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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________________________________________
FORM 10-Q
________________________________________________________
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2020

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number 001-33251
________________________________________________________

UVE-20200930_G1.JPG
UNIVERSAL INSURANCE HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
________________________________________________________
Delaware 65-0231984
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
1110 W. Commercial Blvd., Fort Lauderdale, Florida 33309
(Address of principal executive offices) (Zip Code)
(954) 958-1200
(Registrant’s telephone number, including area code)
________________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock, $0.01 Par Value UVE New York Stock Exchange
    Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No   

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



    Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer  
Smaller reporting company
Emerging growth company
                
    If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

    Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)      Yes      No  

    Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 31,334,080 shares of common stock, par value $0.01 per share, outstanding on October 26, 2020.



UNIVERSAL INSURANCE HOLDINGS, INC.
TABLE OF CONTENTS
Page No.
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2

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of Directors and Stockholders of
Universal Insurance Holdings, Inc. and Subsidiaries
Fort Lauderdale, Florida

RESULTS OF REVIEW OF INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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

BASIS FOR REVIEW RESULTS

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


We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

/s/ Plante & Moran, PLLC
Chicago, Illinois
October 30, 2020

3

PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
(in thousands, except per share data)
  As of
September 30, December 31,
2020 2019
ASSETS
Available-for-sale debt securities, at fair value, net of allowance for credit loss of $470 (amortized cost: $840,646 and $828,336)
$ 842,574  $ 855,284 
Equity securities, at fair value (cost: $54,668 and $43,523)
52,700  43,717 
Investment real estate, net 15,280  15,585 
Total invested assets 910,554  914,586 
Cash and cash equivalents 405,132  182,109 
Restricted cash and cash equivalents 21,115  2,635 
Prepaid reinsurance premiums 333,062  175,208 
Reinsurance recoverable 95,078  193,236 
Premiums receivable, net 76,800  63,883 
Property and equipment, net 52,300  41,351 
Deferred policy acquisition costs 111,295  91,882 
Income taxes recoverable 26,383  34,283 
Deferred income tax asset, net 1,473  3,351 
Other assets 16,992  17,328 
Total assets $ 2,050,184  $ 1,719,852 
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Unpaid losses and loss adjustment expenses $ 202,720  $ 267,760 
Unearned premiums 789,137  661,279 
Advance premium 55,334  30,975 
Payable for securities purchased 98,177  — 
Book overdraft —  90,401 
Reinsurance payable, net 351,255  122,581 
Other liabilities and accrued expenses 69,975  43,029 
Long-term debt 8,823  9,926 
Total liabilities 1,575,421  1,225,951 
Commitments and Contingencies (Note 12)
STOCKHOLDERS’ EQUITY:
Cumulative convertible preferred stock, $0.01 par value
—  — 
Authorized shares - 1,000
Issued shares - 10 and 10
Outstanding shares - 10 and 10
Minimum liquidation preference, $9.99 and $9.99 per share
Common stock, $0.01 par value
468  467 
Authorized shares - 55,000
Issued shares - 46,821 and 46,707
Outstanding shares - 31,334 and 32,638
Treasury shares, at cost - 15,487 and 14,069
(223,086) (196,585)
Additional paid-in capital 101,438  96,036 
Accumulated other comprehensive income, net of taxes 1,662  20,364 
Retained earnings 594,281  573,619 
Total stockholders’ equity 474,763  493,901 
Total liabilities and stockholders’ equity $ 2,050,184  $ 1,719,852 

The accompanying notes to condensed consolidated financial statements are an integral part of these statements.
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UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited)
(in thousands, except per share data)

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


CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

Three Months Ended
September 30,
Nine Months Ended
September 30,
2020 2019 2020 2019
Net income (loss) $ (3,169) $ 20,146  $ 36,780  $ 97,587 
Other comprehensive income (loss), net of taxes (36,421) 5,160  (19,299) 29,099 
Comprehensive income (loss) $ (39,590) $ 25,306  $ 17,481  $ 126,686 
The accompanying notes to condensed consolidated financial statements are an integral part of these statements.
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UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019 (unaudited)
(in thousands, except per share data)  


Treasury Shares Common
Shares
Issued
Preferred
Shares
Issued
Common
Stock
Amount
Preferred
Stock
Amount
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Treasury
Shares,
at Cost
Total
Stockholders’
Equity
Balance, December 31, 2019 (14,069) 46,707  10  $ 467  $ —  $ 96,036  $ 573,619  $ 20,364  $ (196,585) $ 493,901 
Cumulative effect of changes in accounting principle (ASU 2016-13)
—  —  —  —  —  —  (597) 597  —  — 
Balance, January 1, 2020 (14,069) 46,707  10  467  —  96,036  573,022  20,961  (196,585) 493,901 
Vesting of performance share units (25)
(1)
83  —  —  (1) —  —  (646) (646)
Grant and issue of stock award —  —  —  —  30  —  —  —  30 
Retirement of treasury shares 25 
(1)
(25) —  —  —  (646) —  —  646  — 
Purchases of treasury stock (312) —  —  —  —  —  —  —  (6,587) (6,587)
Share-based compensation —  —  —  —  —  1,691  —  —  —  1,691 
Net income —  —  —  —  —  —  20,067  —  —  20,067 
Other comprehensive loss, net of taxes —  —  —  —  —  —  —  (8,946) —  (8,946)
Declaration of dividends
($0.16 per common share and
$0.25 per preferred share)
—  —  —  —  —  —  (5,222) —  —  (5,222)
Balance, March 31, 2020 (14,381) 46,766  10  468  —  97,110  587,867  12,015  (203,172) 494,288 
Vesting of restricted stock units (25)
(1)
65  —  —  —  —  —  —  (424) (424)
Retirement of treasury shares 25 
(1)
(25) —  —  —  (424) —  —  424  — 
Purchases of treasury stock (572) —  —  —  —  —  —  —  (10,029) (10,029)
Share-based compensation —  —  —  —  —  3,082  —  —  —  3,082 
Net income —  —  —  —  —  —  19,882  —  —  19,882 
Other comprehensive income, net of taxes —  —  —  —  —  —  —  26,068  —  26,068 
Declaration of dividends
($0.16 per common share and
$0.25 per preferred share)
—  —  —  —  —  —  (5,166) —  —  (5,166)
Balance, June 30, 2020 (14,953) 46,806  10  468  —  99,768  602,583  38,083  (213,201) 527,701 
Vesting of restricted stock units (10)
(1)
25  —  —  —  —  —  —  (184) (184)
Retirement of treasury shares 10 
(1)
(10) —  —  —  (184) —  —  184  — 
Purchases of treasury stock (534) —  —  —  —  —  —  —  (9,885) (9,885)
Share-based compensation —  —  —  —  —  1,854  —  —  —  1,854 
Net loss —  —  —  —  —  —  (3,169) —  —  (3,169)
Other comprehensive loss , net of taxes —  —  —  —  —  —  —  (36,421) —  (36,421)
Declaration of dividends
($0.16 per common share and
$0.25 per preferred share)
—  —  —  —  —  —  (5,133) —  —  (5,133)
Balance, September 30, 2020 (15,487) 46,821  10  $ 468  $ —  $ 101,438  $ 594,281  $ 1,662  $ (223,086) $ 474,763 

(1) All shares acquired represent shares tendered to cover the strike price for options and tax withholdings on the intrinsic value of options exercised, restricted stock vested, performance share units vested, or restricted stock units vested. These shares have been cancelled by the Company.

The accompanying notes to condensed consolidated financial statements are an integral part of these statements.
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UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (continued)
(in thousands, except per share data)  


Treasury Shares Common
Shares
Issued
Preferred
Shares
Issued
Common
Stock
Amount
Preferred
Stock
Amount
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Treasury
Shares,
at Cost
Total
Stockholders’
Equity
Balance, December 31, 2018 (11,731) 46,514  10  $ 465  $ —  $ 86,353  $ 553,224  $ (8,010) $ (130,399) $ 501,633 
Vesting of performance share units (56)
(1)
148  —  —  (2) —  —  (2,069) (2,069)
Grants and vesting of restricted stock (5)
(1)
25  —  —  —  —  —  —  (166) (166)
Stock option exercises (36)
(1)
84  —  —  1,438  —  —  (1,367) 72 
Retirement of treasury shares 97 
(1)
(97) —  (1) —  (3,601) —  —  3,602  — 
Purchases of treasury stock (321) —  —  —  —  —  —  —  (10,117) (10,117)
Share-based compensation —  —  —  —  —  3,140  —  —  —  3,140 
Net income —  —  —  —  —  —  40,148  —  —  40,148 
Other comprehensive income, net of taxes —  —  —  —  —  —  —  11,984  —  11,984 
Declaration of dividends
($0.16 per common share and
$0.25 per preferred share)
—  —  —  —  —  —  (5,575) —  —  (5,575)
Balance, March 31, 2019 (12,052) 46,674  10  467  —  87,328  587,797  3,974  (140,516) 539,050 
Grants and vesting of restricted stock (14)
(1)
25  —  —  —  —  —  —  (402) (402)
Stock option exercises (14)
(1)
27  —  —  —  403  —  —  (414) (11)
Retirement of treasury shares 28 
(1)
(28) —  —  —  (816) —  —  816  — 
Purchases of treasury stock (486) —  —  —  —  —  —  —  (14,107) (14,107)
Share-based compensation —  —  —  —  —  3,311  —  —  —  3,311 
Net income —  —  —  —  —  —  37,293  —  —  37,293 
Other comprehensive income, net of taxes —  —  —  —  —  —  —  11,955  —  11,955 
Declaration of dividends
($0.16 per common share and
$0.25 per preferred share)
—  —  —  —  —  —  (5,547) —  —  (5,547)
Declaration of dividends
($0.16 per common share)
—  —  —  —  —  —  (5,476) —  —  (5,476)
Balance, June 30, 2019 (12,538) 46,698  10  467  —  90,226  614,067  15,929  (154,623) 566,066 
Vesting of restricted stock units (10)
(1)
25  —  —  —  —  —  —  (259) (259)
Stock option exercises (2)
(1)
—  —  —  54  —  —  (59) (5)
Retirement of treasury shares 12 
(1)
(12) —  —  —  (318) —  —  318  — 
Purchases of treasury stock (964) —  —  —  —  —  —  —  (25,708) (25,708)
Share-based compensation —  —  —  —  —  3,584  —  —  —  3,584 
Net income —  —  —  —  —  —  20,146  —  —  20,146 
Other comprehensive income, net of taxes —  —  —  —  —  —  —  5,160  —  5,160 
Declaration of dividends
($0.25 per preferred share)
—  —  —  —  —  —  (3) —  —  (3)
Balance, September 30, 2019 (13,502) 46,713  10  $ 467  $ —  $ 93,546  $ 634,210  $ 21,089  $ (180,331) $ 568,981 

(1) All shares acquired represent shares tendered to cover the strike price for options and tax withholdings on the intrinsic value of options exercised, restricted stock vested, performance share units vested, or restricted stock units vested. These shares have been cancelled by the Company.

The accompanying notes to condensed consolidated financial statements are an integral part of these statements.
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UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(in thousands)

Nine Months Ended
September 30,
2020 2019
Cash flows from operating activities:
Net cash provided by operating activities $ 173,545  $ 56,589 
Cash flows from investing activities:
Proceeds from sale of property and equipment 141  27 
Purchases of property and equipment (14,580) (9,723)
Purchases of equity securities (11,145) (1,091)
Purchases of available-for-sale debt securities (735,426) (194,228)
Purchases of investment real estate, net (6) (883)
Proceeds from sales of equity securities —  29,137 
Proceeds from sales of available-for-sale debt securities 757,812  73,041 
Proceeds from sales of investment real estate —  10,537 
Maturities of available-for-sale debt securities 115,543  100,304 
Net cash provided by investing activities 112,339  7,121 
Cash flows from financing activities:
Preferred stock dividend (8) (8)
Common stock dividend (15,516) (16,618)
Issuance of common stock for stock option exercises —  239 
Purchase of treasury stock (26,501) (49,932)
Payments related to tax withholding for share-based compensation (1,253) (3,078)
Repayment of debt (1,103) (1,103)
Net cash provided by (used in) financing activities (44,381) (70,500)
Cash and cash equivalents, and restricted cash and cash equivalents:
Net increase (decrease) during the period 241,503  (6,790)
Balance, beginning of period 184,744  169,063 
Balance, end of period $ 426,247  $ 162,273 

The following table summarizes our cash and cash equivalents and restricted cash and cash equivalents within the Condensed Consolidated Balance Sheets (in thousands):
  September 30, December 31,
2020 2019
Cash and cash equivalents $ 405,132  $ 182,109 
Restricted cash and cash equivalents (1) 21,115  2,635 
Total cash and cash equivalents and restricted cash and cash equivalents $ 426,247  $ 184,744 
(1)See “—Note 5 (Insurance Operations)” for a discussion of the nature of the restrictions for restricted cash and cash equivalents and “—Note 14 (Variable Interest Entities)” for a discussion of restricted cash held in a trust account.




The accompanying notes to condensed consolidated financial statements are an integral part of these statements.
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UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Nature of Operations and Basis of Presentation
Nature of Operations
Universal Insurance Holdings, Inc. (“UVE”, and together with its wholly-owned subsidiaries, “the Company”) is a Delaware corporation incorporated in 1990. The Company is a vertically integrated insurance holding company performing all aspects of insurance underwriting, distribution and claims. Through its wholly-owned insurance company subsidiaries, Universal Property & Casualty Insurance Company (“UPCIC”) and American Platinum Property and Casualty Insurance Company (“APPCIC”, and together with UPCIC, the “Insurance Entities”), the Company is principally engaged in the property and casualty insurance business offered primarily through its network of independent agents. Risk from catastrophic losses is managed through the use of reinsurance agreements. The Company’s primary product is residential homeowners’ insurance currently offered in 18 states as of September 30, 2020, including Florida, which comprises the majority of the Company’s policies in force. See “—Note 5 (Insurance Operations)” for more information regarding the Company’s insurance operations.
The Company generates revenues primarily from the collection of premiums and investment returns on funds invested on cash flows in excess of those retained and used for claims-paying obligations and insurance operations. Other significant sources of revenue include brokerage commissions collected from reinsurers on certain reinsurance programs placed on behalf of the Insurance Entities, policy fees collected from policyholders by our wholly-owned managing general agent subsidiary and payment plan fees charged to policyholders who choose to pay their premiums in installments. Our wholly-owned adjusting company receives claims-handling fees from the Insurance Entities. The Insurance Entities are reimbursed for these fees on claims that are subject to recovery under the Insurance Entities’ respective reinsurance programs. These fees, after expenses, are recorded in the Condensed Consolidated Financial Statements as an adjustment to losses and loss adjustment expense (“LAE”).
Basis of Presentation
The Company has prepared the accompanying unaudited Condensed Consolidated Financial Statements (“Financial Statements”) in accordance with the rules and regulations of the United States Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, the Financial Statements do not include all of the information and footnotes required by United States Generally Accepted Accounting Principles (“U.S. GAAP”) for annual financial statements. Therefore, the Financial Statements should be read in conjunction with the audited Consolidated Financial Statements contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019, filed with the SEC on March 2, 2020. The Condensed Consolidated Balance Sheet at December 31, 2019 was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation have been included in the Financial Statements. The results for interim periods do not necessarily indicate the results that may be expected for any other interim period or for the full year.
To conform to the current period presentation, certain amounts in the prior periods’ condensed consolidated financial statements and notes have been reclassified. Such reclassifications were of an immaterial amount and had no effect on net income or stockholders’ equity.
The Financial Statements include the accounts of the Company and its wholly-owned subsidiaries, as well as variable interest entities (“VIE”) in which the Company is determined to be the primary beneficiary. All material intercompany balances and transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. The Company’s primary use of estimates is in the recognition of liabilities for unpaid losses, loss adjustment expenses, subrogation recoveries and reinsurance recoveries. Actual results could differ from those estimates.

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2. Significant Accounting Policies
The Company reported Significant Accounting Policies in its Annual Report on Form 10-K for the year ended December 31, 2019. The following are new or revised disclosures or disclosures required on a quarterly basis.

Recently Adopted Accounting Pronouncements

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

Accounting Policies

Consolidation Policy: The Financial Statements include the accounts of the Company, its wholly-owned subsidiaries and VIEs in which the Company is determined to be the primary beneficiary. This analysis includes a review of the VIE’s capital structure, related contractual relationships and terms, nature of the VIE’s operations and purpose, nature of the VIE’s interests issued and the Company’s involvement with the entity. When assessing the need to consolidate a VIE, the Company evaluates the design of the VIE as well as the related risks to which the entity was designed to expose the variable interest holders. The primary beneficiary is the entity that has both (i) the power to direct the activities of the VIE that most significantly affect the entity’s economic performance and (ii) the obligation to absorb losses or the right to receive benefits that could be potentially significant to the VIE. While also considering these factors, the consolidation conclusion depends on the Company’s decision-making ability and its ability to influence activities that significantly affect the economic performance of the VIE.

Restricted Cash and Cash Equivalents: The Company classifies amounts of cash and cash equivalents that are restricted in terms
of their use and withdrawal separately in the face of the Condensed Consolidated Balance Sheet. See “—Note 5 (Insurance Operations)” and “—Note 14 (Variable Interest Entities)” for discussions on the nature of the restrictions.

Investment, Securities Available-for-Sale: The Company’s investments in debt securities and short-term investments are classified as available-for-sale with maturities of greater than three months. Available-for-sale debt securities and short-term investments are recorded at fair value in the Condensed Consolidated Balance Sheet, net of any allowance for credit losses, if any. Unrealized gains and losses, excluding the credit loss portion, on available-for-sale debt securities and short-term investments are excluded from earnings and reported as a component of other comprehensive income (“OCI”), net of related deferred taxes until reclassified to earnings upon the consummation of a sales transaction with an unrelated third party. Gains and losses realized on the disposition of available-for-sale debt securities are determined on the first-in, first-out (“FIFO”) basis and credited or charged to income. Premium and discount on investment securities are amortized and accreted using the interest method and charged or credited to investment income.

Allowance for Credit Losses-Available-For-Sale Securities: For available-for-sale debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or is more likely than not that it will be required to sell, the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For available-for-sale debt securities that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by rating agencies, market sentiment and trends and adverse conditions specifically related to the security, among other quantitative and qualitative factors utilized at establishing an estimate for credit losses. If the assessment indicates that a credit loss exists, the present values of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in OCI.

Changes in the allowance for credit losses are recorded as a provision for (or reversal of) credit loss expense and are reported as general and administrative expenses. Losses are charged against the allowance when management believes an available-for-sale debt security is confirmed as uncollected or when either of the criteria regarding intent or requirement to sell is met.

Accrued interest receivable on available-for-sale securities totaled $3.6 million at September 30, 2020 and is evaluated in the estimate for credit losses. Accrued interest receivable is included under Other Assets in the Condensed Consolidated Balance Sheet.

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

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

Reinsurance. Ceded written premium is recorded upon the effective date of the reinsurance contracts and earned over the contract period. Amounts recoverable from reinsurers are estimated in a manner consistent with the provisions of the reinsurance agreements and consistent with the establishment of the gross insurance liability to the Company. Under ASC 326 and given the short-term nature of these receivables, the Company considered the effects of credit enhancements (i.e. funds withheld liability, letters of credit and trust arrangements) and other qualitative factors that allowed it to conclude there was no material risk exposure. There is no estimated credit loss allowance as of September 30, 2020 established under ASC 326 and the Company did not have an allowance for uncollectible amounts due from reinsurers as of December 31, 2019.

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

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

September 30, 2020
Amortized
Cost
Allowance for Expected Credit Losses Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
Debt Securities:
  U.S. government obligations and agencies $ 135,087  $ —  $ 247  $ (6) $ 135,328 
  Corporate bonds 436,033  (412) 2,014  (1,937) 435,698 
  Mortgage-backed and asset-backed securities 251,199  —  2,299  (496) 253,002 
  Municipal bonds 7,086  —  53  —  7,139 
  Redeemable preferred stock 11,241  (58) 301  (77) 11,407 
Total $ 840,646  $ (470) $ 4,914  $ (2,516) $ 842,574 

December 31, 2019
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
Debt Securities:
  U.S. government obligations and agencies $ 53,688  $ 864  $ (188) $ 54,364 
  Corporate bonds 457,180  19,179  (141) 476,218 
  Mortgage-backed and asset-backed securities 304,285  7,400  (606) 311,079 
  Municipal bonds 3,397  103  (4) 3,496 
  Redeemable preferred stock 9,786  427  (86) 10,127 
Total $ 828,336  $ 27,973  $ (1,025) $ 855,284 

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

September 30, 2020 December 31, 2019
Equivalent S&P Credit Ratings Fair Value % of Total
Fair Value
Fair Value % of Total
Fair Value
AAA $ 368,845  43.8  % $ 372,442  43.6  %
AA 74,964  8.9  % 99,103  11.6  %
A 223,658  26.6  % 238,766  27.9  %
BBB 172,916  20.5  % 143,889  16.8  %
BB and Below 1,198  0.1  % —  — 
No Rating Available 993  0.1  % 1,084  0.1  %
   Total $ 842,574  100.0  % $ 855,284  100.0  %

The table above includes credit quality ratings by Standard and Poor’s Rating Services, Inc. (“S&P”), Moody’s Investors Service, Inc. and Fitch Ratings, Inc. The Company has presented the highest rating of the three rating agencies for each investment position.
12

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

September 30, 2020 December 31, 2019
Amortized
Cost
Fair Value Amortized
Cost
Fair Value
Mortgage-backed Securities:
Agency $ 166,418  $ 168,027  $ 143,723  $ 144,729 
Non-agency 28,090  28,259  71,140  75,896 
Asset-backed Securities:
Auto loan receivables 31,811  31,938  42,767  43,127 
Credit card receivables 6,712  6,712  21,145  21,487 
Other receivables 18,168  18,066  25,510  25,840 
Total $ 251,199  $ 253,002  $ 304,285  $ 311,079 
The following tables summarize available-for-sale debt securities, aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position, for which no allowance for expected credit losses has been recorded as of the dates presented (in thousands):

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

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

Unrealized losses on available-for-sale debt securities in the above table as of September 30, 2020 have not been recognized into income as credit losses because the issuers are of high credit quality (rated AA or higher), management does not intend to sell and it is likely management will not be required to sell the securities prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates and other market conditions. There were no material factors impacting any one category or specific security requiring an accrual for credit loss. The issuers continue to make principal and interest payments on the bonds. The fair value is expected to recover as the bonds approach maturity.

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

13

The following table presents a reconciliation of the beginning and ending balances for expected credit losses on available-for-sale debt securities (in thousands):
Corporate Bonds Redeemable
Preferred Stock
Total
Balance, December 31, 2019 $ —  $ —  $ — 
Cumulative effect adjustment as of January 1, 2020 665  126  791 
Increase (decrease) (253) (68) (321)
Balance, September 30, 2020 $ 412  $ 58  $ 470 

See “—Note 2 (Significant Accounting Policies — Recently Adopted Accounting Pronouncements)” for more information about the methodology and significant inputs used to measure the amount related to expected credit losses on available-for-sale debt securities.
The following table presents the amortized cost and fair value of investments with maturities as of the date presented (in thousands):
September 30, 2020
Amortized Cost Fair Value
Due in one year or less $ 75,023  $ 75,416 
Due after one year through five years 469,895  471,884 
Due after five years through ten years 235,351  235,383 
Due after ten years 58,212  57,709 
Perpetual maturity securities 2,165  2,182 
Total $ 840,646  $ 842,574 

All securities, except those with perpetual maturities, were categorized in the table above utilizing years to effective maturity. Effective maturity takes into consideration all forms of potential prepayment, such as call features or prepayment schedules, that shorten the lifespan of contractual maturity dates.
The following table provides certain information related to available-for-sale debt securities and equity securities during the periods presented (in thousands):
Three Months Ended
September 30,
Nine Months Ended
September 30,
2020 2019 2020 2019
Proceeds from sales and maturities (fair value):
  Available-for-sale debt securities $ 773,673  $ 61,615  $ 873,355  $ 173,345 
  Equity securities $ —  $ —  $ —  $ 29,137 
Gross realized gains on sale of securities:
  Available-for-sale debt securities $ 53,893  $ 65  $ 54,779  $ 364 
  Equity securities $ —  $ —  $ —  $ 335 
Gross realized losses on sale of securities:
  Available-for-sale debt securities $ (66) $ (87) $ (485) $ (277)
  Equity securities $ —  $ —  $ —  $ (14,787)
Realized gains on sales of investment real estate $ —  $ —  $ —  $ 1,213 

In the third quarter, the Company took advantage of the market recovery and recognized $53.8 million of net realized gains on the sales of our available-for-sale debt securities that were in an unrealized gain position.
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The following table presents the components of net investment income, comprised primarily of interest and dividends, for the periods presented (in thousands):
Three Months Ended
September 30,
Nine Months Ended
September 30,
2020 2019 2020 2019
Available-for-sale debt securities $ 4,394  $ 6,316  $ 16,425  $ 18,508 
Equity securities 583  487  1,732  2,091 
Cash and cash equivalents (1) 49  1,374  935  4,066 
Other (2) 268  243  782  754 
  Total investment income 5,294  8,420  19,874  25,419 
Less: Investment expenses (3) (737) (807) (2,304) (2,254)
  Net investment income $ 4,557  $ 7,613  $ 17,570  $ 23,165 

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

Equity Securities
The following table provides the unrealized gains and losses recognized during the periods presented on equity securities still held at the end of the reported period (in thousands):
Three Months Ended
September 30,
Nine Months Ended
September 30,
2020 2019 2020 2019
Unrealized gains (losses) recognized during the reported period on equity securities still held at the end of the reported period $ 1,991  $ 573  $ (2,162) $ 3,339 
Investment Real Estate
Investment real estate consisted of the following as of the dates presented (in thousands):
September 30, December 31,
2020 2019
Income Producing:
Investment real estate $ 14,685  $ 14,679 
Less: Accumulated depreciation (1,595) (1,284)
13,090  13,395 
Non-Income Producing:    
Investment real estate 2,190  2,190 
Investment real estate, net $ 15,280  $ 15,585 

During the nine months ended September 30, 2019, the Company completed the sale of an investment real estate property. The Company received net cash proceeds of approximately $10.5 million and recognized a pre-tax gain of approximately $1.2 million that is included in net realized gains (losses) on investments in the Condensed Consolidated Statements of Income for the nine months ended September 30, 2019.
Depreciation expense related to investment real estate for the periods presented (in thousands):

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

15

4. Reinsurance
The Company seeks to reduce its risk of loss by reinsuring certain levels of risk in various areas of exposure with other insurance enterprises or reinsurers, generally as of the beginning of the hurricane season on June 1st of each year. The Company’s current reinsurance programs consist principally of catastrophe excess of loss reinsurance, subject to the terms and conditions of the applicable agreements. Notwithstanding the purchase of such reinsurance, the Company is responsible for certain retained loss amounts before reinsurance attaches and for insured losses related to catastrophes and other events that exceed coverage provided by the reinsurance programs. The Company remains responsible for the settlement of insured losses irrespective of whether any of the reinsurers fail to make payments otherwise due.
Amounts recoverable from reinsurers are estimated in a manner consistent with the provisions of the reinsurance contracts and consistent with the establishment of the gross liability for losses, LAE and other expenses. Reinsurance premiums, losses and LAE are accounted for on a basis consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts.
To reduce credit risk for amounts due from reinsurers, the Insurance Entities seek to do business with financially sound reinsurance companies and regularly evaluate the financial strength of all reinsurers used.
The following table presents ratings from rating agencies and the unsecured amounts due from the reinsurers whose aggregate balance exceeded 3% of the Company’s stockholders’ equity as of the dates presented (in thousands):

  Ratings as of September 30, 2020 Due from as of
Reinsurer AM Best
Company
Standard
and Poor’s
Rating
Services, Inc.
Moody’s
Investors Service, Inc.
September 30, 2020 December 31, 2019
Florida Hurricane Catastrophe Fund (1) n/a n/a n/a $ 65,883  $ 199,647 
Allianz Risk Transfer —  19,269 
Total (2) $ 65,883  $ 218,916 
(1)No rating is available, because the fund is not rated.
(2)Amounts represent prepaid reinsurance premiums and net recoverables for paid and unpaid losses, including incurred but not reported reserves, and loss adjustment expenses.
The Company’s reinsurance arrangements had the following effect on certain items in the Condensed Consolidated Statements of Income for the periods presented (in thousands):

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

Nine Months Ended September 30,
2020 2019
Premiums
Written
Premiums
Earned
Losses and Loss
Adjustment
Expenses
Premiums
Written
Premiums
Earned
Losses and Loss
Adjustment
Expenses
Direct $ 1,148,656  $ 1,020,798  $ 682,896  $ 990,066  $ 911,550  $ 663,768 
Ceded (497,263) (339,408) (158,026) (422,414) (284,867) (304,807)
Net $ 651,393  $ 681,390  $ 524,870  $ 567,652  $ 626,683  $ 358,961 
16


The following prepaid reinsurance premiums and reinsurance recoverable are reflected in the Condensed Consolidated Balance Sheets as of the dates presented (in thousands):
September 30, December 31,
2020 2019
Prepaid reinsurance premiums $ 333,062  $ 175,208 
Reinsurance recoverable on paid losses and LAE $ 35,749  $ 70,015 
Reinsurance recoverable on unpaid losses and LAE 59,329  123,221 
Reinsurance recoverable $ 95,078  $ 193,236 

17

5. Insurance Operations
Deferred Policy Acquisition Costs
The Company defers certain costs in connection with written premium, called Deferred Policy Acquisition Costs (“DPAC”). DPAC is amortized over the effective period of the related insurance policies.
The following table presents the beginning and ending balances and the changes in DPAC for the periods presented (in thousands):
Three Months Ended
September 30,
Nine Months Ended
September 30,
2020 2019 2020 2019
DPAC, beginning of period $ 103,527  $ 90,530  $ 91,882  $ 84,686 
Capitalized Costs 58,727  48,783  164,700  140,998 
Amortization of DPAC (50,959) (44,493) (145,287) (130,864)
DPAC, end of period $ 111,295  $ 94,820  $ 111,295  $ 94,820 
Regulatory Requirements and Restrictions
The Insurance Entities are subject to regulations and standards of the Florida Office of Insurance Regulation (“FLOIR”). The Insurance Entities are also subject to regulations and standards of regulatory authorities in other states where they are licensed, although as Florida-domiciled insurers, their principal regulatory authority is the FLOIR. These standards and regulations include a requirement that the Insurance Entities maintain specified levels of statutory capital and restrict the timing and amount of dividends and other distributions that may be paid by the Insurance Entities to the parent company. Except in the case of extraordinary dividends, these standards generally permit dividends to be paid from statutory unassigned surplus of the regulated subsidiary and are limited based on the regulated subsidiary’s level of statutory net income and statutory capital and surplus. The maximum dividend that may be paid by the Insurance Entities to their immediate parent company, Protection Solutions, Inc. (“PSI”, formerly known as Universal Insurance Holding Company of Florida), without prior regulatory approval is limited by the provisions of the Florida Insurance Code. These dividends are referred to as “ordinary dividends.” However, if the dividend, together with other dividends paid within the preceding twelve months, exceeds this statutory limit or is paid from sources other than earned surplus, the entire dividend is generally considered an “extraordinary dividend” and must receive prior regulatory approval.
In accordance with Florida Insurance Code, and based on the calculations performed by the Company as of December 31, 2019, UPCIC has the capacity to pay ordinary dividends of $12.1 million during 2020. APPCIC, based on its accumulated earnings as of December 31, 2019, is unable to pay any ordinary dividends during 2020. For the three and nine months ended September 30, 2020, no dividends were paid from the Insurance Entities to PSI.
The Florida Insurance Code requires an insurance company to maintain capitalization equivalent to the greater of ten percent of the insurer’s total liabilities or $10.0 million. The following table presents the amount of capital and surplus calculated in accordance with statutory accounting principles, which differ from U.S. GAAP, and an amount representing ten percent of total liabilities for the Insurance Entities as of the dates presented (in thousands):
September 30, 2020 December 31, 2019
Statutory capital and surplus
  UPCIC $ 300,597  $ 301,120 
  APPCIC $ 16,171  $ 16,433 
Ten percent of total liabilities
  UPCIC $ 126,227  $ 99,228 
  APPCIC $ 820  $ 621 

As of the dates in the table above, the Insurance Entities each exceeded the minimum statutory capitalization requirement. Statutory capital and surplus for UPCIC at December 31, 2019 includes a $30 million capital contribution funded in February 2020 by UVE through PSI, the Insurance Entities’ parent company, which was permitted to be included in UPCIC’s statutory capital and surplus at December 31, 2019 with the permission of the FLOIR under statutory accounting principles. This contribution was not recognized on a U.S. GAAP basis at December 31, 2019. Statutory capital and surplus for UPCIC at September 30, 2020 includes a $44.0 million capital contribution funded in September 2020 by UVE through PSI, the Insurance Entities’ parent company.
18

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

Three Months Ended
September 30,
Nine Months Ended
September 30,
2020 2019 2020 2019
Capital contributions $ 44,000  $ —  $ 74,000  $ — 
The following table summarizes combined net income (loss) for the Insurance Entities determined in accordance with statutory accounting practices for the periods presented (in thousands):
Three Months Ended
September 30,
Nine Months Ended
September 30,
  2020 2019 2020 2019
Combined net income (loss) $ (41,436) $ (5,486) $ (37,034) $ 28,854 
The Insurance Entities are required by various state laws and regulations to maintain certain assets in depository accounts. The following table represents assets held by insurance regulators as of the dates presented (in thousands):
September 30, 2020 December 31, 2019
Restricted cash and cash equivalents $ 2,635  $ 2,635 
Investments $ 3,564  $ 3,419 

19

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

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

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

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

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




20

7. Long-Term Debt
Long-term debt consists of the following as of the dates presented (in thousands):
September 30, December 31,
2020 2019
Surplus note $ 8,823  $ 9,926 
In 2006, UPCIC entered into a $25.0 million surplus note with the State Board of Administration of Florida (the “SBA”) under Florida’s Insurance Capital Build-Up Incentive Program. The surplus note has a twenty-year term and accrues interest, adjusted quarterly based on the 10-year Constant Maturity Treasury Index. Principal and interest are paid periodically pursuant to terms of the surplus note.
UPCIC was in compliance with the terms of the surplus note as of September 30, 2020.
21

8. Stockholders’ Equity

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

Total Number of Shares Average
Repurchased During the Aggregate Price Per
Dollar Amount Nine Months Ended September 30, Purchase Share
Date Authorized Expiration Date Authorized 2020 2019 Price  Repurchased Plan Completed
November 6, 2019 December 31, 2021 $ 40,000  1,418,087  $ 26,501  $ 18.69 
May 6, 2019 December 31, 2020 $ 40,000  —  1,302,401  $ 35,419  $ 27.20  November 2019
December 12, 2018 May 31, 2020 $ 20,000  —  468,108  $ 14,513  $ 31.00  May 2019
See the “Condensed Consolidated Statements of Stockholders’ Equity” for a roll-forward of treasury shares.



22

9. Income Taxes
During the three months ended September 30, 2020, the Company recorded approximately $0.6 million of income tax benefit compared to $7.8 million of income tax expense for the three months ended September 30, 2019. The effective tax rate (“ETR”) for the three months ended September 30, 2020 was 16.4% compared to a 27.8% ETR for the same period in 2019.
During the nine months ended September 30, 2020 and 2019, the Company recorded approximately $14.5 million and $35.0 million of income tax expense, respectively. The ETR for the nine months ended September 30, 2020 was 28.2% compared to a 26.4% ETR for the same period in 2019.
In calculating these rates, the Company considered a variety of factors including the forecasted full year pre-tax results, the U.S. federal tax rate, expected non-deductible expenses and estimated state income taxes. The Company’s final ETR for the full year will be dependent on the level of pre-tax income, discrete items, the apportionment of taxable income among state tax jurisdictions and the extent of non-deductible expenses in relation to pre-tax income.
The Company’s income tax provision reflects an estimated annual ETR of 28.4% for 2020, calculated before the impact of discrete items. The effect of reporting discrete items through September 30, 2020 amounts to a decrease to the annual estimated ETR of 20 basis points, resulting in a total annual estimated ETR of 28.2%. The annual estimated ETR includes a federal income tax rate of 21% and a state income tax rate, net of federal benefit, of 3.7%.
Deferred tax assets and liabilities are recorded based on the difference between the financial statement and tax basis of assets and liabilities at the enacted tax rates. The Company reviews its deferred tax assets regularly for recoverability. Management has reviewed all available evidence, both positive and negative, in determining the need for a valuation allowance with respect to the gross deferred tax assets. In reviewing the gross deferred tax assets, management has concluded that the likelihood for utilization of these deferred tax assets is certain (greater than 50%) and determined that a valuation allowance on any of the deferred tax assets is not required. Management will continue to analyze the gross deferred tax assets on a quarterly basis to determine whether there is a need for a valuation allowance in the future.
The Company files its tax returns as prescribed by the tax laws of the jurisdictions in which it operates. As of September 30, 2020, the Company’s 2017 through 2019 tax years are still subject to examination by the Internal Revenue Service and various tax years remain open to examination in certain state jurisdictions.
23

10. Earnings Per Share
Basic earnings (loss) per share (“EPS”) is computed based on the weighted average number of common shares outstanding for the period, excluding any dilutive common share equivalents. Diluted EPS reflects the potential dilution resulting from exercises of stock options, vesting of performance share units, vesting of restricted stock, vesting of restricted stock units, and conversion of preferred stock.
The following table reconciles the numerator (i.e., income) and denominator (i.e., shares) of the basic and diluted EPS computations for the periods presented (in thousands, except per share data):

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