portfolio, which totaled $50.7 million, before credit losses of $0.5 million at June 30, 2020, compared to $26.9 million in unrealized gains at December 31, 2019. Our equity securities were initially negatively impacted by the decline in valuations in the equity market but partially recovered during the quarter with $3.9 million of unrealized gains being recorded in the second quarter of 2020. As a precaution, we have accumulated cash held with our investment advisors as securities mature or are paid down as a defensive measure to support our liquidity needs in the event of a business downturn. We believe the high credit rating and shorter duration foundation of our portfolio, as described above, and portfolio diversification will help us weather these difficult market conditions, thereby limiting the impact of future economic financial market downturns on the portfolio. Although we believe this liquidity strategy is prudent under the present circumstances, net investment income will be lower than it would have been if we had reinvested those dollars. We will continue to monitor the impact of COVID-19 on our portfolio. Significant uncertainties still exist regarding the potential long-term impact of COVID-19 on our investment portfolio, as well as new emerging risks.
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 six months ended June 30, 2020, commission revenue was $14.8 million, compared to $11.6 million for the six months ended June 30, 2019. The increase in commission revenue of $3.2 million, or 27.9%, for the six months ended June 30, 2020 was primarily due to increased commissions from third-party reinsurers earned on increased reinsurance premiums as well as the difference in pricing and structure associated with our reinsurance program when compared to the prior year.
Policy fees for the six months ended June 30, 2020 were $12.1 million compared to $11.0 million for the same period in 2019. The increase of $1.1 million, or 9.7%, was the result of an increase in the total number of new and renewal policies written during the six months ended June 30, 2020 compared to the same period in 2019.
The following table presents losses and LAE incurred on a direct, ceded and net basis expressed in dollars and as a percent of the respective amounts of earned premium. These amounts are further categorized as 1) weather events for the current accident year, 2) prior year development and 3) all other losses and LAE for the current accident year (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
|
|
Loss Ratio
|
|
Ceded
|
|
Loss Ratio
|
|
Net
|
|
Loss Ratio
|
|
Premiums earned
|
$
|
663,590
|
|
|
|
|
$
|
216,391
|
|
|
|
|
$
|
447,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weather events*
|
$
|
18,000
|
|
|
2.7
|
%
|
|
$
|
—
|
|
|
—
|
%
|
|
$
|
18,000
|
|
|
4.0
|
%
|
|
Prior year adverse reserve
development
|
54,067
|
|
|
8.1
|
%
|
|
49,248
|
|
|
22.8
|
%
|
|
4,819
|
|
|
1.1
|
%
|
|
All other losses and loss adjustment
expenses
|
263,622
|
|
|
39.7
|
%
|
|
48
|
|
|
—
|
%
|
|
263,574
|
|
|
58.9
|
%
|
|
Total losses and loss adjustment expenses
|
$
|
335,689
|
|
|
50.5
|
%
|
|
$
|
49,296
|
|
|
22.8
|
%
|
|
$
|
286,393
|
|
|
64.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*Includes only current year weather events beyond those expected.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
|
|
Loss Ratio
|
|
Ceded
|
|
Loss Ratio
|
|
Net
|
|
Loss Ratio
|
|
Premiums earned
|
$
|
598,485
|
|
|
|
|
$
|
178,401
|
|
|
|
|
$
|
420,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weather events*
|
$
|
9,917
|
|
|
1.7
|
%
|
|
$
|
2,917
|
|
|
1.6
|
%
|
|
$
|
7,000
|
|
|
1.7
|
%
|
Prior year adverse reserve
development
|
100,208
|
|
|
16.7
|
%
|
|
99,723
|
|
|
55.9
|
%
|
|
485
|
|
|
0.1
|
%
|
All other losses and loss adjustment
expenses
|
219,203
|
|
|
36.6
|
%
|
|
298
|
|
|
0.2
|
%
|
|
218,905
|
|
|
52.1
|
%
|
|
Total losses and loss adjustment expenses
|
$
|
329,328
|
|
|
55.0
|
%
|
|
$
|
102,938
|
|
|
57.7
|
%
|
|
$
|
226,390
|
|
|
53.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*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.
Total losses and LAE, net for the six months ended June 30, 2020 were $286.4 million compared to $226.4 million in the same period in 2019, an increase of $60.0 million, or 26.5%. Total losses and LAE increased during the six months ended June 30, 2020, principally due to three key factors: (1) increased losses in connection with the growth in our underlying business; (2) increased weather events above plan in 2020 when compared to 2019 and; (3) increased core loss ratio from 37% in 2019 to 40% in 2020. In addition, for the six months ended June 30, 2020, there was prior year adverse reserve development of $54.1 million direct, less $49.2 million ceded, resulting in $4.8 million net from revised estimates for Hurricanes Irma, Michael and Matthew. For the same period in 2019, there was prior year adverse development of $100.2 million direct, $99.7 million ceded resulting in net prior year adverse reserve development of $0.5 million principally resulting from increases in ultimate losses and LAE for Hurricanes Matthew, Florence and Irma. The six months ended June 30, 2020 included net $18.0 million for weather events beyond those expected compared to net $7.0 million in the prior year.
The net loss ratio for the six months ended June 30, 2020 was 64.0% compared to 53.9% for the same period in the prior year. The increase of 10.1 loss ratio points was a result of: (1) increased core loss ratio (6.6 loss ratio points, which include 2.1 loss ratio points as a result of higher reinsurance costs); (2) increased weather events (2.3 loss ratio points); (3) prior year adverse development (1.0 loss ratio points); and (4) reduced financial benefit from the management of claims, including claims fees ceded to reinsurers (0.2 loss ratio points).
The Company continues to experience increased costs for losses and LAE in the Florida market where an industry has developed around the personal residential claims process, resulting in historically high levels of represented claims and inflated claims. Active solicitation of personal residential claims in Florida by policyholder representatives, remediation companies and repair companies has led to a frequency and severity of personal residential claims in the state exceeding historical levels in Florida and levels seen in other jurisdictions.
We have taken steps to implement new claim settlement rules associated with the Florida legislation passed in 2019 designed to reduce the negative effects of claims involving assignments of benefits (“AOB”). An AOB is a document signed by a policyholder that allows a third party to be paid for services performed for an insured homeowner who would normally be reimbursed by the insurance company directly after making a claim. The Company has seen an increase in the use of an AOB subsequently resulting in litigation initiated by vendors rather than policyholders. Claims paid under an AOB often involve efforts by vendors to collect on inflated invoices and ultimately pursue unnecessary litigation, with the Company often times required to pay both its own defense costs and those of the plaintiff. As a result, these claims and the ensuing litigation cost the Company significantly more than claims settled when an AOB is not involved. In 2019, the Florida legislature passed legislation designed to increase consumer protections against AOB abuses and reduce AOB-related litigation. While the Florida legislation addressing abuses associated with AOB may be beneficial in reducing one aspect of the concerns affecting the Florida market, the overall impact of the deterioration in claims-related tactics and behaviors thus far has continued to outpace any benefits arising from the new legislation.
The market trends in losses and LAE led us to file in February 2020 for an overall 12.4% rate increase in Florida, which was approved effective May 2020 for new business and July 2020 for renewals, make changes to certain new business guidelines and develop specialized claims and litigation management efforts to address market trends driving up claim costs.
The financial benefit from the management of claims ceded, including claim fees ceded to reinsurers, was $1.0 million for the six months ended June 30, 2020, compared to $2.1 million during the six months ended June 30, 2019. The benefit was recorded in the condensed consolidated financial statements as a reduction to losses and LAE.
General and administrative expenses were $146.6 million for the six months ended June 30, 2020, compared to $139.2 million during the same period in 2019, as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
Change
|
|
|
|
|
2020
|
|
|
|
2019
|
|
|
|
$
|
|
%
|
|
|
$
|
|
Ratio
|
|
$
|
|
Ratio
|
|
|
|
|
|
Premiums earned, net
|
$
|
447,199
|
|
|
|
|
$
|
420,084
|
|
|
|
|
$
|
27,115
|
|
|
6.5
|
%
|
|
General and administrative expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy acquisition costs
|
95,388
|
|
|
21.4
|
%
|
|
87,732
|
|
|
20.9
|
%
|
|
7,656
|
|
|
8.7
|
%
|
|
Other operating costs
|
51,176
|
|
|
11.4
|
%
|
|
51,512
|
|
|
12.3
|
%
|
|
(336)
|
|
|
(0.7)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total general and administrative expenses
|
$
|
146,564
|
|
|
32.8
|
%
|
|
$
|
139,244
|
|
|
33.2
|
%
|
|
$
|
7,320
|
|
|
5.3
|
%
|
General and administrative costs increased by $7.3 million, which was the result of increases in policy acquisition costs of $7.6 million due to commissions associated with increased premium volume, offset by a decrease in other operating costs of $0.3 million. As a percentage of premiums earned, net general and administrative costs decreased from 33.2% for the six months ended June 30, 2019 to 32.8% for the same period in 2020. Our increase in policy acquisition costs continued to be driven by increased premium volume and continued geographic expansion into states that typically have higher commission rates as compared to Florida. Other operating costs for the six months ended June 30, 2020 decreased $0.3 million, reflecting lower amounts recorded for professional fees and incentive compensation costs offset by added costs to support the growth in business. Other operating costs as a percentage of premiums earned, net decreased from 12.3% for the six months ended June 30, 2019 compared to 11.4% for the same period in 2020. Overall, the expense ratio for 2020 benefited from reduced executive compensation and economies of scale as general and administrative expenses did not increase at the same rate as revenues when compared to the same period of 2019.
Income tax expense decreased by $12.2 million, or 44.7%, for the six months ended June 30, 2020, primarily as a result of a 47.4% reduction in income before income taxes, when compared with the six months ended June 30, 2019. Our ETR increased to 27.4% for the six months ended June 30, 2020, as compared to 26.0% for the six months ended June 30, 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, and a lower level of discrete tax benefits.
Other comprehensive income, net of taxes for the six months ended June 30, 2020, was $17.1 million compared to other comprehensive income of $23.9 million for the same period in 2019, reflecting after-tax changes in fair value of debt securities available for sale held in our investment portfolio. See “Item 1—Note 11 (Other Comprehensive Income (Loss))” for additional information about the amounts comprising other comprehensive income for these periods.
Analysis of Financial Condition—As of June 30, 2020 Compared to December 31, 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
|
|
|
|
|
June 30,
|
|
December 31,
|
|
Type of Investment
|
2020
|
|
2019
|
|
Available-for-sale debt securities
|
$
|
869,418
|
|
|
$
|
855,284
|
|
|
|
|
|
|
|
Equity securities
|
49,708
|
|
|
43,717
|
|
|
Investment real estate, net
|
15,377
|
|
|
15,585
|
|
|
Total
|
$
|
934,503
|
|
|
$
|
914,586
|
|
See “Item 1—Condensed Consolidated Statements of Cash Flows” for explanations of changes in investments and “Item 1—Note 3 (Investments).”
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 $277.8 million to $453.0 million as of June 30, 2020 was due to additional ceded written premium of $494.2 million recorded this quarter for the reinsurance costs relating to our new 2020-2021 catastrophe reinsurance program beginning June 1, 2020, less amortization of prepaid reinsurance premiums recorded during 2020.
Reinsurance recoverable represents the estimated amount of paid and unpaid losses, LAE and other expenses that are expected to be recovered from reinsurers. The decrease of $146.4 million to $46.9 million as of June 30, 2020 was primarily due to the collection of amounts due from reinsurers relating to settled claims from hurricanes and other events covered by our reinsurance contracts.
Premiums receivable, net, represents amounts receivable from policyholders. The increase in premiums receivable, net, of $13.0 million to $76.9 million as of June 30, 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 by $7.8 million to $49.2 million as of June 30, 2020, primarily as the result of expenditures to build out and outfit a new office building in Fort Lauderdale, Florida, which will be used to meet the staffing needs of the Company as the business continues to expand.
Deferred policy acquisition costs (“DPAC”) increased by $11.6 million to $103.5 million as of June 30, 2020, which is consistent with the underlying premium 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. As of June 30, 2020, the balance recoverable was $29.0 million, representing amounts due from taxing authorities at that date, compared to a balance recoverable of $34.3 million as of December 31, 2019. Income taxes recoverable as of June 30, 2020 will be applied to future periods for federal and state income taxes payable.
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 six months ended June 30, 2020, deferred tax assets decreased by $17.0 million from a $3.3 million deferred tax asset to a deferred tax liability of $13.7 million primarily due to an increase in unrealized gains on investment, prepaid reinsurance premiums and growth in 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 $120.1 million to $147.7 million as of June 30, 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 six months ended June 30, 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 in the future. The increase of $75.6 million from December 31, 2019 to $736.9 million as of June 30, 2020 reflects both organic growth and the seasonality of our business, which varies from month to month.
Advance premium represents premium payments made by policyholders ahead of the effective date of the policies. The increase of $24.7 million to $55.6 million as of June 30, 2020 reflects customer payment behavior, organic growth and the seasonality of our business.
We exclude net negative cash balances, if any, from cash and cash equivalents that we have with any single financial institution based on aggregating the book balance of all accounts at the institution which have the right of offset. If the aggregation results in a net negative book balance, that balance is reclassified from cash and cash equivalents in our Condensed Consolidated Balance Sheet to book overdraft. These amounts represent outstanding checks or drafts not yet presented to the financial institution in excess of amounts on deposit at the financial institution. We maintain a short-term cash investment strategy sweep to maximize investment returns on cash balances. There were no book overdrafts as of June 30, 2020 and there were book overdrafts totaling $90.4 million as of December 31, 2019.
Reinsurance payable, net, represents the unpaid reinsurance premium installments owed to reinsurers, unpaid reinstatement premiums due to reinsurers and cash advances received from reinsurers, if any. On June 1st of each year, we renew our catastrophe reinsurance program and record the estimated annual cost of our reinsurance program. The annual cost initially increases reinsurance payable, which is then reduced as installment payments are made over the policy period of the reinsurance, which runs from June 1st to May 31st. The balance increased by $377.1 million to $499.7 million as of June 30, 2020 as a result of the timing of the above items.
Other liabilities and accrued expenses increased by $12.4 million to $53.3 million as of June 30, 2020, primarily driven by an increase in commissions payable as a result of higher direct written premium for the month of June 30, 2020 when compared to direct written premium for the month of December 31, 2019, the annual accrual process which builds during the year and settles by year end, the timing of billing from vendors and changes in the payroll accrual based on payroll payment cycles. We record accruals during the year for annual events such as bonuses, vacation accruals and annual company or marketing events.
Capital resources, net, increased by $33.1 million for the six months ended June 30, 2020. The increase in stockholders’ equity was principally the result of our 2020 net income and share-based compensation, and after-tax changes in fair value of our debt securities available for sale held in our investment portfolio, offset by treasury stock repurchases and dividends to shareholders. 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 $0.7 million was the result of principal payments on debt during 2020. See “—Liquidity and Capital 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. We will continue to monitor liquidity as the economic consequences of COVID-19 continue to unfold (see discussion below regarding COVID-19). 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 June 30, 2020 was $331.7 million compared to $182.1 million at December 31, 2019. See “Item 1—Condensed Consolidated Statements of Cash Flows” for a reconciliation of the balance of cash and cash equivalents between June 30, 2020 and December 31, 2019. The increase in cash and cash equivalents was driven by cash flows from operating activities in excess of those used in investing and financing activities. As a precaution, we took a position to increase our liquidity this year as a result of the COVID-19 pandemic and have increased our cash as a defensive measure. Our investment and cash investment strategy at times includes cash 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 a net negative book balance, that balance is reclassified from cash and cash equivalents in our Condensed Consolidated Balance Sheet to book overdraft. Cash and cash equivalents balances are available to settle book overdrafts, and to pay reinsurance premiums, expenses and claims. Reinsurance premiums are paid in installments during the reinsurance policy period, which runs from June 1st to May 31st of the following year. The FHCF 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 June 30, 2020 and December 31, 2019 represents cash equivalents on deposit with certain regulatory agencies in the various states in which our Insurance Entities do business.
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, 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 the holding company include dividends paid by our service entities generated from income earned on fees paid by the Insurance Entities to affiliated companies for general agency, inspections and claims adjusting services. Dividends are also paid from income earned from brokerage commissions earned on reinsurance contracts placed by our wholly-owned subsidiary, Blue Atlantic Reinsurance Company, and policy fees. We also maintain high quality investments in our portfolio as a source of liquidity along with ongoing interest and
dividend income from those investments. As discussed in “Item 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 six months ended June 30, 2020 and the year ended December 31, 2019, the Insurance Entities did not pay dividends to PSI.
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, 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 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 Insurance Entities are responsible for losses related to catastrophic events in excess of coverage provided by the Insurance Entities’ reinsurance programs and 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 on 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
|
|
|
|
|
June 30,
|
|
December 31,
|
|
|
2020
|
|
2019
|
|
Stockholders’ equity
|
$
|
527,701
|
|
|
$
|
493,901
|
|
|
Total long-term debt
|
9,191
|
|
|
9,926
|
|
|
Total capital resources
|
$
|
536,892
|
|
|
$
|
503,827
|
|
|
|
|
|
|
|
Debt-to-total capital ratio
|
1.7
|
%
|
|
2.0
|
%
|
|
Debt-to-equity ratio
|
1.7
|
%
|
|
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 described in our Annual Report on Form 10-K for the year ended December 31, 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 June 30, 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, we 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. Despite the turbulent and declining market values during the first quarter of 2020, the overall performance of our portfolio was in accordance with our primary objectives of capital preservation and liquidity. As we had an increase in our unrealized gains in the fixed income portfolio during the six months ended June 30, 2020, we maintained an overall net unrealized gain in our fixed income portfolio, which totaled $50.7 million, before credit losses of $0.5 million, at June 30, 2020, compared to a net unrealized gain of $26.9 million at December 31, 2019. Additionally, while our equity securities were negatively impacted by the severe decline in valuations in the equity market in the first quarter of 2020, with $8.0 million of unrealized losses being recorded in the first quarter of 2020, valuations partially recovered in the second quarter of 2020. As a result, we recorded $3.9 million of unrealized gains in the income statement during the second quarter of 2020, resulting in a balance of net unrealized loss of $4.0 million as of June 30, 2020 compared to $0.2 million net unrealized gain as of December 31, 2019.
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. As a precautionary measure, we have instructed our investment advisors to accumulate cash upon maturity or paydowns of fixed income securities rather than reinvest into the market and have ceased any purchases of equity securities. 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 have 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 six months ended June 30, 2020, we repurchased an aggregate of 884,175 shares of our common stock in the open market at an aggregate purchase price of $16.6 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 June 30, 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 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONTRACTUAL OBLIGATIONS
The following table represents our contractual obligations for which cash flows are fixed or determinable as of June 30, 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Less than
1 year
|
|
1-3 years
|
|
3-5 years
|
|
Over
5 years
|
|
Reinsurance payable and multi-year commitments (1)
|
$
|
699,274
|
|
|
$
|
499,656
|
|
|
$
|
199,618
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Unpaid losses and LAE, direct (2)
|
147,659
|
|
|
90,220
|
|
|
42,969
|
|
|
10,631
|
|
|
3,839
|
|
|
Long-term debt
|
9,400
|
|
|
1,149
|
|
|
4,539
|
|
|
2,975
|
|
|
737
|
|
|
Total contractual obligations
|
$
|
856,333
|
|
|
$
|
591,025
|
|
|
$
|
247,126
|
|
|
$
|
13,606
|
|
|
$
|
4,576
|
|
(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 June 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).”
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, 2019.
Recent Accounting Pronouncements Not Yet Adopted
In December 2019, the Financial Accounting Standards Board (“FASB”) revised U.S. GAAP with the issuance of Accounting Standards Update (“ASU”) 2019-12, Income Taxes (Topic 740). The amendments in this ASU simplify the accounting for income taxes by removing certain exceptions and clarifying certain requirements regarding franchise taxes, goodwill, consolidated tax expenses and annual effective tax rate calculations. The ASU is effective for interim and annual periods beginning after December 15, 2020, with early adoption permitted. The Company is currently assessing the impact of this standard on our consolidated financial statements.
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 June 30, 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.
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.
Interest Rate Risk
Interest rate risk is the sensitivity of the fair market value of a fixed-rate Financial Instrument to changes in interest rates. Generally, when interest rates rise, the fair value of our fixed-rate Financial Instruments declines over the remaining term of the agreement.
The following tables provide information about our fixed income Financial Instruments as of June 30, 2020 compared to December 31, 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
2024
|
|
Thereafter
|
|
Other
|
|
Total
|
|
Amortized cost
|
$
|
124,808
|
|
|
$
|
48,984
|
|
|
$
|
99,472
|
|
|
$
|
150,711
|
|
|
$
|
100,970
|
|
|
$
|
293,358
|
|
|
$
|
863
|
|
|
$
|
819,166
|
|
|
Fair market value
|
$
|
125,912
|
|
|
$
|
50,128
|
|
|
$
|
103,345
|
|
|
$
|
158,898
|
|
|
$
|
107,775
|
|
|
$
|
322,475
|
|
|
$
|
885
|
|
|
$
|
869,418
|
|
|
Coupon rate
|
2.28
|
%
|
|
3.09
|
%
|
|
3.25
|
%
|
|
3.50
|
%
|
|
3.50
|
%
|
|
3.44
|
%
|
|
5.82
|
%
|
|
3.25
|
%
|
|
Book yield
|
2.27
|
%
|
|
2.82
|
%
|
|
2.74
|
%
|
|
2.88
|
%
|
|
3.01
|
%
|
|
3.39
|
%
|
|
5.77
|
%
|
|
2.97
|
%
|
|
* Years to effective maturity - 4.8 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
|
|
December 31, 2019
|
|
|
|
|
Fair Value
|
|
Percent
|
|
Fair Value
|
|
Percent
|
|
Equity Securities:
|
|
|
|
|
|
|
|
|
Common stock
|
$
|
1,871
|
|
|
3.8
|
%
|
|
$
|
2,377
|
|
|
5.4
|
%
|
|
Mutual funds
|
47,837
|
|
|
96.2
|
%
|
|
41,340
|
|
|
94.6
|
%
|
|
Total equity securities
|
$
|
49,708
|
|
|
100.0
|
%
|
|
$
|
43,717
|
|
|
100.0
|
%
|
A hypothetical decrease of 20% in the market prices of each of the equity securities held at June 30, 2020 and December 31, 2019 would have resulted in a decrease of $9.9 million and $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.”