NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Nature of Operations, Basis of Presentation and Consolidation
Universal Insurance Holdings, Inc. (“UVE”, and together with its wholly-owned subsidiaries, “the Company”) is a Delaware corporation incorporated in 1990. 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 December 31, 2019, including Florida, which comprises the majority of the Company’s policies in force. See “—Note 5 (Insurance Operations),” for more information regarding the Company’s insurance operations.
The Company generates revenues primarily from the collection of premiums and invests funds in excess of those retained for claims-paying obligations and insurance operations. Other significant sources of revenue include brokerage commissions collected from reinsurers on certain reinsurance programs placed by the Insurance Entities, policy fees collected from policyholders by our wholly-owned managing general agent (“MGA”) 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 consolidated financial statements as an adjustment to losses and loss adjustment expense.
The consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America (“U.S. GAAP”). The consolidated financial statements include the accounts of UVE and its wholly-owned subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation.
To conform to the current period presentation, certain amounts in the prior periods’ consolidated financial statements and notes have been reclassified. Such reclassifications were of an immaterial amount and had no effect on net income or stockholders’ equity.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. The Company’s primary use of estimates are in the recognition of liabilities for unpaid losses, loss adjustment expenses and subrogation recoveries, and reinsurance recoveries. Actual results could differ from those estimates.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies followed by the Company are summarized as follows:
Cash and Cash Equivalents. The Company includes in cash equivalents all short-term, highly liquid investments that are readily convertible to known amounts of cash and have an original maturity of three months or less. These amounts are carried at cost, which approximates fair value. The Company excludes any net negative cash balances from cash and cash equivalents that the Company has with any single financial institution. These amounts represent outstanding checks or drafts not yet presented to the financial institution and are reclassified to liabilities and presented as book overdraft in the Company’s Consolidated Balance Sheets.
Restricted Cash and Cash Equivalents. The Company classifies amounts of cash and cash equivalents that are restricted in terms of their use and withdrawal separately in the face of the Consolidated Balance Sheets. See “—Note 5 (Insurance Operations),” for a discussion of 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 consolidated balance sheet. Unrealized gains and losses 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 sales transaction with an unrelated third party or when the decline in fair value is deemed other than temporary. Gains and losses realized on the disposition of debt securities available-for-sale are determined on the 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.
Investment, Equity Securities. The Company’s investment in equity securities are recorded at fair value in the consolidated balance sheet with changes in the fair value of equity securities reported in current period earnings in the consolidated statements of income within net change in unrealized gains (losses) of equity securities as they occur.
Other Than Temporary Impairment. The assessment of whether the impairment of an available-for-sale security’s fair value is other than temporary is performed using a portfolio review as well as a case-by-case review considering a wide range of factors. There are a number of assumptions and estimates inherent in evaluating impairments and determining if they are other than temporary, including: (1) the Company’s ability and intent to hold the investment for a period of time sufficient to allow for an anticipated recovery in value; (2) the expected recoverability of principal and interest; (3) the extent and length of time to which the fair value has been less than amortized cost for available-for-sale securities referred to as severity and duration; (4) the financial condition, near-term and long-term prospects of the issue or issuer, including relevant industry conditions and trends, and implications of rating agency actions and offering prices referred to as credit quality and (5) the specific reasons that a security is in a significant unrealized loss position, including market conditions which could affect liquidity. Additionally, once assumptions and estimates are made, any number of changes in facts and circumstances could cause the Company to subsequently determine that an impairment is other than temporary, including: (1) general economic conditions that are worse than previously forecasted or that have a greater adverse effect on a particular issuer or industry sector than originally estimated; (2) changes in the facts and circumstances related to a particular issue or issuer’s ability to meet all of its contractual obligations and (3) changes in facts and circumstances obtained that causes a change in our ability or intent to hold a security to maturity or until it recovers in value. Management’s intent and ability to hold securities is a determination that is made at each respective balance sheet date giving consideration to factors known to management for each individual issuer of securities such as credit quality and other publicly available information.
Investment Real Estate. Investment real estate is recorded at cost less accumulated depreciation. Depreciation is calculated on a straight-line basis over the estimated useful life of the assets. Real estate taxes, interest and other costs incurred during development and construction of properties are capitalized. Income and expenses from income producing real estate are reported under net investment income. Investment real estate is evaluated for impairment when events or circumstances indicate the carrying value may not be recoverable.
Premiums Receivable. Generally, premiums are collected prior to or during the policy period as permitted under the Insurance Entities payment plans. Credit risk is minimized through the effective administration of policy payment plans whereby rules governing policy cancellation minimize exposure to credit risk. The Company performs a policy level evaluation to determine the extent the premiums receivable balance exceeds the unearned premiums balance. The Company then ages this exposure to establish an allowance for doubtful accounts based on prior credit experience. As of December 31, 2019 and 2018, the Company recorded allowances for doubtful accounts in the amounts of $749 thousand and $711 thousand, respectively.
Property and Equipment. Property and equipment is recorded at cost less accumulated depreciation and is depreciated on the straight-line basis over the estimated useful life of the assets. Estimated useful life of all property and equipment ranges from three for equipment to twenty-seven-and-one-half years for buildings and improvements. Expenditures for improvements are capitalized and depreciated over the remaining useful life of the asset. Routine repairs and maintenance are expensed as incurred. Software is capitalized and amortized over three years. The Company reviews its property and equipment for impairment annually and/or whenever changes in circumstances indicate that the carrying amount may not be recoverable.
Recognition of Premium Revenues. Direct and ceded premiums are recognized as revenue on a pro rata basis over the policy term or over the term of the reinsurance agreement. The portion of direct premiums that will be earned in the future is deferred and reported as unearned premiums. The portion of ceded premiums that will be earned in the future is deferred and reported as prepaid reinsurance premiums (ceded unearned premiums).
Recognition of Commission Revenue. Commission revenue generated from reinsurance brokerage commission earned on ceded premium by the Insurance Entities is recognized over the term of the reinsurance agreements.
Policy Fees. Policy fees, which represents fees paid by policyholders to the MGA’s on all new and renewal insurance policies, are recognized as income upon policy inception.
Other Revenue. The Company offers its policyholders the option of paying their policy premiums in full at inception or in installments. The Company charges fees to its policyholders that elect to pay their premium in installments and records such fees as revenue as the Company bills the fees to the policyholder.
Deferred Policy Acquisition Costs. The Company defers direct commissions and premium taxes relating to the successful acquisition or renewal of insurance policies and defers the costs until recognized as expense over the terms of the policies to which they are related. Deferred policy acquisition costs are recorded at their estimated realizable value.
Goodwill. Goodwill arising from the acquisition of a business is initially measured at cost and not subject to amortization. We assess goodwill for potential impairments at the end of each fiscal year, or during the year if an event or other circumstance indicates that we may not be able to recover the carrying amount of the asset. Goodwill is included under Other Assets in the Consolidated Balance Sheets.
Insurance Liabilities. Unpaid losses and loss adjustment expenses (“LAE”) are provided for as claims are incurred. The provision for unpaid losses and LAE includes: (1) the accumulation of individual case estimates for claims and claim adjustment expenses reported prior to the close of the accounting period; (2) estimates for unreported claims based on industry data and actuarial analysis and (3) estimates of expenses for investigating and adjusting claims based on the experience of the Company and the industry. The Company estimates and accrues its right to subrogate reported or estimated claims against other parties. Subrogated claims are recorded at amounts estimated to be received from the subrogated parties, net of related costs and netted against unpaid losses and LAE.
Inherent in the estimates of ultimate claims and subrogation are expected trends in claim severity, frequency and other factors that may vary as claims are settled. The amount of uncertainty in the estimates is significantly affected by such factors as the amount of claims experience relative to the development period, knowledge of the actual facts and circumstances and the amount of insurance risk retained. In addition, the Company’s policyholders are subject to adverse weather conditions, such as hurricanes, tornadoes, ice storms and tropical storms. The actuarial methods for making estimates for unpaid losses, LAE and subrogation recoveries and for establishing the resulting net liability are periodically reviewed, and any adjustments are reflected in current earnings.
Provision for Premium Deficiency. It is the Company’s policy to evaluate and recognize losses on insurance contracts when estimated future claims, deferred policy acquisition costs and maintenance costs under a group of existing contracts will exceed anticipated future premiums. No accruals for premium deficiency were considered necessary as of December 31, 2019 and 2018.
Reinsurance. Ceded written premium is recorded upon the effective date of the reinsurance contracts and earned over the contract period. Amounts recoverable from reinsurers are estimated in a manner consistent with the provisions of the reinsurance agreements and consistent with the establishment of the gross insurance liability to the Company. Allowances are established for amounts deemed uncollectible, if any.
Income Taxes. The Company accounts for income taxes under the asset and liability method, that recognizes the amount of income taxes payable or refundable for the current year and recognizes deferred tax assets and liabilities based on the tax rates expected to be in effect during the periods in which the temporary differences reverse. Temporary differences arise when income or expenses are recognized in different periods in the consolidated financial statements than on the tax returns. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that all, or some portion, of the benefits related to deferred tax assets will not be realized. Income taxes include both estimated federal and state income taxes.
Income (Loss) Per Share of Common Stock. Basic earnings per share excludes dilution and is computed by dividing the Company’s net income (loss) available to common stockholders, by the weighted-average number of shares of Common Stock outstanding during the period. Diluted earnings per share is computed by dividing the Company’s net income (loss) available to common stockholders, by the weighted average number of shares of Common Stock outstanding during the period plus the impact of all potentially dilutive common shares, primarily preferred stock, unvested shares and options. The dilutive impact of stock options and unvested shares is determined by applying the treasury stock method and the dilutive impact of the preferred stock is determined by applying the “if converted” method.
Fair Value Measurements. The Company’s policy is to record transfers of assets and liabilities, if any, between Level 1 and Level 2 at their fair values as of the end of each reporting period, consistent with the date of the determination of fair value. There were no transfers during the years ended December 31, 2019 or 2018.
Share-based Compensation. The Company accounts for share-based compensation based on the estimated grant-date fair value. The Company recognizes these compensation costs in general and administrative expenses and generally amortizes them on a straight-line basis over the requisite service period of the award, which is the vesting term. Individual tranches of performance-based awards are amortized separately since the vesting of each tranche is either subject to annual measures or time vesting. The fair value of stock option awards is estimated using the Black-Scholes option pricing model with the grant-date assumptions discussed in “—Note 9 (Share-Based Compensation).” The fair value of the restricted share grants, performance share units and restricted stock units are determined based on the market price on the date of grant.
Statutory Accounting. UPCIC and APPCIC are highly regulated and prepare and file financial statements in conformity with the statutory accounting practices prescribed or permitted by the Florida Office of Insurance Regulation (the “FLOIR”) and the National Association of Insurance Commissioners (“NAIC”), which differ from U.S. GAAP. The FLOIR requires insurance companies domiciled in Florida to prepare their statutory financial statements in accordance with the NAIC Accounting Practices and Procedures Manual (the “Manual”), as modified by the FLOIR. Accordingly, the admitted assets, liabilities and capital and surplus of UPCIC and APPCIC as of December 31, 2019 and 2018 and the results of operations and cash flows, for the years ended December 31, 2019, 2018 and 2017, for their regulatory filings have been prepared in accordance with statutory accounting principles as promulgated by the FLOIR and the NAIC. The statutory accounting principles are more restrictive than U.S. GAAP and are designed primarily to demonstrate the ability to meet obligations to policyholders and claimants.
NOTE 3 – INVESTMENTS
Securities Available for Sale
The following table provides the cost or amortized cost and fair value of debt securities available for sale as of the dates presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair Value
|
Debt Securities:
|
|
|
|
|
|
|
|
|
U.S. government obligations and agencies
|
|
$
|
67,435
|
|
|
$
|
241
|
|
|
$
|
(1,039
|
)
|
|
$
|
66,637
|
|
Corporate bonds
|
|
434,887
|
|
|
714
|
|
|
(6,736
|
)
|
|
428,865
|
|
Mortgage-backed and asset-backed securities
|
|
312,840
|
|
|
912
|
|
|
(4,155
|
)
|
|
309,597
|
|
Municipal bonds
|
|
3,405
|
|
|
—
|
|
|
(43
|
)
|
|
3,362
|
|
Redeemable preferred stock
|
|
12,560
|
|
|
55
|
|
|
(638
|
)
|
|
11,977
|
|
Total
|
|
$
|
831,127
|
|
|
$
|
1,922
|
|
|
$
|
(12,611
|
)
|
|
$
|
820,438
|
|
The following table provides the credit quality of available-for-sale debt securities with contractual maturities as of the dates presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
|
|
|
|
% of Total
|
|
|
|
% of Total
|
Average Credit Ratings
|
|
Fair Value
|
|
Fair Value
|
|
Fair Value
|
|
Fair Value
|
AAA
|
|
$
|
372,442
|
|
|
43.6
|
%
|
|
$
|
388,672
|
|
|
47.4
|
%
|
AA
|
|
99,103
|
|
|
11.6
|
%
|
|
100,791
|
|
|
12.3
|
%
|
A
|
|
238,766
|
|
|
27.9
|
%
|
|
214,503
|
|
|
26.1
|
%
|
BBB
|
|
143,889
|
|
|
16.8
|
%
|
|
112,613
|
|
|
13.7
|
%
|
BB and Below
|
|
—
|
|
|
—
|
|
|
494
|
|
|
0.1
|
%
|
No Rating Available
|
|
1,084
|
|
|
0.1
|
%
|
|
3,365
|
|
|
0.4
|
%
|
Total
|
|
$
|
855,284
|
|
|
100.0
|
%
|
|
$
|
820,438
|
|
|
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.
The following table summarizes the cost or amortized cost and fair value of mortgage-backed and asset-backed securities as of the dates presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
|
|
Amortized
Cost
|
|
Fair Value
|
|
Amortized
Cost
|
|
Fair Value
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
Agency
|
|
$
|
143,723
|
|
|
$
|
144,729
|
|
|
$
|
139,418
|
|
|
$
|
136,291
|
|
Non-agency
|
|
71,140
|
|
|
75,896
|
|
|
61,689
|
|
|
61,933
|
|
Asset-backed securities:
|
|
|
|
|
|
|
|
|
Auto loan receivables
|
|
42,767
|
|
|
43,127
|
|
|
53,449
|
|
|
53,341
|
|
Credit card receivables
|
|
21,145
|
|
|
21,487
|
|
|
29,594
|
|
|
29,366
|
|
Other receivables
|
|
25,510
|
|
|
25,840
|
|
|
28,690
|
|
|
28,666
|
|
Total
|
|
$
|
304,285
|
|
|
$
|
311,079
|
|
|
$
|
312,840
|
|
|
$
|
309,597
|
|
The following table summarizes the fair value and gross unrealized losses on available-for-sale debt securities, aggregated by major investment category and length of time that individual securities have been in a continuous unrealized loss position as of the dates presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
Less Than 12 Months
|
|
12 Months or Longer
|
|
|
Number of
Issues
|
|
Fair Value
|
|
Unrealized
Losses
|
|
Number of
Issues
|
|
Fair Value
|
|
Unrealized
Losses
|
Debt Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government obligations and agencies
|
|
2
|
|
|
$
|
3,836
|
|
|
$
|
(108
|
)
|
|
4
|
|
|
$
|
23,186
|
|
|
$
|
(80
|
)
|
Corporate bonds
|
|
18
|
|
|
16,808
|
|
|
(107
|
)
|
|
7
|
|
|
5,866
|
|
|
(34
|
)
|
Mortgage-backed and asset-backed securities
|
|
42
|
|
|
58,023
|
|
|
(245
|
)
|
|
26
|
|
|
34,985
|
|
|
(361
|
)
|
Municipal bonds
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
276
|
|
|
(4
|
)
|
Redeemable preferred stock
|
|
6
|
|
|
630
|
|
|
(8
|
)
|
|
4
|
|
|
1,489
|
|
|
(78
|
)
|
Total
|
|
68
|
|
|
$
|
79,297
|
|
|
$
|
(468
|
)
|
|
42
|
|
|
$
|
65,802
|
|
|
$
|
(557
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
Less Than 12 Months
|
|
12 Months or Longer
|
|
|
Number of
Issues
|
|
Fair Value
|
|
Unrealized
Losses
|
|
Number of
Issues
|
|
Fair Value
|
|
Unrealized
Losses
|
Debt Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government obligations and agencies
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
13
|
|
|
$
|
56,531
|
|
|
$
|
(1,039
|
)
|
Corporate bonds
|
|
228
|
|
|
210,152
|
|
|
(3,318
|
)
|
|
160
|
|
|
131,225
|
|
|
(3,418
|
)
|
Mortgage-backed and asset-backed securities
|
|
36
|
|
|
57,487
|
|
|
(196
|
)
|
|
103
|
|
|
148,436
|
|
|
(3,959
|
)
|
Municipal bonds
|
|
6
|
|
|
3,362
|
|
|
(43
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Redeemable preferred stock
|
|
61
|
|
|
8,092
|
|
|
(506
|
)
|
|
5
|
|
|
1,034
|
|
|
(132
|
)
|
Total
|
|
331
|
|
|
$
|
279,093
|
|
|
$
|
(4,063
|
)
|
|
281
|
|
|
$
|
337,226
|
|
|
$
|
(8,548
|
)
|
Evaluating Investments in Other Than Temporary Impairment (“OTTI”)
As of December 31, 2019, the Company held available-for-sale debt securities that were in an unrealized loss position as presented in the table above. For available-for-sale debt securities with significant declines in value, the Company performs quarterly fundamental credit analysis on a security-by-security basis, which includes consideration of credit quality and credit ratings, review of relevant industry analyst reports and other available market data. For available-for-sale debt securities, the Company considers whether it has the intent and ability to hold the available-for-sale debt securities for a period of time sufficient to recover its cost basis. Where the Company lacks the intent and ability to hold to recovery, or believes the recovery period is extended, the security’s decline in fair value is considered other than temporary and is recorded in earnings. Based on our analysis, our fixed income portfolio is of high quality and we believe that we will recover the amortized cost basis of our available-for-sale debt securities. We continually monitor the credit quality of our investments in available-for-sale debt securities to assess if it is probable that we will receive our contractual or estimated cash flows in the form of principal and interest. Additionally, the Company considers management’s intent and ability to hold the available-for-sale debt securities until recovery and its credit analysis of the individual issuers of the securities. Based on this process and analysis, management has no reason to believe the unrealized losses of the available-for-sale debt securities as of December 31, 2019 are other than temporary.
The following table presents the amortized cost and fair value of investments with maturities as of the date presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
Amortized
Cost
|
|
Fair Value
|
Due in one year or less
|
|
$
|
106,961
|
|
|
$
|
107,259
|
|
Due after one year through five years
|
|
390,128
|
|
|
398,565
|
|
Due after five years through ten years
|
|
313,951
|
|
|
332,068
|
|
Due after ten years
|
|
17,131
|
|
|
17,191
|
|
Perpetual maturity securities
|
|
165
|
|
|
201
|
|
Total
|
|
$
|
828,336
|
|
|
$
|
855,284
|
|
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, equity securities and investment real estate during the periods presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
Proceeds from sales and maturities (fair value)
|
|
|
|
|
|
|
|
|
Available-for-sale debt securities
|
|
$
|
223,266
|
|
|
$
|
255,938
|
|
|
$
|
128,370
|
|
Equity securities
|
|
$
|
29,680
|
|
|
$
|
8,285
|
|
|
$
|
77,640
|
|
Gross realized gains on sale of securities:
|
|
|
|
|
|
|
|
|
Available-for-sale debt securities
|
|
$
|
790
|
|
|
$
|
326
|
|
|
$
|
458
|
|
Equity securities
|
|
$
|
367
|
|
|
$
|
714
|
|
|
$
|
2,415
|
|
Gross realized losses on sale of securities:
|
|
|
|
|
|
|
|
|
Available-for-sale debt securities
|
|
$
|
(298
|
)
|
|
$
|
(3,129
|
)
|
|
$
|
(150
|
)
|
Equity securities
|
|
$
|
(14,787
|
)
|
|
$
|
—
|
|
|
$
|
(153
|
)
|
Realized gains on sales of investment real estate
|
|
$
|
1,213
|
|
|
$
|
—
|
|
|
$
|
—
|
|
The following table presents the components of net investment income, comprised primarily of interest and dividends, for the periods presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
Available-for-sale debt securities
|
|
$
|
24,989
|
|
|
$
|
18,198
|
|
|
$
|
12,375
|
|
Equity securities
|
|
2,648
|
|
|
2,978
|
|
|
1,799
|
|
Available-for-sale short-term investments
|
|
—
|
|
|
145
|
|
|
22
|
|
Cash and cash equivalents (1)
|
|
5,176
|
|
|
5,540
|
|
|
1,043
|
|
Other (2)
|
|
1,008
|
|
|
915
|
|
|
416
|
|
Total investment income
|
|
33,821
|
|
|
27,776
|
|
|
15,655
|
|
Less: Investment expenses (3)
|
|
(3,078
|
)
|
|
(2,960
|
)
|
|
(2,195
|
)
|
Net investment income
|
|
$
|
30,743
|
|
|
$
|
24,816
|
|
|
$
|
13,460
|
|
|
|
|
|
(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) recorded during the periods presented on equity securities still held at the end of the reported period (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
Unrealized gains and (losses) recognized during the reported period
on equity securities still held at the end of the reporting period
|
|
$
|
4,163
|
|
|
$
|
(17,169
|
)
|
|
$
|
—
|
|
Investment Real Estate
Investment real estate consisted of the following as of the dates presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2019
|
|
2018
|
Income Producing:
|
|
|
|
|
Investment real estate
|
|
$
|
14,679
|
|
|
$
|
14,619
|
|
Less: Accumulated depreciation
|
|
(1,284
|
)
|
|
(870
|
)
|
|
|
13,395
|
|
|
13,749
|
|
Non-Income Producing:
|
|
|
|
|
Investment real estate
|
|
2,190
|
|
|
10,690
|
|
Investment real estate, net
|
|
$
|
15,585
|
|
|
$
|
24,439
|
|
During the year ended December 31, 2019, the Company completed the sale of investment real estate. The Company received net cash proceeds of approximately $10.5 million and recognized a pre-tax gain of approximately $1.2 million that is included in net realized gains (losses) on investments in the Consolidated Statements of Income for the year ended December 31, 2019.
Depreciation expense related to investment real estate for the periods presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
Depreciation expense on investment real estate
|
|
$
|
414
|
|
|
$
|
410
|
|
|
$
|
179
|
|
NOTE 4 – REINSURANCE
The Company seeks to reduce its risk of loss by reinsuring certain levels of risk in various areas of exposure with other insurance enterprises or reinsurers, generally as of the beginning of the hurricane season on June 1st of each year. The Company’s current reinsurance programs consist principally of catastrophe excess of loss reinsurance, subject to the terms and conditions of the applicable agreements. The Company is responsible for certain retained loss amounts before reinsurance attaches and 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 December 31, 2019
|
|
|
|
|
|
|
Standard
|
|
|
|
|
|
|
|
|
AM Best
|
|
and Poor’s
Rating
|
|
Moody’s
Investors
|
|
Due from as of
December 31,
|
Reinsurer
|
|
Company
|
|
Services, Inc.
|
|
Service, Inc.
|
|
2019
|
|
2018
|
Florida Hurricane Catastrophe Fund (1)
|
|
n/a
|
|
n/a
|
|
n/a
|
|
$
|
199,647
|
|
|
$
|
165,022
|
|
Allianz Risk Transfer
|
|
A+
|
|
AA
|
|
Aa3
|
|
19,269
|
|
|
139,565
|
|
Renaissance Reinsurance Ltd
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
39,459
|
|
Chubb Tempest Reinsurance Ltd
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
16,208
|
|
Total (2)
|
|
|
|
|
|
|
|
$
|
218,916
|
|
|
$
|
360,254
|
|
|
|
(1)
|
No rating is available, because the fund is not rated.
|
|
|
(2)
|
Amounts represent prepaid reinsurance premiums, reinsurance receivables, and net recoverables for paid and unpaid losses, including incurred but not reported reserves, loss adjustment expenses, and offsetting reinsurance payables.
|
The Company’s reinsurance arrangements had the following effect on certain items in the Consolidated Statements of Income for the periods presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2019
|
|
|
Premiums
Written
|
|
Premiums
Earned
|
|
Losses and Loss
Adjustment
Expenses
|
Direct
|
|
$
|
1,292,721
|
|
|
$
|
1,233,121
|
|
|
$
|
1,084,604
|
|
Ceded
|
|
(423,076
|
)
|
|
(390,619
|
)
|
|
(481,198
|
)
|
Net
|
|
$
|
869,645
|
|
|
$
|
842,502
|
|
|
$
|
603,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2018
|
|
|
Premiums
Written
|
|
Premiums
Earned
|
|
Losses and Loss
Adjustment
Expenses
|
Direct
|
|
$
|
1,190,875
|
|
|
$
|
1,121,640
|
|
|
$
|
1,325,323
|
|
Ceded
|
|
(363,201
|
)
|
|
(353,258
|
)
|
|
(910,868
|
)
|
Net
|
|
$
|
827,674
|
|
|
$
|
768,382
|
|
|
$
|
414,455
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2017
|
|
|
Premiums
Written
|
|
Premiums
Earned
|
|
Losses and Loss
Adjustment
Expenses
|
Direct
|
|
$
|
1,055,886
|
|
|
$
|
999,198
|
|
|
$
|
779,122
|
|
Ceded
|
|
(318,826
|
)
|
|
(310,405
|
)
|
|
(428,694
|
)
|
Net
|
|
$
|
737,060
|
|
|
$
|
688,793
|
|
|
$
|
350,428
|
|
The following prepaid reinsurance premiums and reinsurance recoverable are reflected in the Consolidated Balance Sheets as of the dates presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2019
|
|
2018
|
Prepaid reinsurance premiums
|
|
$
|
175,208
|
|
|
$
|
142,750
|
|
Reinsurance recoverable on paid losses and LAE
|
|
$
|
70,015
|
|
|
$
|
25,238
|
|
Reinsurance recoverable on unpaid losses and LAE
|
|
123,221
|
|
|
393,365
|
|
Reinsurance recoverable
|
|
$
|
193,236
|
|
|
$
|
418,603
|
|
NOTE 5 – INSURANCE OPERATIONS
Deferred Policy Acquisition Costs
The Company defers certain costs in connection with written premiums, 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
DPAC, beginning of year
|
|
$
|
84,686
|
|
|
$
|
73,059
|
|
|
$
|
64,912
|
|
Capitalized Costs
|
|
184,039
|
|
|
174,814
|
|
|
144,849
|
|
Amortization of DPAC
|
|
(176,843
|
)
|
|
(163,187
|
)
|
|
(136,702
|
)
|
DPAC, end of year
|
|
$
|
91,882
|
|
|
$
|
84,686
|
|
|
$
|
73,059
|
|
Regulatory Requirements and Restrictions
The Insurance Entities are subject to regulations and standards of the Florida Office of Insurance Regulation (“FLOIR”). UPCIC also is subject to regulations and standards of regulatory authorities in other states where it is licensed, although as a Florida-domiciled insurer, its principal regulatory authority is the FLOIR. These standards require the Insurance Entities to maintain specified levels of statutory capital and restrict the timing and amount of dividends and other distributions that may be paid by the Insurance Entities to the parent company. Except in the case of extraordinary dividends, these standards generally permit dividends to be paid from statutory unassigned surplus of the regulated subsidiary and are limited based on the regulated subsidiary’s level of statutory net income and statutory capital and surplus. The maximum dividend that may be paid by UPCIC and APPCIC to their immediate parent company, Protection Solutions, Inc. (“PSI”, formally 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 surplus position and earnings history as of December 31, 2019, is unable to pay any ordinary dividends during 2020. For the years ended December 31, 2019 and 2018, no dividends were paid from UPCIC or APPCIC to PSI.
The Florida Insurance Code requires insurance companies 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 both UPCIC and APPCIC as of the dates presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2019
|
|
2018
|
Ten percent of total liabilities
|
|
|
|
|
UPCIC
|
|
$
|
99,228
|
|
|
$
|
90,610
|
|
APPCIC
|
|
$
|
621
|
|
|
$
|
489
|
|
Statutory capital and surplus
|
|
|
|
|
UPCIC
|
|
$
|
301,120
|
|
|
$
|
291,438
|
|
APPCIC
|
|
$
|
16,433
|
|
|
$
|
15,973
|
|
As of the dates in the table above, both UPCIC and APPCIC exceeded the minimum statutory capitalization requirement. UPCIC also met the capitalization requirements of the other states in which it is licensed as of December 31, 2019. UPCIC and APPCIC are also required to adhere to prescribed premium-to-capital surplus ratios and have met those requirements at such dates. 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, but permitted to be included in the 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.
The following table summarizes combined net income (loss) for UPCIC and APPCIC determined in accordance with statutory accounting practices for the periods presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
Combined net income (loss)
|
|
$
|
(49,917
|
)
|
|
$
|
3,118
|
|
|
$
|
35,650
|
|
Through PSI, the Insurance Entities’ parent company, UVE recorded contributions for the periods presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
Capital Contributions
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
UPCIC and APPCIC are required annually to comply with the NAIC risk-based capital (“RBC”) requirements. RBC requirements prescribe a method of measuring the amount of capital appropriate for an insurance company to support its overall business operations in light of its size and risk profile. NAIC RBC requirements are used by regulators to determine appropriate regulatory actions relating to insurers who show signs of a weak or deteriorating condition. As of December 31, 2019, based on calculations using the appropriate NAIC RBC formula, UPCIC’s and APPCIC’s reported total adjusted capital was in excess of the requirements.
The Insurance Entities are required by various state laws and regulations to maintain certain assets in depository accounts. The following table represents assets held by insurance regulators as of the dates presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2019
|
|
2018
|
Restricted cash and cash equivalents
|
|
$
|
2,635
|
|
|
$
|
2,635
|
|
Investments
|
|
$
|
3,419
|
|
|
$
|
3,876
|
|
NOTE 6 – PROPERTY AND EQUIPMENT
Property and equipment consisted of the following as of the dates presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2019
|
|
2018
|
Land
|
|
$
|
5,344
|
|
|
$
|
4,489
|
|
Building
|
|
24,091
|
|
|
24,027
|
|
Computers
|
|
7,885
|
|
|
7,390
|
|
Furniture
|
|
2,002
|
|
|
2,142
|
|
Automobiles and other vehicles
|
|
9,481
|
|
|
8,348
|
|
Software
|
|
2,835
|
|
|
2,689
|
|
Total
|
|
51,638
|
|
|
49,085
|
|
Less: Accumulated depreciation and amortization
|
|
(17,074
|
)
|
|
(14,094
|
)
|
Net of accumulated depreciation and amortization
|
|
34,564
|
|
|
34,991
|
|
Construction in progress
|
|
6,787
|
|
|
—
|
|
Property and equipment, net
|
|
$
|
41,351
|
|
|
$
|
34,991
|
|
Depreciation and amortization expense was $4.5 million, $4.4 million and $3.9 million for the years ended December 31, 2019, 2018 and 2017, respectively.
NOTE 7 – LONG-TERM DEBT
Long-term debt consists of the following as of the dates presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2019
|
|
2018
|
Surplus note
|
|
$
|
9,926
|
|
|
$
|
11,397
|
|
Surplus Note
On November 9, 2006, UPCIC entered into a $25.0 million surplus note with the State Board of Administration of Florida (the “SBA”) under Florida’s Insurance Capital Build-Up Incentive Program (the “ICBUI”). The surplus note has a twenty-year term and accrues interest, adjusted quarterly based on the 10-year Constant Maturity Treasury Index. The carrying amount of the surplus note is included in the statutory capital and surplus of UPCIC of approximately $9.9 million as of December 31, 2019.
The effective interest rate paid on the surplus note was 2.32%, 2.89% and 2.47% for the years ended December 31, 2019, 2018 and 2017, respectively. Any payment of principal or interest by UPCIC on the surplus note must be approved by the Florida Commissioner of the OIR. Quarterly principal payments of $368 thousand are due through 2026. Aggregate principal payments of approximately $1.5 million were made during each of the years ended December 31, 2019, 2018 and 2017.
UPCIC is in compliance with each of the loan’s covenants as implemented by rules promulgated by the SBA. An event of default will occur under the surplus note, as amended, if UPCIC: (i) defaults in the payment of the surplus note; (ii) fails to submit quarterly filings to the FLOIR; (iii) fails to maintain at least $50 million of surplus during the term of the surplus note, except for certain situations; (iv) misuses proceeds of the surplus note; (v) makes any misrepresentations in the application for the program; (vi) pays any dividend when principal or interest payments are past due under the surplus note; or (vii) fails to maintain a level of surplus and reinsurance sufficient to cover in excess of UPCIC’s 1-in-100 year probable maximum loss as determined by a hurricane loss model accepted by the Florida Commission on Hurricane Loss Projection Methodology as certified by the FLOIR annually. To avoid a penalty rate, UPCIC must maintain either a ratio of net written premium to surplus of 2:1 or a ratio of gross written premiums to surplus of 6:1 according to a calculation method set forth in the surplus note. As of December 31, 2019, UPCIC’s net written premium to surplus ratio and gross written premium to surplus ratio were in excess of the required minimums and, therefore, UPCIC is not subject to the penalty rate.
Maturities
The following table provides an estimate of principal payments to be made for the amounts due on the surplus note as of December 31, 2019 (in thousands):
|
|
|
|
|
2020
|
$
|
1,471
|
|
2021
|
1,471
|
|
2022
|
1,471
|
|
2023
|
1,471
|
|
2024
|
1,471
|
|
Thereafter
|
2,571
|
|
Total
|
$
|
9,926
|
|
Interest Expense
Interest expense was $0.2 million, $0.3 million, and $0.3 million for the years ended December 31, 2019, 2018 and 2017, respectively.
NOTE 8 – STOCKHOLDERS’ EQUITY
Cumulative Convertible Preferred Stock
As of December 31, 2019 and 2018, the Company had shares outstanding of Series A Preferred Stock. Each share of Series A Preferred Stock is convertible by the Company into shares of common stock.
The following table provides certain information for the convertible Series A preferred stock as of the dates presented (in thousands, except conversion factor):
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2019
|
|
2018
|
Shares issued and outstanding
|
|
10
|
|
|
10
|
|
Conversion factor
|
|
2.50
|
|
|
2.50
|
|
Common shares resulting if converted
|
|
25
|
|
|
25
|
|
The Series A Preferred Stock pays a cumulative dividend of $0.25 per share per quarter. The Company declared and paid aggregate dividends to the holder of record of the Company’s Series A Preferred Stock of $10 thousand for each of the years ended December 31, 2019 and 2018.
Common Stock
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
|
|
|
|
|
|
|
Dollar
|
Repurchased During the Year
|
|
Aggregate
|
|
Price per
|
|
|
|
|
Expiration
|
|
Amount
|
Ended December 31,
|
|
Purchase
|
|
Share
|
|
Plan
|
Date Authorized
|
|
Date
|
|
Authorized
|
2019
|
|
2018
|
|
Price
|
|
Repurchased
|
|
Completed
|
November 6, 2019
|
|
December 31, 2021
|
|
$
|
40,000
|
|
403,142
|
|
|
—
|
|
|
$
|
11,673
|
|
|
$
|
28.96
|
|
|
|
May 6, 2019
|
|
December 31, 2020
|
|
$
|
40,000
|
|
1,466,575
|
|
|
—
|
|
|
$
|
40,000
|
|
|
$
|
27.27
|
|
|
November 2019
|
December 12, 2018
|
|
May 31, 2020
|
|
$
|
20,000
|
|
468,108
|
|
|
138,234
|
|
|
$
|
20,000
|
|
|
$
|
32.98
|
|
|
May 2019
|
September 5, 2017
|
|
December 31, 2018
|
|
$
|
20,000
|
|
—
|
|
|
550,455
|
|
|
$
|
19,789
|
|
|
$
|
35.95
|
|
|
December 2018
|
Dividends Declared
The Company declared dividends on its outstanding shares of common stock to its shareholders of record as follows for the periods presented (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
Per Share
Amount
|
|
Aggregate
Amount (1)
|
|
Per Share
Amount
|
|
Aggregate
Amount (1)
|
|
Per Share
Amount
|
|
Aggregate
Amount (1)
|
First Quarter
|
|
$
|
0.16
|
|
|
$
|
5,572
|
|
|
$
|
0.14
|
|
|
$
|
4,904
|
|
|
$
|
0.14
|
|
|
$
|
4,932
|
|
Second Quarter
|
|
$
|
0.16
|
|
|
$
|
5,545
|
|
|
$
|
0.14
|
|
|
$
|
4,920
|
|
|
$
|
0.14
|
|
|
$
|
4,887
|
|
Third Quarter
|
|
$
|
0.16
|
|
|
$
|
5,476
|
|
|
$
|
0.16
|
|
|
$
|
5,592
|
|
|
$
|
0.14
|
|
|
$
|
4,830
|
|
Fourth Quarter
|
|
$
|
0.29
|
|
|
$
|
9,516
|
|
|
$
|
0.29
|
|
|
$
|
10,130
|
|
|
$
|
0.27
|
|
|
$
|
9,392
|
|
|
|
(1)
|
Includes dividend equivalents due to certain employees who hold performance share units or restricted share units which are subject to time-vesting conditions.
|
Applicable provisions of the Delaware General Corporation Law may affect the ability of the Company to declare and pay dividends on its Common Stock. In particular, pursuant to the Delaware General Corporation Law, a company may pay dividends out of its surplus, as defined, or out of its net profits, for the fiscal year in which the dividend is declared and/or the preceding year. Surplus is defined in the Delaware General Corporation Law to be the excess of net assets of the company over capital. Capital is defined to be the aggregate par value of shares issued. Moreover, the ability of the Company to pay dividends, if and when declared by its Board of Directors, may be restricted by regulatory limits on the amount of dividends, which the Insurance Entities are permitted to pay the Company.
Restrictions limiting the payment of dividends by UVE
UVE pays dividends to shareholders, which are funded by earnings on investments and distributions from the earnings of its consolidated subsidiaries. Generally, other than as disclosed above and in “—Note 7 (Long-Term Debt),” there are no restrictions for UVE limiting the payment of dividends. However, UVE’s ability to pay dividends to shareholders may be affected by restrictions on the ability of the Insurance Entities to pay dividends to UVE through PSI. See “—Note 5 (Insurance Operations),” for a discussion of these restrictions. There are no such restrictions for UVE’s non-insurance consolidated subsidiaries. UVE received distributions from the earnings of its non-insurance consolidated subsidiaries of $121.3 million, $96.6 million and $122.2 million during the years ended December 31, 2019, 2018 and 2017, respectively. UVE did not make any capital contributions to the to the Insurance Entities during the years ended December 31, 2019, 2018 and 2017. Statutory capital and surplus for UPCIC at December 31, 2019 includes a $30.0 million capital contribution funded in February 2020 by UVE through PSI, the Insurance Entities’ parent company, but permitted to be included in statutory capital and surplus at December 31, 2019 with the permission of the FLOIR under statutory accounting principles.
The Company prepares and files a consolidated federal tax return for UVE and its consolidated subsidiaries.
NOTE 9 – SHARE-BASED COMPENSATION
Equity Compensation Plan
Under the Company’s 2009 Omnibus Incentive Plan, as amended (the “Incentive Plan”), 2,352,920 shares remained reserved for issuance and were available for new awards under the Incentive Plan as of December 31, 2019.
Awards under the Incentive Plan may include incentive stock options, non-qualified stock option awards (“Stock Option”), stock appreciation rights, non-vested shares of common stock, restricted stock awards (“Restricted Stock”), performance share units (“PSUs”), restricted stock units (“RSUs”), and other share-based awards and cash-based incentive awards. Awards under the Incentive Plan may be granted to employees, directors, consultants or other persons providing services to the Company or its affiliates.
The following table provides certain information related to Stock Options, Restricted Stock, PSUs and RSUs during the year ended December 31, 2019 (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2019
|
|
|
Stock Options
|
|
Restricted Stock
|
|
Performance
Share Units
|
|
Restricted
Stock Units
|
|
|
Number of
Options (2)
|
|
Weighted
Average
Exercise
Price per
Share (1)
|
|
Aggregate
Intrinsic
Value
|
|
Weighted
Average
Remaining
Term
|
|
Number of Shares (2)
|
|
Weighted
Average
Grant Date
Fair Value
per Share (1)
|
|
Number
of Share
Units (2)
|
|
Weighted
Average
Grant Date
Fair Value
per Share Units (1)
|
|
Number of Share Units (2)
|
|
Weighted Average Grant Date Fair Value per Share Units (1)
|
Outstanding as of
December 31, 2018
|
|
1,776
|
|
|
$
|
25.51
|
|
|
|
|
|
|
63
|
|
|
$
|
34.38
|
|
|
220
|
|
|
$
|
30.10
|
|
|
—
|
|
|
$
|
—
|
|
Granted
|
|
400
|
|
|
31.52
|
|
|
|
|
|
|
50
|
|
|
30.73
|
|
|
77
|
|
|
33.47
|
|
|
50
|
|
|
26.47
|
|
Forfeited
|
|
—
|
|
|
—
|
|
|
|
|
|
|
n/a
|
|
|
n/a
|
|
|
n/a
|
|
|
n/a
|
|
|
n/a
|
|
|
n/a
|
|
Exercised
|
|
(151
|
)
|
|
17.67
|
|
|
|
|
|
|
n/a
|
|
|
n/a
|
|
|
n/a
|
|
|
n/a
|
|
|
n/a
|
|
|
n/a
|
|
Vested
|
|
n/a
|
|
|
n/a
|
|
|
|
|
|
|
(97
|
)
|
|
33.10
|
|
|
(148
|
)
|
|
29.81
|
|
|
(25
|
)
|
|
26.47
|
|
Expired
|
|
—
|
|
|
—
|
|
|
|
|
|
|
n/a
|
|
|
n/a
|
|
|
n/a
|
|
|
n/a
|
|
|
n/a
|
|
|
n/a
|
|
Outstanding as of
December 31, 2019
|
|
2,025
|
|
|
$
|
27.28
|
|
|
$
|
5,076
|
|
|
6.73
|
|
16
|
|
|
$
|
30.85
|
|
|
149
|
|
|
$
|
32.13
|
|
|
25
|
|
|
$
|
26.47
|
|
Exercisable as of
December 31, 2019
|
|
1,051
|
|
|
$
|
24.07
|
|
|
$
|
4,866
|
|
|
5.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Unless otherwise specified, such as in the case of the exercise of Stock Options, the per share prices were determined using the closing price of the Company’s Common Stock as quoted on the exchanges on which the Company was listed. Shares issued upon exercise of options represent original issuances in private transactions pursuant to Section 4(2) of the Securities Act of 1933, as amended or issuances under the Company’s Incentive Plan.
|
|
|
(2)
|
All shares outstanding as of December 31, 2019, are expected to vest.
|
The following table provides certain information in connection with the Company’s share-based compensation arrangements for the periods presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
Compensation expense:
|
|
|
|
|
|
|
Stock options
|
|
$
|
6,516
|
|
|
$
|
7,579
|
|
|
$
|
6,907
|
|
Restricted stock
|
|
3,104
|
|
|
609
|
|
|
—
|
|
Performance share units
|
|
2,508
|
|
|
4,598
|
|
|
3,608
|
|
Restricted stock units
|
|
880
|
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
13,008
|
|
|
$
|
12,786
|
|
|
$
|
10,515
|
|
Deferred tax benefits:
|
|
|
|
|
|
|
Stock options
|
|
$
|
1,522
|
|
|
$
|
1,877
|
|
|
$
|
2,640
|
|
Restricted stock
|
|
47
|
|
|
8
|
|
|
—
|
|
Performance share units
|
|
185
|
|
|
945
|
|
|
1,379
|
|
Restricted stock units
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
1,754
|
|
|
$
|
2,830
|
|
|
$
|
4,019
|
|
Realized tax benefits:
|
|
|
|
|
|
|
Stock options
|
|
$
|
577
|
|
|
$
|
7,957
|
|
|
$
|
5,831
|
|
Restricted stock
|
|
37
|
|
|
—
|
|
|
—
|
|
Performance share units
|
|
1,163
|
|
|
920
|
|
|
1,264
|
|
Restricted stock units
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
1,777
|
|
|
$
|
8,877
|
|
|
$
|
7,095
|
|
Excess tax benefits (shortfall):
|
|
|
|
|
|
|
Stock options
|
|
$
|
415
|
|
|
$
|
5,330
|
|
|
$
|
5,548
|
|
Restricted stock
|
|
(18
|
)
|
|
—
|
|
|
—
|
|
Performance share units
|
|
244
|
|
|
97
|
|
|
245
|
|
Restricted stock units
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
641
|
|
|
$
|
5,427
|
|
|
$
|
5,793
|
|
Weighted average fair value per option or share:
|
|
|
|
|
|
|
Stock option grants
|
|
$
|
9.82
|
|
|
$
|
11.74
|
|
|
$
|
10.18
|
|
Restricted stock grants
|
|
$
|
30.73
|
|
|
$
|
33.64
|
|
|
$
|
—
|
|
Performance share unit grants
|
|
$
|
33.47
|
|
|
$
|
32.51
|
|
|
$
|
27.20
|
|
Restricted stock unit grants
|
|
$
|
26.47
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Intrinsic value of options exercised
|
|
$
|
2,343
|
|
|
$
|
32,217
|
|
|
$
|
15,256
|
|
Fair value of restricted stock vested
|
|
$
|
2,783
|
|
|
$
|
632
|
|
|
$
|
—
|
|
Fair value of performance share units vested
|
|
$
|
5,520
|
|
|
$
|
3,726
|
|
|
$
|
3,307
|
|
Fair value of restricted stock units vested
|
|
$
|
657
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Cash received for strike price and tax withholdings
|
|
$
|
238
|
|
|
$
|
120
|
|
|
$
|
—
|
|
Shares acquired through cashless exercise (1)
|
|
186
|
|
|
1,361
|
|
|
491
|
|
Value of shares acquired through cashless exercise (1)
|
|
$
|
6,133
|
|
|
$
|
49,199
|
|
|
$
|
12,808
|
|
|
|
(1)
|
All shares acquired represent shares tendered to cover the strike price for options and tax withholdings on the intrinsic value of Stock Options exercised, Restricted Stock vested, PSUs vested or RSUs vested. These shares have been canceled by the Company.
|
The following table provides the amount of unrecognized compensation expense as of the most recent balance sheet date and the weighted average period over which those expenses will be recorded for Stock Options, Restricted Stock, PSUs and RSUs (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
|
Stock
Options
|
|
Restricted Stock
|
|
Performance
Share Units
|
|
Restricted
Stock Units
|
Unrecognized expense
|
|
$
|
4,309
|
|
|
$
|
514
|
|
|
$
|
1,242
|
|
|
$
|
443
|
|
Weighted average remaining years
|
|
1.53
|
|
|
1.00
|
|
|
1.40
|
|
|
0.67
|
Stock Options
Stock Options granted by the Company generally expire between five to ten years from the grant date and generally vest over a one- to three-year service period commencing on the grant date.
The Company used the modified Black-Scholes model to estimate the fair value of employee Stock Options on the date of grant utilizing the assumptions noted below. The risk-free rate is based on the U.S. Treasury bill yield curve in effect at the time of grant for the expected term of the option. The expected term of options granted represents the period of time that the options are expected to be outstanding. Expected volatilities are based on historical volatilities of our Common Stock. The dividend yield was based on expected dividends at the time of grant.
The following table provides the assumptions utilized in the Black-Scholes model for Stock Options granted during the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
Weighted-average risk-free interest rate
|
|
2.44
|
%
|
|
2.69
|
%
|
|
1.94
|
%
|
Expected term of option in years
|
|
6.00
|
|
|
6.00
|
|
|
5.84
|
|
Weighted-average volatility
|
|
38.1
|
%
|
|
40.2
|
%
|
|
45.1
|
%
|
Dividend yield
|
|
2.4
|
%
|
|
1.7
|
%
|
|
2.0
|
%
|
Weighted average grant date fair value per share
|
|
$
|
9.82
|
|
|
$
|
11.74
|
|
|
$
|
10.18
|
|
Restricted Stock, Performance Share Units and Restricted Stock Units
Restricted Stock, Performance Share Units and Restricted Stock Units are awarded to certain employees in consideration for services rendered pursuant to terms of employment agreements or to provide those employees a continued incentive to share in the success of the Company. Restricted Stock generally vests over a one- to three-year service period commencing on the grant date. Each performance share unit has a value equal to one share of common stock and generally vests over a three-year service period commencing on the grant date. Each restricted stock unit has a value equal to one share of common stock and generally vests over a one-year service period commencing on the grant date.
NOTE 10 – EMPLOYEE BENEFIT PLAN
Effective January 1, 2009, the Company adopted a qualified retirement plan covering substantially all employees. It is designed to help the employees meet their financial needs during their retirement years. Eligibility for participation in the plan is generally based on employee’s date of hire or on completion of a specified period of service. Employer contributions to this plan are made in cash.
The plan titled the “Universal Property & Casualty 401(k) Profit Sharing Plan” (the “401(k) Plan”) is a defined contribution plan that allows employees to defer compensation through contributions to the 401(k) Plan. The contributions are invested on the employees’ behalf, and the benefits paid to employees are based on contributions and any earnings or losses. The 401(k) Plan includes a Company contribution of 100 percent of each eligible participant’s contribution up to a maximum of five percent of the participant’s compensation during the 401(k) Plan year. The Company may make additional profit-sharing contributions. However, no additional profit-sharing contribution was made during the years ended December 31, 2019, 2018 and 2017.
The Company accrued for aggregate contributions of approximately $2.2 million, $1.8 million and $1.6 million to the 401(k) Plan during the years ended December 31, 2019, 2018 and 2017, respectively.
NOTE 11 – RELATED PARTY TRANSACTIONS
There were no related party transactions for the years ended December 31, 2019, 2018 and 2017.
NOTE 12 – INCOME TAXES
Significant components of the income tax provision are as follows for the periods presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
Current:
|
|
|
|
|
|
|
Federal
|
|
$
|
12,328
|
|
|
$
|
31,981
|
|
|
$
|
53,962
|
|
State and local
|
|
2,703
|
|
|
7,581
|
|
|
8,278
|
|
Total current expense
|
|
15,031
|
|
|
39,562
|
|
|
62,240
|
|
Deferred:
|
|
|
|
|
|
|
Federal
|
|
1,622
|
|
|
(3,487
|
)
|
|
851
|
|
State and local
|
|
350
|
|
|
(253
|
)
|
|
458
|
|
Total deferred expense (benefit)
|
|
1,972
|
|
|
(3,740
|
)
|
|
1,309
|
|
Income tax expense
|
|
$
|
17,003
|
|
|
$
|
35,822
|
|
|
$
|
63,549
|
|
The following table reconciles the statutory federal income tax rate to the Company’s effective income tax rate for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
Expected provision at federal statutory tax rate
|
|
21.0
|
%
|
|
21.0
|
%
|
|
35.0
|
%
|
Increases (decreases) resulting from:
|
|
|
|
|
|
|
State income tax, net of federal tax benefit
|
|
3.7
|
%
|
|
3.8
|
%
|
|
3.2
|
%
|
Effect of change in tax rate
|
|
0.3
|
%
|
|
—
|
|
|
2.8
|
%
|
Disallowed meals & expenses
|
|
0.7
|
%
|
|
0.3
|
%
|
|
0.4
|
%
|
Disallowed compensation
|
|
3.2
|
%
|
|
1.3
|
%
|
|
0.4
|
%
|
Excess tax benefit
|
|
(1.0
|
)%
|
|
(3.5
|
)%
|
|
(3.4
|
)%
|
Other, net
|
|
(1.1
|
)%
|
|
0.5
|
%
|
|
(1.1
|
)%
|
Total income tax expense (benefit)
|
|
26.8
|
%
|
|
23.4
|
%
|
|
37.3
|
%
|
The Company recognized excess income tax benefit of $0.6 million and $5.4 million from stock-based compensation awards that vested and/or were exercised during the years ended December 31, 2019 and 2018, respectively. Excess income tax benefits are reflected as an income tax benefit in the consolidated statements of income as a component of the provision for income taxes.
Changes in federal tax law have affected the Company’s balances of deferred income tax assets and liabilities. On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (“Tax Act”) was signed into law. The Tax Act amended the definition of annual rate and the computational rules for loss payment patterns. The Tax Act also provided transitional rules for the application of the amendments in the first taxable year beginning after December 31, 2017. Under the transitional rules, the Company is required to revalue discounted loss reserves under the new computational rules of the Tax Act and include in income that adjustment over an eight-year period in gross income of the Company. The effect of this change in tax law resulted in an immaterial adjustment to income tax in 2019 and 2018.
Additional factors giving rise to the differences in the Company’s effective tax rate, when compared to statutory rates in the current and prior years, include non-deductible executive compensation, tax-exempt interest income, and the current expansion outside of Florida into non-income taxing state jurisdictions.
The Company accounts for income taxes using a balance sheet approach. As of December 31, 2019 and 2018, the significant components of the Company’s deferred income taxes consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2019
|
|
2018
|
Deferred income tax assets:
|
|
|
|
|
Unearned premiums
|
|
$
|
23,925
|
|
|
$
|
22,700
|
|
Advanced premiums
|
|
1,493
|
|
|
1,269
|
|
Unpaid losses and LAE
|
|
1,660
|
|
|
820
|
|
Share-based compensation
|
|
3,837
|
|
|
3,237
|
|
Accrued wages
|
|
189
|
|
|
332
|
|
Allowance for uncollectible receivables
|
|
212
|
|
|
203
|
|
Additional tax basis of securities
|
|
33
|
|
|
33
|
|
Capital loss carryforwards
|
|
3,143
|
|
|
1,298
|
|
Unrealized gain/loss
|
|
—
|
|
|
4,246
|
|
Other comprehensive income
|
|
—
|
|
|
4,086
|
|
Other
|
|
—
|
|
|
9
|
|
Total deferred income tax assets
|
|
34,492
|
|
|
38,233
|
|
Valuation allowance
|
|
—
|
|
|
(781
|
)
|
Deferred income tax assets, net of valuation allowance
|
|
34,492
|
|
|
37,452
|
|
Deferred income tax liabilities:
|
|
|
|
|
Deferred policy acquisition costs, net
|
|
(22,613
|
)
|
|
(20,944
|
)
|
Prepaid expenses
|
|
—
|
|
|
(677
|
)
|
Fixed assets
|
|
(959
|
)
|
|
(992
|
)
|
Unrealized gain/loss
|
|
(1,480
|
)
|
|
—
|
|
Other comprehensive income
|
|
(5,197
|
)
|
|
—
|
|
Unpaid loss and LAE transition adjustment
|
|
(563
|
)
|
|
(78
|
)
|
Other
|
|
(329
|
)
|
|
(175
|
)
|
Total deferred income tax liabilities
|
|
(31,141
|
)
|
|
(22,866
|
)
|
Net deferred income tax asset
|
|
$
|
3,351
|
|
|
$
|
14,586
|
|
At each balance sheet date, management assesses the need to establish a valuation allowance that reduces deferred income tax assets when it is more likely than not that all, or some portion, of the deferred income tax assets will not be realized. A valuation allowance would be based on all available information including the Company’s assessment of uncertain tax positions and projections of future taxable income and capital gain from each tax-paying component in each jurisdiction, principally derived from business plans and available tax planning strategies.
Management 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 determining the manner in which available evidence should be weighted, management has determined that the need for a valuation allowance is not warranted as of December 31, 2019.
The Company has adopted Accounting for Uncertainty in Income Taxes (“ASC 740”) which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. ASC 740 provides a threshold for the financial statement recognition and measurement of an income tax position taken or expected to be taken in an income tax return. The Company’s policy is to classify interest and penalties related to unrecognized tax positions, if any, in its provision for income taxes. As of December 31, 2019, 2018 and 2017, the Company determined that no uncertain tax liabilities are required.
The Company filed a consolidated federal income tax return for the tax years ended December 31, 2018, 2017 and 2016 and intends to file the same for the tax year ended December 31, 2019. The tax allocation agreement between the Company and the Insurance Entities provides that they will incur income taxes based on a computation of taxes as if they were stand-alone taxpayers. The computations are made utilizing the financial statements of the Insurance Entities prepared on a statutory basis of accounting and prior to consolidating entries which include the conversion of certain balances and transactions of the statutory financial statements to a U.S. GAAP basis.
The Company files its income tax returns as prescribed by the tax laws of the jurisdictions in which it operates. During the 2018 tax year, the Company’s 2015 tax return was subject to audit by the Internal Revenue Service. The audit subsequently concluded during the 2018 tax year with no change to the income tax return. The Company’s 2016 through 2018 tax years are still subject to examination by the Internal Revenue Service and various tax years remain open to examination in certain state jurisdictions.
NOTE 13 – EARNINGS PER SHARE
Basic earnings per share (“EPS”) is computed based on the weighted average number of common shares outstanding for the period, excluding any dilutive common share equivalents. Diluted EPS reflects the potential dilution resulting from exercises of stock options, vesting of performance share units, vesting of restricted stock units, vesting of restricted stock, and conversion of preferred stock.
The following table reconciles the numerator (i.e., income) and denominator (i.e., shares) of the basic and diluted earnings per share computations for the periods presented (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
Numerator for EPS:
|
|
|
|
|
|
|
Net income
|
|
$
|
46,514
|
|
|
$
|
117,051
|
|
|
$
|
106,935
|
|
Less: Preferred stock dividends
|
|
(10
|
)
|
|
(10
|
)
|
|
(10
|
)
|
Income available to common stockholders
|
|
$
|
46,504
|
|
|
$
|
117,041
|
|
|
$
|
106,925
|
|
Denominator for EPS:
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
33,893
|
|
|
34,856
|
|
|
34,841
|
|
Plus: Assumed conversion of share-based compensation (1)
|
|
315
|
|
|
905
|
|
|
943
|
|
Assumed conversion of preferred stock
|
|
25
|
|
|
25
|
|
|
25
|
|
Weighted average diluted common shares outstanding
|
|
34,233
|
|
|
35,786
|
|
|
35,809
|
|
Basic earnings per common share
|
|
$
|
1.37
|
|
|
$
|
3.36
|
|
|
$
|
3.07
|
|
Diluted earnings per common share
|
|
$
|
1.36
|
|
|
$
|
3.27
|
|
|
$
|
2.99
|
|
Weighted average number of antidilutive shares
|
|
773
|
|
|
445
|
|
|
1,504
|
|
|
|
(1)
|
Represents the dilutive effect of unexercised stock options, unvested performance share units, unvested restricted stock units and unvested restricted stock.
|
NOTE 14 – OTHER COMPREHENSIVE INCOME (LOSS)
The following table provides the components of other comprehensive income (loss) on a pretax and after-tax basis for the periods presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
Pre-tax
|
|
Tax
|
|
After-tax
|
|
Pre-tax
|
|
Tax
|
|
After-tax
|
|
Pre-tax
|
|
Tax
|
|
After-tax
|
Net changes related to
available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains (losses)
arising during the period
|
|
$
|
38,129
|
|
|
$
|
9,384
|
|
|
$
|
28,745
|
|
|
$
|
(9,111
|
)
|
|
$
|
(2,254
|
)
|
|
$
|
(6,857
|
)
|
|
$
|
2,773
|
|
|
$
|
1,058
|
|
|
$
|
1,715
|
|
Less: Reclassification adjustments
(gains) losses realized in
net income
|
|
(492
|
)
|
|
(121
|
)
|
|
(371
|
)
|
|
2,803
|
|
|
694
|
|
|
2,109
|
|
|
(2,570
|
)
|
|
(982
|
)
|
|
(1,588
|
)
|
Other comprehensive income
(loss)
|
|
37,637
|
|
|
9,263
|
|
|
28,374
|
|
|
(6,308
|
)
|
|
(1,560
|
)
|
|
(4,748
|
)
|
|
203
|
|
|
76
|
|
|
127
|
|
Reclassification adjustments to
retained earnings (1)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,830
|
|
|
2,811
|
|
|
3,019
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Change in accumulated other
comprehensive income (loss)
|
|
$
|
37,637
|
|
|
$
|
9,263
|
|
|
$
|
28,374
|
|
|
$
|
(478
|
)
|
|
$
|
1,251
|
|
|
$
|
(1,729
|
)
|
|
$
|
203
|
|
|
$
|
76
|
|
|
$
|
127
|
|
(1) Effective January 1, 2018, the Company adopted ASU 2018-02 and ASU 2016-01 and this amount represents reclassifications to retained earnings associated with the disproportional income tax effects of the Tax Act on items within accumulated other comprehensive income (“AOCI”) and unrealized losses in AOCI relating to available-for-sale equity security investments, respectively.
The following table provides the reclassifications out of accumulated other comprehensive income for the periods presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts Reclassified from
Accumulated Other
Comprehensive Income
|
|
|
Details about Accumulated Other
|
|
Years Ended December 31,
|
|
Affected Line Item in the Statement
|
Comprehensive Income Components
|
|
2019
|
|
2018
|
|
2017
|
|
Where Net Income is Presented
|
Unrealized gains (losses) on
available-for-sale debt securities
|
|
|
|
|
|
|
|
|
|
|
$
|
492
|
|
|
$
|
(2,803
|
)
|
|
$
|
2,570
|
|
|
Net realized gains (losses) on investments
|
|
|
(121
|
)
|
|
694
|
|
|
(982
|
)
|
|
Income taxes, current
|
Total reclassification for the period
|
|
$
|
371
|
|
|
$
|
(2,109
|
)
|
|
$
|
1,588
|
|
|
Net of tax
|
|
|
|
|
|
|
|
|
|
NOTE 15 – COMMITMENTS AND CONTINGENCIES
Obligations under Multi-Year Reinsurance Contracts
The Company purchases reinsurance coverage to protect our capital and to limit our losses when major events occur. Our reinsurance commitments run from June 1 of the current year to May 31 of the following year. Certain of our reinsurance agreements are for periods longer than one year. Amounts payable for coverage during the current June 1st to May 31st contract period are recorded as “Reinsurance Payable” in the financial statements. Multi-year contract commitments for future years will be recorded at the commencement of the coverage period. Amounts payable for future reinsurance contract years that the Company is obligated to pay are: (1) $118.9 million in 2020 and (2) $84.3 million in 2021.
Litigation
Lawsuits are filed against the Company from time to time. Many of these lawsuits involve claims under policies that we underwrite and reserve for as an insurer. We are also involved in various other legal proceedings and litigation unrelated to claims under our policies that arise in the ordinary course of business operations. Management believes that any liabilities that may arise as a result of these legal matters will not have a material adverse effect on our financial condition or results of operations. The Company contests liability and/or the amount of damages as appropriate in each pending matter.
In accordance with applicable accounting guidance, the Company establishes an accrued liability for legal matters when those matters present loss contingencies that are both probable and estimable.
Legal proceedings are subject to many uncertain factors that generally cannot be predicted with certainty, and the Company may be exposed to losses in excess of any amounts accrued. The Company currently estimates that the reasonably possible losses for legal proceedings, whether in excess of a related accrued liability or where there is no accrued liability, and for which the Company is able to estimate a possible loss, are immaterial. This represents management’s estimate of possible loss with respect to these matters and is based on currently available information. These estimates of possible loss do not represent our maximum loss exposure, and actual results may vary significantly from current estimates.
NOTE 16 – FAIR VALUE MEASUREMENTS
U.S. GAAP defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. U.S. GAAP describes three approaches to measuring the fair value of assets and liabilities: the market approach, the income approach and the cost approach. Each approach includes multiple valuation techniques. U.S. GAAP does not prescribe which valuation technique should be used when measuring fair value, but does establish a fair value hierarchy that prioritizes the inputs used in applying the various techniques. Inputs broadly refer to the assumptions that market participants use to make pricing decisions, including assumptions about risk. Level 1 inputs are given the highest priority in the hierarchy while Level 3 inputs are given the lowest priority. Assets and liabilities carried at fair value are classified in one of the following three categories based on the nature of the inputs to the valuation technique used:
|
|
•
|
Level 1 – Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities in active markets as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
|
|
|
•
|
Level 2 – Observable market-based inputs or unobservable inputs that are corroborated by market data.
|
|
|
•
|
Level 3 – Unobservable inputs that are not corroborated by market data. These inputs reflect management’s best estimate of fair value using its own assumptions about the assumptions a market participant would use in pricing the asset or liability.
|
Summary of significant valuation techniques for assets measured at fair value on a recurring basis
Level 1
Common stock: Comprise actively traded, exchange-listed U.S. and international equity securities. Valuation is based on unadjusted quoted prices for identical assets in active markets that the Company can access.
Mutual funds: Comprise actively traded funds. Valuation is based on daily quoted net asset values for identical assets in active markets that the Company can access.
Level 2
U.S. government obligations and agencies: Comprise U.S. Treasury Bills or Notes or U.S. Treasury Inflation Protected Securities. The primary inputs to the valuation include quoted prices for identical assets in inactive markets or similar assets in active or inactive markets, contractual cash flows, benchmark yields and credit spreads.
Corporate bonds: Comprise investment-grade fixed income securities. The primary inputs to the valuation include quoted prices for identical assets in inactive markets or similar assets in active or inactive markets, contractual cash flows, benchmark yields and credit spreads.
Mortgage-backed and asset-backed securities: Comprise securities that are collateralized by mortgage obligations and other assets. The primary inputs to the valuation include quoted prices for identical assets in inactive markets or similar assets in active or inactive markets, contractual cash flows, benchmark yields, collateral performance and credit spreads.
Municipal bonds: Comprise fixed income securities issued by a state, municipality or county. The primary inputs to the valuation include quoted prices for identical assets in inactive markets or similar assets in active or inactive markets, contractual cash flows, benchmark yields and credit spreads.
Redeemable preferred stock: Comprise preferred stock securities that are redeemable. The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active.
As required by U.S. GAAP, assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the placement of the asset or liability within the fair value hierarchy levels.
The following tables set forth by level within the fair value hierarchy the Company’s assets measured at fair value on a recurring basis as of the dates presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
|
|
|
As of December 31, 2019
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Available-For-Sale Debt Securities:
|
|
|
|
|
|
|
|
|
U.S. government obligations and agencies
|
|
$
|
—
|
|
|
$
|
54,364
|
|
|
$
|
—
|
|
|
$
|
54,364
|
|
Corporate bonds
|
|
—
|
|
|
476,218
|
|
|
—
|
|
|
476,218
|
|
Mortgage-backed and asset-backed securities
|
|
—
|
|
|
311,079
|
|
|
—
|
|
|
311,079
|
|
Municipal bonds
|
|
—
|
|
|
3,496
|
|
|
—
|
|
|
3,496
|
|
Redeemable preferred stock
|
|
—
|
|
|
10,127
|
|
|
—
|
|
|
10,127
|
|
Equity Securities:
|
|
|
|
|
|
|
|
|
Common stock
|
|
2,377
|
|
|
—
|
|
|
—
|
|
|
2,377
|
|
Mutual funds
|
|
41,340
|
|
|
—
|
|
|
—
|
|
|
41,340
|
|
Total assets accounted for at fair value
|
|
$
|
43,717
|
|
|
$
|
855,284
|
|
|
$
|
—
|
|
|
$
|
899,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
|
|
|
As of December 31, 2018
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Available-For-Sale Debt Securities:
|
|
|
|
|
|
|
|
|
U.S. government obligations and agencies
|
|
$
|
—
|
|
|
$
|
66,637
|
|
|
$
|
—
|
|
|
$
|
66,637
|
|
Corporate bonds
|
|
—
|
|
|
428,865
|
|
|
—
|
|
|
428,865
|
|
Mortgage-backed and asset-backed securities
|
|
—
|
|
|
309,597
|
|
|
—
|
|
|
309,597
|
|
Municipal bonds
|
|
—
|
|
|
3,362
|
|
|
—
|
|
|
3,362
|
|
Redeemable preferred stock
|
|
—
|
|
|
11,977
|
|
|
—
|
|
|
11,977
|
|
Equity Securities:
|
|
|
|
|
|
|
|
|
Common stock
|
|
15,564
|
|
|
—
|
|
|
—
|
|
|
15,564
|
|
Mutual funds
|
|
47,713
|
|
|
—
|
|
|
—
|
|
|
47,713
|
|
Total assets accounted for at fair value
|
|
$
|
63,277
|
|
|
$
|
820,438
|
|
|
$
|
—
|
|
|
$
|
883,715
|
|
The Company utilizes third-party independent pricing services that provide a price quote for each available-for-sale debt security and equity security. Management reviews the methodology used by the pricing services. If management believes that the price used by the pricing service does not reflect an orderly transaction between participants, management will use an alternative valuation methodology. There were no adjustments made by the Company to the prices obtained from the independent pricing source for any available-for-sale debt security or equity securities included in the tables above.
The following table summarizes the carrying value and estimated fair values of the Company’s financial instruments not carried at fair value as of the dates presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2019
|
|
2018
|
|
|
Carrying
Value
|
|
(Level 3)
Estimated
Fair Value
|
|
Carrying
Value
|
|
(Level 3)
Estimated
Fair Value
|
Liabilities (debt):
|
|
|
|
|
|
|
|
|
Surplus note
|
|
$
|
9,926
|
|
|
$
|
9,365
|
|
|
$
|
11,397
|
|
|
$
|
10,125
|
|
Level 3
Long-term debt: The fair value of the surplus note was determined by management from the expected cash flows discounted using the interest rate quoted by the holder. The SBA is the holder of the surplus note and the quoted interest rate is below prevailing rates quoted by private lending institutions. However, as the Company’s use of funds from the surplus note is limited by the terms of the agreement, the Company has determined the interest rate quoted by the SBA to be appropriate for purposes of establishing the fair value of the note.
NOTE 17 – LIABILITY FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
Set forth in the following tables is information about unpaid losses and loss adjustment expenses as of December 31, 2019, net of reinsurance and estimated subrogation, as well as cumulative claim counts and the total of incurred-but-not-reported liabilities plus expected development on reported claims included within the liability for unpaid losses and LAE (in thousands).
The liability for losses and loss adjustment expenses includes an amount determined from loss reports and individual cases and an amount, based on past experience, for losses incurred but not reported. Such liabilities are necessarily based on estimates and, although management believes that the amount is adequate, the ultimate liability may be in excess of or less than the amounts provided. The methods for making such estimates and for establishing the resulting liability are continually reviewed, and any adjustments are reflected in earnings currently. The reserve for losses and loss adjustment expenses is reported net of receivables for salvage and subrogation of approximately $73 million and $99 million at December 31, 2019 and 2018, respectively.
The information about unpaid losses and loss adjustment expenses for the years ended December 31, 2015 to 2017, is presented as supplementary information and is unaudited.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Total of Incurred-but-Not-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plus Expected
|
|
|
Incurred Loss and Defense & Cost Containment Expenses, Net of Reinsurance
|
|
Development (Redundancy)
|
|
Cumulative Number
|
For the Years Ended December 31,
|
|
on Reported Claims
|
|
of Reported Claims
|
Accident Year
|
|
2015
|
|
2016
|
|
2017
|
|
2018
|
|
2019
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
2015
|
|
$
|
170,381
|
|
|
$
|
187,431
|
|
|
$
|
194,600
|
|
|
$
|
213,860
|
|
|
$
|
225,964
|
|
|
$
|
(763
|
)
|
|
26,785
|
|
2016
|
|
|
|
269,814
|
|
|
286,252
|
|
|
324,577
|
|
|
351,487
|
|
|
719
|
|
|
40,504
|
|
2017
|
|
|
|
|
|
303,944
|
|
|
334,734
|
|
|
375,123
|
|
|
5,547
|
|
|
127,129
|
|
2018
|
|
|
|
|
|
|
|
334,368
|
|
|
335,946
|
|
|
2,546
|
|
|
53,899
|
|
2019
|
|
|
|
|
|
|
|
|
|
446,419
|
|
|
67,638
|
|
|
46,079
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$
|
1,734,939
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Paid Loss and Defense & Cost Containment Expenses, Net of Reinsurance
|
For the Years Ended December 31,
|
Accident Year
|
|
2015
|
|
2016
|
|
2017
|
|
2018
|
|
2019
|
|
|
(Unaudited)
|
|
|
2015
|
|
$
|
115,328
|
|
|
$
|
191,481
|
|
|
$
|
208,592
|
|
|
$
|
219,941
|
|
|
$
|
226,550
|
|
2016
|
|
|
|
204,122
|
|
|
297,374
|
|
|
328,286
|
|
|
349,837
|
|
2017
|
|
|
|
|
|
205,200
|
|
|
328,105
|
|
|
365,588
|
|
2018
|
|
|
|
|
|
|
|
253,008
|
|
|
327,310
|
|
2019
|
|
|
|
|
|
|
|
|
|
335,991
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,605,276
|
|
All outstanding liabilities before 2015, net of reinsurance
|
|
|
(208
|
)
|
Liabilities for claims and claim adjustment expenses, net of reinsurance
|
|
|
$
|
129,455
|
|
Set forth is the following reconciliation of the net incurred and paid claims development tables to the liability for unpaid losses and LAE in the consolidated Balance Sheet as of December 31, 2019 (in thousands):
|
|
|
|
|
|
December 31, 2019
|
Liabilities for unpaid claims and claim adjustment expenses, net of reinsurance
|
$
|
129,455
|
|
Reinsurance recoverable on unpaid claims
|
123,221
|
|
Liabilities for adjusting and other claim payments
|
15,084
|
|
Total gross liability for unpaid claims and claim adjustment expense
|
$
|
267,760
|
|
Set forth is the supplementary information about average historical claims duration as of December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
|
Years
|
|
1
|
|
2
|
|
3
|
|
4
|
|
5
|
|
|
61.1
|
%
|
|
19.4
|
%
|
|
9.7
|
%
|
|
4.7
|
%
|
|
2.5
|
%
|
Set forth in the following table is the change in liability for unpaid losses and LAE for the periods presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
Balance at beginning of year
|
|
$
|
472,829
|
|
|
$
|
248,425
|
|
|
$
|
58,494
|
|
Less: Reinsurance recoverable
|
|
(393,365
|
)
|
|
(182,405
|
)
|
|
(106
|
)
|
Net balance at beginning of period
|
|
79,464
|
|
|
66,020
|
|
|
58,388
|
|
Incurred (recovered) related to:
|
|
|
|
|
|
|
|
|
|
Current year
|
|
515,338
|
|
|
314,933
|
|
|
322,929
|
|
Prior years
|
|
88,068
|
|
|
99,522
|
|
|
27,499
|
|
Total incurred
|
|
603,406
|
|
|
414,455
|
|
|
350,428
|
|
Paid related to:
|
|
|
|
|
|
|
|
|
|
Current year
|
|
391,161
|
|
|
221,708
|
|
|
215,274
|
|
Prior years
|
|
147,170
|
|
|
179,303
|
|
|
127,522
|
|
Total paid
|
|
538,331
|
|
|
401,011
|
|
|
342,796
|
|
Net balance at end of period
|
|
144,539
|
|
|
79,464
|
|
|
66,020
|
|
Plus: Reinsurance recoverable
|
|
123,221
|
|
|
393,365
|
|
|
182,405
|
|
Balance at end of year
|
|
$
|
267,760
|
|
|
$
|
472,829
|
|
|
$
|
248,425
|
|
During 2019, the liability for unpaid losses and loss adjustment expenses, prior to reinsurance, decreased by $205.1 million from $472.8 million as of December 31, 2018 to $267.8 million as of December 31, 2019. This decrease was primarily a result of settlement of losses and loss adjustment reserves associated with Hurricane Irma, Florence, Matthew and Michael. During 2019, losses and loss adjustment expenses totaling $469.9 million, for Hurricane Irma, Michael and Florence, were substantially ceded to reinsurers resulting in a net impact of $4.5 million after reinsurance. Other factors leading to the increases in incurred losses during 2019 include the increase in our underlying exposure due to increased writings in Florida and other states, as well as increases in the estimated current accident year loss ratio, as well as prior year adverse development. Prior years’ adverse development, net of reinsurance was $88.1 million in 2019 which includes a reduction of $40.7 million in our estimated recovery from subrogation and adverse claim development of $47.4 million on prior years reserves. Prior years adverse development, net of reinsurance, was $88.1 million, $99.5 million and $27.5 million during the years ended December 31, 2019, 2018 and 2017, respectively. The Company recorded adverse development on prior years’ loss estimates as claims from prior years’ continue to be resolved at higher-than-anticipated values notwithstanding prior efforts to review and re-estimate those amounts. The Company continues to experience increased costs for losses and loss adjustment expense 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. The adverse conditions in the Florida personal residential insurance market can be attributed largely to the proliferation of represented claims, involving both public adjusters and attorneys, as well as by aggressive estimates and demands put forth by remediation and repair companies. Active solicitation of personal residential claims in Florida has adversely affected both the frequency and severity of losses as otherwise understood based on historical patterns and patterns experienced in other states.
Basis for estimating liabilities for unpaid claims and claim adjustment expenses
The Company establishes a liability to provide for the estimated unpaid portion of the costs of paying losses and LAE under insurance policies the Insurance Entities have issued. Predominately all of the Company’s claims relate to the Company’s core product, homeowners insurance and the various policy forms in which it is available. The liability for unpaid losses and LAE consists of the following:
|
|
•
|
Case reserves, which are the reserves established by the claims examiner on reported claims.
|
|
|
•
|
Incurred but not reported (“IBNR”), which are anticipated losses expected to be reported to the Company and development of reported claims, including anticipated recoveries from either subrogation and ceded reinsurance. Ceded reinsurance is reported separately as reinsurance recoverable.
|
|
|
•
|
LAE, which are the estimated expenses associated with the settlement of case reserves, and IBNR.
|
Underwriting results are significantly influenced by the Company’s practices in establishing its estimated liability for unpaid losses and LAE. The liability is an estimate of amounts necessary to ultimately settle all current and future claims and LAE on losses occurring during the policy coverage period each year as of the financial statement date.
Characteristics of Reserves
The liability for unpaid losses and LAE, also known as reserves, is established based on estimates of the ultimate future amounts needed to settle claims, either known or unknown, less losses and LAE that have been paid to date. Historically, claims are typically reported promptly with relatively little reporting lag between the date of occurrence and the date the loss is reported. Certain number of claims are not known immediately after a loss and insureds are delayed at reporting those losses to us. In the current Florida market, an increased number of claims are reported well after the purported dates of loss. Reporting delays at times are material. In addition, claims which the Insurance Entities believed were settled often are reopened based on newly reported claim demands from our insureds as a result of third party representation. The Company is seeing increased litigation and changes to consumer behavior over the reporting and settlement process especially with Florida-based claims. The Company’s claim settlement data suggests that the Company’s typical insurance claims have an average settlement time of less than one year from the reported date unless delayed by some form of litigation or dispute.
Reserves are estimated for both reported and unreported claims, and include estimates of all expenses associated with processing and settling all incurred claims, including consideration for anticipated subrogation recoveries that will offset loss payments. The Company updates reserve estimates periodically as new information becomes available or as events emerge that may affect the resolution of unsettled claims. Changes in prior year reserve estimates (reserve re-estimates), which may be material, are determined by comparing updated estimates of ultimate losses to prior estimates, and the differences are recorded as losses and LAE in the Consolidated Statements of Income in the period such changes are determined. Estimating the ultimate cost of losses and LAE is an inherently uncertain and complex process involving a high degree of subjective judgment and is subject to the interpretation and usage of numerous uncertain variables as discussed further below.
Reserves for losses and LAE are determined in three primary sectors. These sectors are (1) the estimation of reserves for Florida non-catastrophe losses, (2) hurricane losses, and (3) non-Florida non-catastrophe losses and any other losses. Evaluations are performed for gross loss, LAE and subrogation separately, and on a net and direct basis for each sector. The analyses for non-catastrophe losses are further separated into data groupings of like exposure or type of loss. These groups are property damage on homeowner policy forms HO-3 and HO-8 combined, property damage on homeowner policy forms HO-4 and HO-6 combined, property damage on dwelling fire policies, sinkhole claims, and water damage claims. Although these sectors are aggregated into the single tables noted above, analyses are performed in these three sectors, due to the analogous nature of the product and similar claim settlement traits.
As claims are reported, the claims department establishes an estimate of the liability for each individual claim called case reserves. For certain liability claims of sufficient size and complexity, the field adjusting staff establishes case reserve estimates of ultimate cost, based on their assessment of facts and circumstances related to each individual claim. Opportunities for subrogation are also identified for further analysis and collection. For other claims which occur in large volumes and settle in a relatively short time frame, it is not practical or efficient to set case reserves for each claim, and an initial case reserve of $2,500 is set for these claims. In the normal course of business, we may also supplement our claims processes by utilizing third party adjusters, appraisers, engineers, inspectors, other professionals and information sources to assess and settle catastrophe and non-catastrophe related claims.
The Actuarial Methods used to Develop Reserve Estimates
Reserve estimates for both unpaid losses and LAE are derived using several different actuarial estimation methods in order to provide the actuary with multiple predictive viewpoints to consider for each of the sectors discussed above. Each of the methods
has merit, because they each provide insight into emerging patterns. These methods are each variations on two primary actuarial techniques: “chain ladder development” techniques and “counts and average” techniques. The “chain ladder development” actuarial technique is an estimation process in which historical payment and reserving patterns are applied to actual paid and/or reported amounts (paid losses, recovered subrogation or LAE plus individual case reserves established by claim adjusters) for an accident period to create an estimate of how losses or recoveries are likely to develop over time. The “counts and average” technique includes an evaluation of historical and projected costs per claim, and late-reported claim counts, for open claims by accident period. An accident period refers to classification of claims based on the date in which the claims occurred, regardless of the date they were reported to the company. These analyses are used to prepare estimates of required reserves for payments or recoveries to be made in the future. Transactions are organized into half-year accident periods for purposes of the reserve estimates. Key data elements used to determine our reserve estimates include historical claim counts, loss and LAE payments, subrogation received, case reserves, earned policy exposures, and the related development factors applicable to this data.
The first method for estimating unpaid amounts for each sector is a chain ladder method called the paid development method. This method is based upon the assumption that the relative change in a given accident period’s paid losses from one evaluation point to the next is similar to the relative change in prior periods’ paid losses at similar evaluation points. In utilizing this method, actual 6-month historical loss activity is evaluated. Successive periods can be arranged to form a triangle of data. Paid-to-Paid (“PTP”) development factors are calculated to measure the change in cumulative paid losses, LAE, and subrogation recoveries, from one evaluation point to the next. These historical PTP factors form the basis for selecting the PTP factors used in projecting the current valuation of losses to an ultimate basis. In addition, a tail factor is selected to account for loss development beyond the observed experience. The tail factor is based on trends shown in the data and consideration of industry loss development benchmarks. Utilization of a paid development method has the advantage of avoiding potential distortions in the data due to changes in case reserving methodology. This method’s implicit assumption is that the rate of payment of claims has been relatively consistent over time, and that there have been no material changes in the rate at which claims have been reported or settled. In instances where changes in settlement rates are detected, the PTP factors are adjusted accordingly, utilizing appropriate actuarial techniques. These adjusted techniques each produce additional development method estimates for consideration.
A second method is the reported development method. This method is similar to the paid development method; however, case reserves are considered in the analysis. Successive periods of reported loss estimates (including paid loss, subrogation recoveries, paid LAE and held case reserves) are organized similar to the paid development method in order to evaluate and select Report-to-Report (“RTR”) development factors. This method has the advantage of recognizing the information provided by current case reserves. Its implicit assumption is that the relative adequacy of case reserves is consistent over time, and that there have been no material changes in the rate at which claims have been reported or settled. In cases where significant reserve strengthening or other changes have occurred, RTR factors are adjusted accordingly, utilizing appropriate actuarial techniques.
A third method is the Bornhuetter-Ferguson (“B-F”) method, which is also utilized for estimating unpaid loss and LAE amounts. Each B-F technique is a blend of chain ladder development methods and an expected loss method, whereby the total reserve estimate equals the unpaid portion of a predetermined expected unpaid ultimate loss projection. The unpaid portion is determined based on assumptions underlying the development methods. As an experience year matures and expected unreported (or unpaid) losses become smaller, the initial expected loss assumption becomes gradually less important. This has the advantage of stability, but it is less responsive to actual results that have emerged. Two parameters are needed in each application of the B-F method: an initial assumption of expected losses and the expected reporting or payment pattern. Initial expected losses for each accident period other than the current year is determined using the estimated ultimate loss ratio from the prior analysis. Initial expected losses for the current year’s accident periods are determined based on trends in historical loss ratios, rate changes, and underlying loss trends. The expected reporting pattern is based on the reported or paid loss development method described above. This method is often used in situations where the reported loss experience is relatively immature or lacks sufficient credibility for the application of other methods.
A fourth method, called the counts and averages method, is utilized for estimates of loss, subrogation and LAE for each Florida sector. In this method, an estimate of unpaid losses or expenses is determined by separately projecting ultimate reported claim counts and ultimate claim severities (cost or recoveries per claim) on open and unreported claims for each accident period. Typically, chain ladder development methods are used to project ultimate claim counts and claim severities based on historical data using the same methodology described in the paid and reported development methods above. Estimated ultimate losses are then calculated as the product of the two items. This method is intended to avoid data distortions that may exist with the other methods for the most recent years as a result of changes in case reserve levels, settlement rates and claims handling fees. In addition, it may provide insight into the drivers of loss experience. For example, this method is utilized for sinkhole losses due to unique settlement patterns that have emerged since the passage of legislation that codified claim settlement practices with respect to sinkhole related claims and subsequent policy form changes, we implemented. The method is also utilized to evaluate segments impacted by the implementation of our Fast Track Initiative, which is an initiative to settle claims on an accelerated basis. These claims are expected
to be reported and settled at different rates and ultimate values than historically observed, requiring a departure from traditional development methodologies.
The implicit assumption of these techniques is that the selected factors and averages combine to form development patterns or severity trends that are predictive of future loss development of incurred claims. In selecting relevant parameters utilized in each estimation method, due consideration is given to how the patterns of development change from one year to the next over the course of several consecutive years of recent history. Furthermore, the effects of inflation and other anticipated trends are considered in the reserving process in order to generate selections that include adequate provisions to estimate the cost of claims that settle in the future. Finally, in addition to paid loss, reported loss, subrogation recoveries, and LAE development triangles, various diagnostic triangles, such as triangles showing historical patterns in the ratio of paid-to-reported losses and closed-to-reported claim counts are prepared. These diagnostic triangles are utilized in order to monitor the stability of various determinants of loss development, such as consistency in claims settlement and case reserving.
Estimates of unpaid losses for hurricane experience are developed using a combination of company-specific and industry patterns, due to the relatively infrequent nature of storms and the high severity typically associated with them. Development patterns and other benchmarks are based on consideration of all reliable information, such as historical events with similar landfall statistics, the range of estimates developed from industry catastrophe models, and claim reporting and handling statistics from our field units. It is common for the company to update its projection of unpaid losses and LAE for a significant hurricane event on a monthly, or even weekly basis, for the first 6-months following an event.
Estimation methods described above each produce estimates of ultimate losses and LAE. Based on the results of these methods, a single estimate (commonly referred to as an actuarial point/central estimate) of the ultimate loss and LAE is selected accordingly for each accident-year claim grouping. Estimated IBNR reserves are determined by subtracting reported losses from the selected ultimate loss, and the paid LAE from the ultimate LAE. The estimated loss IBNR reserves are added to case reserves to determine total estimated unpaid losses. Note that estimated IBNR reserves can be negative for an individual accident-year claim grouping if the selected ultimate loss includes a provision for anticipated subrogation, or if there is a possibility that case reserves are overstated. No case reserves are carried for LAE, therefore the estimated LAE IBNR reserves equal the total estimated unpaid LAE. For each sector, the reserving methods are carried out on both a net and direct basis in order to estimate liabilities accordingly. When selecting a single actuarial point/central estimate on a net basis, careful consideration is given for the reinsurance arrangements that were in place during each accident year, exposure period and segment being reviewed.
How Reserve Estimates are Established and Updated
Reserve estimates are developed for both open claims and unreported claims. The actuarial methods described above are used to derive claim settlement patterns by determining development factors to be applied to specific data elements. Development factors are calculated for data elements such as claim counts reported and settled, paid losses and paid losses combined with case reserves, loss expense payments, and subrogation recoveries. Historical development patterns for these data elements are used as the assumptions to calculate reserve estimates.
Often, different estimates are prepared for each detailed component, incorporating alternative analyses of changing claim settlement patterns and other influences on losses, from which a best estimate is selected for each component, occasionally incorporating additional analyses and actuarial judgment as described above. These estimates are not based on a single set of assumptions. Based on a review of these estimates, the best estimate of required reserves is recorded for each accident year and the required reserves are summed to create the reserve balance carried in the Consolidated Balance Sheets.
Reserves are re-estimated periodically by combining historical payment and reserving patterns with current actual results. When actual development of claims reported, paid losses or case reserve changes are different than the historical development pattern used in a prior period reserve estimate, and as actuarial studies validate new trends based on indications of updated development factor calculations, new ultimate loss and LAE predictions are determined. This process incorporates the historic and latest trends, and other underlying changes in the data elements used to calculate reserve estimates. The difference between indicated reserves based on new reserve estimates and the previously recorded estimate of reserves is the amount of reserve re-estimates. The resulting increase or decrease in the reserve re-estimates is recorded and included in “Losses and loss adjustment expenses” in the Consolidated Statements of Income.
Claim frequency
The methodology used to determine claim counts is based first around the event and then based on coverage. One event could have one or more claims based on the policy coverage, for example an event could have a claim for the first party coverage and a claim for third party liability regardless of the number of third party claimants. If multiple third-party liability claims are reported together, they would be counted as one claim.
NOTE 18 – QUARTERLY RESULTS FOR 2019 AND 2018 (UNAUDITED)
The following table provides a summary of quarterly results for the periods presented (in thousands except per share data):
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First
Quarter
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Second
Quarter
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Third
Quarter
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Fourth
Quarter
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For the Year Ended December 31, 2019
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Premiums earned, net
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$
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209,727
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$
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210,357
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$
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206,599
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$
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215,819
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Net investment income
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8,142
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7,410
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7,613
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7,578
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Total revenues
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236,586
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233,722
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229,641
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239,402
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Total expenses
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182,842
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182,792
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201,745
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308,455
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Net income (loss)
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40,148
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37,293
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20,146
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(51,073
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)
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Basic earnings (loss) per share
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$
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1.16
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$
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1.09
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$
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0.60
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$
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(1.55
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)
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Diluted earnings (loss) per share
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$
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1.14
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$
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1.08
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$
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0.59
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$
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(1.55
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)
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For the Year Ended December 31, 2018
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Premiums earned, net
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$
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182,577
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$
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192,272
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$
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188,938
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$
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204,595
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Net investment income
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4,785
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5,786
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6,642
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7,603
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Total revenues
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191,500
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209,788
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206,155
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216,373
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Total expenses
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139,801
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148,540
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154,988
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227,614
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Net income (loss)
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40,055
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46,084
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37,380
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(6,468
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)
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Basic earnings (loss) per share
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$
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1.15
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$
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1.32
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$
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1.07
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$
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(0.19
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)
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Diluted earnings (loss) per share
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$
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1.12
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$
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1.29
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$
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1.04
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$
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(0.19
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)
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Total revenues in the fourth quarter of 2019 exceeded 2018 driven by an increase in premium rates, organic growth in policy counts in, and outside of Florida partially offset by an increase in ceded earned premium reflecting both an increase in the exposures covered by reinsurance and its pricing. The increase in expenses was due to a higher amount of net losses and loss adjustment expenses recorded in the fourth quarter of 2019 compared to 2018 which was due primarily to an increase in volume of policies and a higher loss experience in the 2019 accident year, increased weather events in the current year offset by a reduction in adverse prior year development.
NOTE 19 – SUBSEQUENT EVENTS
The Company performed an evaluation of subsequent events through the date the financial statements were issued and determined there were no recognized or unrecognized subsequent events that would require an adjustment or additional disclosure in the consolidated financial statements as of December 31, 2019.
On February 11, 2020, the Company declared a quarterly cash dividend of $0.16 per share of common stock payable March 19, 2020, to shareholders of record on March 12, 2020.