UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended SeptemberJune 30, 20172018

or

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

For the transition period from                      to                     

Commission File Number 001-33251

 

UNIVERSAL INSURANCE HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

65-0231984

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer
Identification No.)

1110 W. Commercial Blvd., Fort Lauderdale, Florida 33309

(Address of principal executive offices)

(954) 958-1200

(Registrant’s telephone number, including area code)

 

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

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

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

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

 

 

 

 

 

 

 

 

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 34,443,28834,872,073 shares of common stock, par value $0.01 per share, outstanding on November 3, 2017July 23, 2018.

 

 

 

 

 


UNIVERSAL INSURANCE HOLDINGS, INC.

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

 

 

 

 

 

Page No.

 

  

 

 

Item 1.

 

Financial Statements:

  

4

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of SeptemberJune 30, 20172018 (unaudited) and December 31, 2016 (unaudited)2017

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Income for the three and nine-monthsix-month periods ended SeptemberJune 30, 20172018 and 20162017 (unaudited)

 

5

 

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the three and nine-monthsix-month periods ended SeptemberJune 30, 20172018 and 20162017 (unaudited)

 

5

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the nine-monthsix-month periods ended SeptemberJune 30, 20172018 and 20162017 (unaudited)

 

6

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

 

7

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

2627

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosure about Market Risk

 

4447

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

4549

 

PART II – OTHER INFORMATION

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

4549

 

 

 

 

 

Item 1A.

 

Risk Factors

 

4650

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

4650

 

 

 

 

 

Item 6.

 

Exhibits

 

4751

 

 

 

 

 

Signatures

 

4852

 

 

 


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To The Board of Directors and Stockholders of

Universal Insurance Holdings, Inc. and Subsidiaries

Fort Lauderdale, Florida

We have reviewed the accompanying condensed consolidated balance sheet of Universal Insurance Holdings, Inc. and its wholly-owned subsidiaries (the “Company”) as of SeptemberJune 30, 20172018 and the related condensed consolidated statements of income and comprehensive income for the threethree-month and nine-monthsix-month periods ended SeptemberJune 30, 2018 and 2017 and 2016 andthe related condensed consolidated statementsstatement of cash flows for the nine-monthsix-month periods ended SeptemberJune 30, 20172018 and 2016.2017.   These interim financial statements are the responsibility of the Company’s management.

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

Based on our review, we are not aware of any material modifications that should be made to the accompanying interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Universal Insurance Holdings, Inc. and Subsidiaries as of December 31, 20162017 and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for the year then ended (not presented herein) and we expressed an unqualified audit opinion on those consolidated financial statements in our report dated February 23, 2017.2018. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2016,2017, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

 

/s/ Plante & Moran, PLLC

Chicago, Illinois

July 27, 2018

Chicago, Illinois

November 9, 2017

 

 

 


PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

(in thousands, except per share data)

 

As of

 

As of

 

June 30,

 

 

December 31,

 

September 30,

 

 

December 31,

 

2018

 

 

2017

 

2017

 

 

2016

 

(unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturities, at fair value

$

609,179

 

 

$

584,361

 

Equity securities, at fair value

 

26,075

 

 

 

50,803

 

Short-term investments, at fair value

 

 

 

 

5,002

 

Available-for-sale debt securities

$

656,762

 

 

$

639,334

 

Available-for-sale short-term investments

 

 

 

 

10,000

 

Equity securities

 

70,866

 

 

 

62,215

 

Investment real estate, net

 

16,324

 

 

 

11,435

 

 

19,539

 

 

 

18,474

 

Total invested assets

 

651,578

 

 

 

651,601

 

 

747,167

 

 

 

730,023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

366,176

 

 

 

105,730

 

 

311,088

 

 

 

213,486

 

Restricted cash and cash equivalents

 

2,635

 

 

 

2,635

 

 

2,635

 

 

 

2,635

 

Prepaid reinsurance premiums

 

212,489

 

 

 

124,385

 

 

310,618

 

 

 

132,806

 

Reinsurance recoverable

 

412,697

 

 

 

106

 

 

117,851

 

 

 

182,405

 

Premiums receivable, net

 

66,687

 

 

 

53,833

 

Reinsurance receivable, net

 

1,402

 

 

 

 

Premium receivable, net

 

67,186

 

 

 

56,500

 

Property and equipment, net

 

32,959

 

 

 

32,162

 

 

34,792

 

 

 

32,866

 

Deferred policy acquisition costs

 

75,934

 

 

 

64,912

 

 

88,756

 

 

 

73,059

 

Income taxes recoverable

 

19,174

 

 

 

3,262

 

 

11,839

 

 

 

9,472

 

Deferred income tax asset, net

 

5,300

 

 

 

10,674

 

 

177

 

 

 

9,286

 

Other assets

 

11,432

 

 

 

10,707

 

 

17,766

 

 

 

12,461

 

Total assets

$

1,857,061

 

 

$

1,060,007

 

$

1,711,277

 

 

$

1,454,999

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unpaid losses and loss adjustment expenses

$

440,443

 

 

$

58,494

 

$

151,916

 

 

$

248,425

 

Unearned premiums

 

556,299

 

 

 

475,756

 

 

608,921

 

 

 

532,444

 

Advance premium

 

28,667

 

 

 

17,796

 

 

38,230

 

 

 

26,216

 

Accounts payable

 

3,999

 

 

 

3,187

 

 

2,778

 

 

 

2,866

 

Book overdraft

 

2,982

 

 

 

36,715

 

Reinsurance payable, net

 

341,356

 

 

 

80,891

 

 

341,912

 

 

 

110,381

 

Dividends payable

 

4,846

 

 

 

 

 

5,638

 

 

 

 

Other liabilities and accrued expenses

 

47,659

 

 

 

37,665

 

 

54,695

 

 

 

45,096

 

Long-term debt

 

13,235

 

 

 

15,028

 

 

12,132

 

 

 

12,868

 

Total liabilities

 

1,436,504

 

 

 

688,817

 

 

1,219,204

 

 

 

1,015,011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commitments and Contingencies (Note 12)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS' EQUITY:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative convertible preferred stock, $.01 par value

 

 

 

 

 

 

 

 

 

 

Authorized shares - 1,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issued shares - 10 and 10

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding shares - 10 and 10

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Minimum liquidation preference, $9.99 and $9.99 per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock, $.01 par value

 

455

 

 

 

453

 

 

463

 

 

 

458

 

Authorized shares - 55,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issued shares - 45,473 and 45,324

 

 

 

 

 

 

 

Outstanding shares - 34,440 and 35,052

 

 

 

 

 

 

 

Treasury shares, at cost - 11,033 and 10,272

 

(104,866

)

 

 

(86,982

)

Issued shares - 46,257 and 45,778

 

 

 

 

 

 

 

Outstanding shares - 34,872 and 34,735

 

 

 

 

 

 

 

Treasury shares, at cost - 11,385 and 11,043

 

(116,239

)

 

 

(105,123

)

Additional paid-in capital

 

89,429

 

 

 

82,263

 

 

85,925

 

 

 

86,186

 

Accumulated other comprehensive income (loss), net of taxes

 

(2,207

)

 

 

(6,408

)

 

(9,161

)

 

 

(6,281

)

Retained earnings

 

437,746

 

 

 

381,864

 

 

531,085

 

 

 

464,748

 

Total stockholders' equity

 

420,557

 

 

 

371,190

 

 

492,073

 

 

 

439,988

 

Total liabilities and stockholders' equity

$

1,857,061

 

 

$

1,060,007

 

$

1,711,277

 

 

$

1,454,999

 

 

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

 

 


UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited)

(in thousands, except per share data)

 

Three Months Ended

 

 

Nine Months Ended

 

 

Three Months Ended

 

 

Six Months Ended

 

 

September 30,

 

 

September 30,

 

 

June 30,

 

 

June 30,

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

PREMIUMS EARNED AND OTHER REVENUES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct premiums written

$

274,744

 

 

$

241,888

 

 

$

816,350

 

 

$

741,782

 

 

$

342,781

 

 

$

296,191

 

 

$

612,765

 

 

$

541,606

 

 

Change in unearned premium

 

(19,935

)

 

 

(7,388

)

 

 

(80,543

)

 

 

(59,211

)

 

 

(68,754

)

 

 

(51,568

)

 

 

(76,477

)

 

 

(60,608

)

 

Direct premium earned

 

254,809

 

 

 

234,500

 

 

 

735,807

 

 

 

682,571

 

 

 

274,027

 

 

 

244,623

 

 

 

536,288

 

 

 

480,998

 

 

Ceded premium earned

 

(80,292

)

 

 

(74,966

)

 

 

(230,722

)

 

 

(214,128

)

 

 

(81,755

)

 

 

(75,614

)

 

 

(161,439

)

 

 

(150,430

)

 

Premiums earned, net

 

174,517

 

 

 

159,534

 

 

 

505,085

 

 

 

468,443

 

 

 

192,272

 

 

 

169,009

 

 

 

374,849

 

 

 

330,568

 

 

Net investment income (expense)

 

3,085

 

 

 

2,304

 

 

 

9,012

 

 

 

6,051

 

 

 

5,786

 

 

 

3,223

 

 

 

10,571

 

 

 

5,927

 

 

Net realized gains (losses) on investments

 

803

 

 

 

101

 

 

 

2,450

 

 

 

1,344

 

 

Net realized gains (losses) on sale of securities

 

145

 

 

 

1,710

 

 

 

(2,496

)

 

 

1,647

 

 

Net change in unrealized gains (losses) of equity securities

 

(1,521

)

 

 

 

 

 

(6,630

)

 

 

 

 

Commission revenue

 

5,304

 

 

 

4,603

 

 

 

14,546

 

 

 

12,927

 

 

 

5,709

 

 

 

4,644

 

 

 

10,980

 

 

 

9,242

 

 

Policy fees

 

4,861

 

 

 

4,226

 

 

 

14,594

 

 

 

13,093

 

 

 

5,764

 

 

 

5,250

 

 

 

10,539

 

 

 

9,733

 

 

Other revenue

 

1,673

 

 

 

1,668

 

 

 

4,917

 

 

 

4,827

 

 

 

1,633

 

 

 

1,651

 

 

 

3,475

 

 

 

3,244

 

 

Total premiums earned and other revenues

 

190,243

 

 

 

172,436

 

 

 

550,604

 

 

 

506,685

 

 

 

209,788

 

 

 

185,487

 

 

 

401,288

 

 

 

360,361

 

 

OPERATING COSTS AND EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Losses and loss adjustment expenses

 

116,375

 

 

 

73,548

 

 

 

267,129

 

 

 

199,749

 

 

 

89,842

 

 

 

80,184

 

 

 

165,768

 

 

 

150,754

 

 

General and administrative expenses

 

57,269

 

 

 

54,725

 

 

 

171,582

 

 

 

166,780

 

 

 

58,698

 

 

 

57,380

 

 

 

122,573

 

 

 

114,313

 

 

Total operating costs and expenses

 

173,644

 

 

 

128,273

 

 

 

438,711

 

 

 

366,529

 

 

 

148,540

 

 

 

137,564

 

 

 

288,341

 

 

 

265,067

 

 

INCOME BEFORE INCOME TAXES

 

16,599

 

 

 

44,163

 

 

 

111,893

 

 

 

140,156

 

 

 

61,248

 

 

 

47,923

 

 

 

112,947

 

 

 

95,294

 

 

Income tax expense

 

6,635

 

 

 

17,281

 

 

 

41,354

 

 

 

54,400

 

 

 

15,164

 

 

 

18,547

 

 

 

26,808

 

 

 

34,719

 

 

NET INCOME

$

9,964

 

 

$

26,882

 

 

$

70,539

 

 

$

85,756

 

 

$

46,084

 

 

$

29,376

 

 

$

86,139

 

 

$

60,575

 

 

Basic earnings per common share

$

0.29

 

 

$

0.77

 

 

$

2.02

 

 

$

2.46

 

 

$

1.32

 

 

$

0.84

 

 

$

2.47

 

 

$

1.73

 

 

Weighted average common shares outstanding - Basic

 

34,686

 

 

 

35,042

 

 

 

34,927

 

 

 

34,878

 

 

 

34,909

 

 

 

34,959

 

 

 

34,874

 

 

 

35,049

 

 

Diluted earnings per common share

$

0.28

 

 

$

0.75

 

 

$

1.96

 

 

$

2.41

 

 

$

1.29

 

 

$

0.82

 

 

$

2.42

 

 

$

1.68

 

 

Weighted average common shares outstanding - Diluted

 

35,615

 

 

 

35,723

 

 

 

35,917

 

 

 

35,594

 

 

 

35,589

 

 

 

35,958

 

 

 

35,636

 

 

 

36,061

 

 

Cash dividend declared per common share

$

0.14

 

 

$

0.14

 

 

$

0.42

 

 

$

0.42

 

 

$

0.14

 

 

$

0.14

 

 

$

0.28

 

 

$

0.28

 

 

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

 

Three Months Ended

 

 

Nine Months Ended

 

 

Three Months Ended

 

 

Six Months Ended

 

 

September 30,

 

 

September 30,

 

 

June 30,

 

 

June 30,

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

Net income

$

9,964

 

 

$

26,882

 

 

$

70,539

 

 

$

85,756

 

 

$

46,084

 

 

$

29,376

 

 

$

86,139

 

 

$

60,575

 

 

Other comprehensive income (loss), net of taxes

 

251

 

 

 

(491

)

 

 

4,201

 

 

 

5,631

 

 

 

(1,849

)

 

 

1,486

 

 

 

(5,899

)

 

 

3,950

 

 

Comprehensive income

$

10,215

 

 

$

26,391

 

 

$

74,740

 

 

$

91,387

 

 

$

44,235

 

 

$

30,862

 

 

$

80,240

 

 

$

64,525

 

 

 

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

 

 

 


UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(in thousands)

 

 

 

Nine Months Ended September 30,

 

Six Months Ended June 30,

 

2017

 

 

2016

 

2018

 

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by (used in) operating activities

$

286,195

 

 

$

178,637

 

$

158,081

 

 

$

140,965

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from sale of property and equipment

 

17

 

 

 

31

 

 

17

 

 

 

15

 

Purchases of property and equipment

 

(3,655

)

 

 

(6,041

)

 

(4,024

)

 

 

(2,757

)

Purchases of equity securities

 

(47,070

)

 

 

(46,414

)

 

(19,106

)

 

 

(13,275

)

Purchases of fixed maturities

 

(114,593

)

 

 

(278,961

)

Purchases of available-for-sale debt securities

 

(205,738

)

 

 

(67,517

)

Purchases of investment real estate, net

 

(5,023

)

 

 

(4,400

)

 

(1,269

)

 

 

(3,759

)

Proceeds from sales of equity securities

 

75,027

 

 

 

46,819

 

 

4,127

 

 

 

56,971

 

Proceeds from sales of fixed maturities

 

19,643

 

 

 

78,966

 

Maturities of fixed maturities

 

75,770

 

 

 

38,111

 

Maturities of short-term investments

 

5,000

 

 

 

25,000

 

Proceeds from sales of available-for-sale debt securities

 

119,222

 

 

 

6,507

 

Maturities of available-for-sale debt securities

 

64,480

 

 

 

39,144

 

Maturities of available-for-sale short-term investments

 

10,000

 

 

 

5,000

 

Net cash provided by (used in) investing activities

 

5,116

 

 

 

(146,889

)

 

(32,291

)

 

 

20,329

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock dividend

 

(8

)

 

 

(7

)

 

(5

)

 

 

(5

)

Common stock dividend

 

(9,803

)

 

 

(9,828

)

 

(9,821

)

 

 

(9,803

)

Issuance of common stock for stock option exercises

 

73

 

 

 

 

Purchase of treasury stock

 

(17,884

)

 

 

(8,415

)

 

(11,116

)

 

 

(8,919

)

Sale of treasury stock

 

 

 

 

2,965

 

Payments related to tax withholding for share-based compensation

 

(1,367

)

 

 

(4,905

)

 

(6,583

)

 

 

(1,367

)

Excess tax benefits (shortfall) from share-based compensation

 

 

 

 

(1,563

)

Repayment of debt

 

(1,803

)

 

 

(1,768

)

 

(736

)

 

 

(1,435

)

Net cash provided by (used in) financing activities

 

(30,865

)

 

 

(23,521

)

 

(28,188

)

 

 

(21,529

)

Net increase (decrease) in cash and cash equivalents

 

260,446

 

 

 

8,227

 

Cash and cash equivalents at beginning of period

 

105,730

 

 

 

197,014

 

Cash and cash equivalents at end of period

$

366,176

 

 

$

205,241

 

Cash and cash equivalents, and restricted cash and cash equivalents:

 

 

 

 

 

 

 

Net increase (decrease) during the period

 

97,602

 

 

 

139,765

 

Balance, beginning of period

 

216,121

 

 

 

108,365

 

Balance, end of period

$

313,723

 

 

$

248,130

 

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

 

 

 

 

June 30, 2018

 

 

December 31, 2017

 

Cash and cash equivalents

$

311,088

 

 

$

213,486

 

Restricted cash and cash equivalents (1)

 

2,635

 

 

 

2,635

 

Total cash and cash equivalents and restricted cash and cash equivalents

$

313,723

 

 

$

216,121

 

(1)

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

 

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

 

 


UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

1. Nature of Operations and Basis of Presentation

Nature of Operations

Universal Insurance Holdings, Inc. (“UVE”) is a Delaware corporation incorporated in 1990. UVE with its wholly-owned subsidiaries (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”), together referred to as the “Insurance Entities,” the Company is principally engaged in the property and casualty insurance business offered primarily through aits 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 fifteenseventeen states as of SeptemberJune 30, 2017,2018, including Florida, which comprises the vast majority of the Company’s in-force policies. 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 agencyagent subsidiary and payment plan fees charged to policyholders who choose to pay their premiums in installments.

Basis of Presentation

The Company has prepared the accompanying unaudited Condensed Consolidated Financial Statements (“Financial Statements”) in accordance with the rules and regulations of the United States Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, the Financial Statements do not include all of the information and footnotes required by United States Generally Accepted Accounting Principles (“U. S. GAAP”) for annual financial statements. Therefore, the Financial Statements should be read in conjunction with the audited Consolidated Financial Statements contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016,2017, filed with the SEC on February 24, 2017.23, 2018. The condensed consolidated balance sheet at December 31, 2016,2017, was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation have been included in the Financial Statements. The results for interim periods do not necessarily indicate the results that may be expected for any other interim period or for the full year.

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

The Financial Statements include the accounts of UVE and its wholly-owned subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation.

Management must make estimates and assumptions that affect amounts reported in the Company’s Financial Statements and in disclosures of contingent assets and liabilities. Actual results could differ from those estimates.

 

 


2. Significant Accounting Policies

The Company reported Significant Accounting Policies in its Annual Report on Form 10-K for the year ended December 31, 2016.2017. The following are new or revised disclosures or disclosures required on a quarterly basis.

Recently Adopted Accounting Pronouncements

In MarchJanuary 2016, the Financial Accounting Standards Board (“FASB”) issued guidance which simplifies several aspectsrevised U.S. GAAP with the issuance of Accounting Standards Update (“ASU”) 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities to improve the accounting for share-based payment transactions.recognition and measurement of financial instruments. The new guidanceASU requires excess income tax benefits (windfalls) and deficiencies (shortfalls)certain investments in equity securities to be recognizedmeasured at fair value with changes in fair value reported in earnings and requires changes in instrument-specific credit risk for financial liabilities recorded at fair value under the income statement as income tax benefits or charges whenfair value option to be reported in Other Comprehensive Income (“OCI”). The Company adopted this ASU effective January 1, 2018 using the awards vest or are settled.modified retrospective transition method and recorded a cumulative effect adjustment of $3.6 million to the Condensed Consolidated Balance Sheets to reclassify unrealized losses on investments in equity securities to retained earnings from other comprehensive income. The former guidance requiredadoption of this ASU also resulted in the recognition of excess tax benefits or deficienciesthe change in stockholders’ equity. unrealized gains and losses for equity security investments as a separate component in the Condensed Consolidated Statements of Income during the three and six months ended June 30, 2018.

In addition, all income tax-relatedAugust 2016, the FASB revised U.S. GAAP with the issuance of ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments intended to reduce diversity in practice in how certain cash flows resulting from share-basedreceipts and cash payments will be reported as operating activitiesare presented and classified in the statement of cash flows. The new ASU applies to: 1) debt prepayment or debt extinguishment costs, 2) settlement of zero-coupon debt instruments, 3) contingent consideration payments made after business combination, 4) proceeds from the settlement of insurance claims, 5) proceeds from the settlement of corporate-owned life insurance policies, 6) distributions received from equity method investments, 7) beneficial interests in securitization transactions, and 8) separately identifiable cash flows underand application of the new guidance.predominance principle. Historically, the items outlined above have not been applicable to the Company. The guidance also allows usCompany adopted this ASU effective January 1, 2018 and the adoption did not have an impact on our Condensed Consolidated Statements of Cash Flows.

In November 2016, the FASB revised U.S. GAAP, Statement of Cash Flows (Topic 230): Restricted Cash with the issuance of the ASU 2016-18, to repurchase morereduce diversity in the classification and presentation of an employee's shares for tax withholding purposes without triggering liability accounting; clarifies that allchanges in restricted cash payments for tax withholdings made on an employee’s behalf should be presented as a financing activity onin the Company’s statement of cash flows;flows. The new ASU requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and provides an accounting policy electionamounts generally described as restricted cash or restricted cash equivalents. The Company is required to account for forfeitures as they occur.reconcile such total to amounts on the Condensed Consolidated Balance Sheets and disclose the nature of the restrictions. The guidance isCompany adopted this ASU effective for fiscal yearsJanuary 1, 2018, which only resulted in a change in the presentation of the Condensed Consolidated Statements of Cash Flows.

In February 2018, the FASB revised U.S. GAAP, Comprehensive Income (Topic 220), with the issuance of ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income in response to the enactment of the Tax Cuts and interim periods beginning afterJobs Act of 2017 (the “Tax Act”) on December 15, 2016, with early adoption permitted.22, 2017.  The new ASU permits a company to reclassify the disproportionate income tax effects of the Tax Act on items within accumulated other comprehensive income (“AOCI”) to retained earnings and requires certain new disclosures. The Company adopted this guidance effective January 1, 2017.

The adoption2018 and made an election to reclassify the income tax effects of the new standard resultedTax Act from AOCI to retained earnings. Retained earnings were reduced by approximately $0.6 million due to this reclassification. The reclassification represents the effect of the change in the recognitionU.S. federal corporate income tax rate on the gross deferred tax amounts and related valuation allowances at the date of excessenactment of the Tax Act related to items remaining in accumulated other comprehensive income. The Company follows an aggregate portfolio approach and considers that it had two portfolios, an available for sale debt equity portfolio and an available for sale equity portfolio, the disproportionate tax benefit of $0.8 million reflectedeffects relating to the available for sale equity portfolio were included in the Company’s Condensed Consolidated Statements of Income as an income tax benefit for the nine months ended September 30, 2017. Additionally, excess tax benefits on the Company’s Condensed Consolidated Statement of Cash Flows are presented as an operating activity on a prospective basis. The presentation requirement for cash flows related to employee taxes paid for withheld shares did not impact any of the periods presented in the Company’s Condensed Consolidated Statement of Cash Flows since these cash flows have historically been presented as a financing activity. The Company will continue to account for forfeitures as they occur. The standard also modifies the calculation of dilutive earnings per share to no longer use proceeds from tax benefits or deficiencies.transition adjustment when adopting ASU 2016-01.

 

 


3. Investments

Securities Available for Sale

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

 

September 30, 2017

 

June 30, 2018

 

Cost or

 

 

Gross

 

 

Gross

 

 

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

Fixed Maturities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government obligations and agencies

$

55,519

 

 

$

21

 

 

$

(524

)

 

$

55,016

 

$

59,086

 

 

$

 

 

$

(1,374

)

 

$

57,712

 

Corporate bonds

 

215,455

 

 

 

883

 

 

 

(507

)

 

 

215,831

 

 

339,730

 

 

 

424

 

 

 

(6,190

)

 

 

333,964

 

Mortgage-backed and asset-backed securities

 

219,321

 

 

 

110

 

 

 

(1,333

)

 

 

218,098

 

 

242,492

 

 

 

31

 

 

 

(5,091

)

 

 

237,432

 

Municipal bonds

 

106,926

 

 

 

706

 

 

 

(1,342

)

 

 

106,290

 

 

15,798

 

 

 

 

 

 

(81

)

 

 

15,717

 

Redeemable preferred stock

 

13,336

 

 

 

631

 

 

 

(23

)

 

 

13,944

 

 

11,762

 

 

 

318

 

 

 

(143

)

 

 

11,937

 

Equity Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

5,992

 

 

 

 

 

 

(309

)

 

 

5,683

 

Mutual funds

 

22,316

 

 

 

143

 

 

 

(2,067

)

 

 

20,392

 

Total

$

638,865

 

 

$

2,494

 

 

$

(6,105

)

 

$

635,254

 

$

668,868

 

 

$

773

 

 

$

(12,879

)

 

$

656,762

 

 

December 31, 2016

 

December 31, 2017

 

Cost or

 

 

Gross

 

 

Gross

 

 

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

Fixed Maturities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government obligations and agencies

$

74,937

 

 

$

 

 

$

(670

)

 

$

74,267

 

$

60,481

 

 

$

 

 

$

(877

)

 

$

59,604

 

Corporate bonds

 

192,328

 

 

 

402

 

 

 

(1,300

)

 

 

191,430

 

 

228,336

 

 

 

476

 

 

 

(1,308

)

 

 

227,504

 

Mortgage-backed and asset-backed securities

 

216,679

 

 

 

135

 

 

 

(2,038

)

 

 

214,776

 

 

221,956

 

 

 

19

 

 

 

(2,523

)

 

 

219,452

 

Municipal bonds

 

94,794

 

 

 

130

 

 

 

(3,727

)

 

 

91,197

 

 

120,883

 

 

 

599

 

 

 

(1,187

)

 

 

120,295

 

Redeemable preferred stock

 

12,723

 

 

 

125

 

 

 

(157

)

 

 

12,691

 

 

12,059

 

 

 

485

 

 

 

(65

)

 

 

12,479

 

Equity Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

214

 

 

 

 

 

 

(121

)

 

 

93

 

Mutual funds

 

53,900

 

 

 

407

 

 

 

(3,597

)

 

 

50,710

 

Short-term investments

 

5,000

 

 

 

2

 

 

 

 

 

 

5,002

 

 

10,000

 

 

 

 

 

 

 

 

 

10,000

 

Total

$

650,575

 

 

$

1,201

 

 

$

(11,610

)

 

$

640,166

 

$

653,715

 

 

$

1,579

 

 

$

(5,960

)

 

$

649,334

 

 

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

 

 

September 30, 2017

 

 

December 31, 2016

 

 

June 30, 2018

 

 

December 31, 2017 (1)

 

 

 

 

 

 

% of Total

 

 

 

 

 

 

% of Total

 

 

 

 

 

 

% of Total

 

 

 

 

 

 

% of Total

 

Comparable Ratings

 

Fair Value

 

 

Fair Value

 

 

Fair Value

 

 

Fair Value

 

Credit Ratings

 

Fair Value

 

 

Fair Value

 

 

Fair Value

 

 

Fair Value

 

AAA

 

$

130,119

 

 

 

21.4

%

 

$

131,260

 

 

 

22.3

%

 

$

310,359

 

 

 

47.3

%

 

$

317,313

 

 

 

48.9

%

AA

 

 

268,056

 

 

 

44.0

%

 

 

275,480

 

 

 

46.7

%

 

 

73,207

 

 

 

11.1

%

 

 

129,573

 

 

 

20.0

%

A

 

 

122,808

 

 

 

20.2

%

 

 

107,418

 

 

 

18.2

%

 

 

182,479

 

 

 

27.8

%

 

 

146,749

 

 

 

22.6

%

BBB

 

 

79,950

 

 

 

13.1

%

 

 

67,263

 

 

 

11.4

%

 

 

87,007

 

 

 

13.3

%

 

 

51,020

 

 

 

7.8

%

BB+ and Below

 

 

3,738

 

 

 

0.6

%

 

 

3,444

 

 

 

0.6

%

 

 

114

 

 

 

0.0

%

 

 

1,569

 

 

 

0.2

%

No Rating Available

 

 

4,508

 

 

 

0.7

%

 

 

4,498

 

 

 

0.8

%

 

 

3,596

 

 

 

0.5

%

 

 

3,110

 

 

 

0.5

%

Total

 

$

609,179

 

 

 

100.0

%

 

$

589,363

 

 

 

100.0

%

 

$

656,762

 

 

 

100.0

%

 

$

649,334

 

 

 

100.0

%

(1)

The credit ratings in the table above have been reclassified from the prior periods’ consolidated financial statements to conform to the current periods’ presentation.

 

The tablestable above include comparableincludes credit quality ratings by Standard and Poor’s Rating Services, Inc., Moody’s Investors Service,

Inc. and Fitch Ratings, Inc. The Company modified the presentation of this table by presenting 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):

 

 

September 30, 2017

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost or

 

 

 

 

 

 

Cost or

 

 

 

 

 

 

June 30, 2018

 

 

December 31, 2017

 

 

Amortized

 

 

 

 

 

 

Amortized

 

 

 

 

 

 

Amortized

 

 

 

 

 

 

Amortized

 

 

 

 

 

 

Cost

 

 

Fair Value

 

 

Cost

 

 

Fair Value

 

 

Cost

 

 

Fair Value

 

 

Cost

 

 

Fair Value

 

Mortgage-backed Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency

 

$

119,469

 

 

$

118,387

 

 

$

110,724

 

 

$

109,022

 

 

$

140,252

 

 

$

137,247

 

 

$

118,014

 

 

$

116,014

 

Non-agency

 

 

15,418

 

 

 

15,334

 

 

 

19,408

 

 

 

19,265

 

 

 

29,023

 

 

 

28,608

 

 

 

17,676

 

 

 

17,488

 

Asset-backed Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Auto loan receivables

 

 

36,989

 

 

 

36,959

 

 

 

37,390

 

 

 

37,429

 

 

 

30,187

 

 

 

29,845

 

 

 

35,105

 

 

 

34,962

 

Credit card receivables

 

 

35,869

 

 

 

35,846

 

 

 

38,640

 

 

 

38,568

 

 

 

16,258

 

 

 

16,074

 

 

 

38,844

 

 

 

38,719

 

Other receivables

 

 

11,576

 

 

 

11,572

 

 

 

10,517

 

 

 

10,492

 

 

 

26,772

 

 

 

25,658

 

 

 

12,317

 

 

 

12,269

 

Total

 

$

219,321

 

 

$

218,098

 

 

$

216,679

 

 

$

214,776

 

 

$

242,492

 

 

$

237,432

 

 

$

221,956

 

 

$

219,452

 

 

The following table summarizes the fair value and gross unrealized losses on available-for-sale debt securities, available for sale, 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 (dollars in thousands):

 

September 30, 2017

 

June 30, 2018

 

Less Than 12 Months

 

 

12 Months or Longer

 

Less Than 12 Months

 

 

12 Months or Longer

 

Number of

 

 

 

 

 

 

Unrealized

 

 

Number of

 

 

 

 

 

 

Unrealized

 

Number of

 

 

 

 

 

 

Unrealized

 

 

Number of

 

 

 

 

 

 

Unrealized

 

Issues

 

 

Fair Value

 

 

Losses

 

 

Issues

 

 

Fair Value

 

 

Losses

 

Issues

 

 

Fair Value

 

 

Losses

 

 

Issues

 

 

Fair Value

 

 

Losses

 

Fixed Maturities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government obligations and agencies

 

10

 

 

$

47,102

 

 

$

(404

)

 

 

4

 

 

$

4,345

 

 

$

(120

)

 

9

 

 

$

35,148

 

 

$

(608

)

 

 

8

 

 

$

22,564

 

 

$

(766

)

Corporate bonds

 

100

 

 

 

76,577

 

 

 

(410

)

 

 

11

 

 

 

7,105

 

 

 

(97

)

 

346

 

 

 

266,868

 

 

 

(5,103

)

 

 

33

 

 

 

31,018

 

 

 

(1,087

)

Mortgage-backed and asset-backed securities

 

90

 

 

 

146,458

 

 

 

(1,196

)

 

 

8

 

 

 

13,063

 

 

 

(137

)

 

100

 

 

 

135,607

 

 

 

(2,172

)

 

 

61

 

 

 

84,444

 

 

 

(2,919

)

Municipal bonds

 

43

 

 

 

46,363

 

 

 

(601

)

 

 

15

 

 

 

24,714

 

 

 

(741

)

 

7

 

 

 

3,521

 

 

 

(81

)

 

 

 

 

 

 

 

 

 

Redeemable preferred stock

 

13

 

 

 

1,518

 

 

 

(19

)

 

 

1

 

 

 

107

 

 

 

(4

)

 

66

 

 

 

3,808

 

 

 

(143

)

 

 

 

 

 

 

 

 

 

Equity Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

2

 

 

 

5,683

 

 

 

(309

)

 

 

 

 

 

 

 

 

 

Mutual funds

 

5

 

 

 

293

 

 

 

(2

)

 

 

2

 

 

 

9,202

 

 

 

(2,065

)

Total

 

263

 

 

$

323,994

 

 

$

(2,941

)

 

 

41

 

 

$

58,536

 

 

$

(3,164

)

 

528

 

 

$

444,952

 

 

$

(8,107

)

 

 

102

 

 

$

138,026

 

 

$

(4,772

)

 

December 31, 2016

 

December 31, 2017

 

Less Than 12 Months

 

 

12 Months or Longer

 

Less Than 12 Months

 

 

12 Months or Longer

 

Number of

 

 

 

 

 

 

Unrealized

 

 

Number of

 

 

 

 

 

 

Unrealized

 

Number of

 

 

 

 

 

 

Unrealized

 

 

Number of

 

 

 

 

 

 

Unrealized

 

Issues

 

 

Fair Value

 

 

Losses

 

 

Issues

 

 

Fair Value

 

 

Losses

 

Issues

 

 

Fair Value

 

 

Losses

 

 

Issues

 

 

Fair Value

 

 

Losses

 

Fixed Maturities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government obligations and agencies

 

11

 

 

$

70,453

 

 

$

(608

)

 

 

2

 

 

$

3,504

 

 

$

(62

)

 

7

 

 

$

35,464

 

 

$

(301

)

 

 

9

 

 

$

24,140

 

 

$

(576

)

Corporate bonds

 

116

 

 

 

96,379

 

 

 

(1,219

)

 

 

4

 

 

 

3,250

 

 

 

(80

)

 

159

 

 

 

142,208

 

 

 

(792

)

 

 

39

 

 

 

29,796

 

 

 

(516

)

Mortgage-backed and asset-backed securities

 

73

 

 

 

149,928

 

 

 

(1,923

)

 

 

5

 

 

 

9,660

 

 

 

(115

)

 

83

 

 

 

137,481

 

 

 

(955

)

 

 

37

 

 

 

70,218

 

 

 

(1,568

)

Municipal bonds

 

69

 

 

 

79,402

 

 

 

(3,726

)

 

 

 

 

 

 

 

 

 

 

36

 

 

 

28,265

 

 

 

(246

)

 

 

30

 

 

 

48,370

 

 

 

(941

)

Redeemable preferred stock

 

50

 

 

 

6,340

 

 

 

(158

)

 

 

 

 

 

 

 

 

 

 

21

 

 

 

2,464

 

 

 

(65

)

 

 

 

 

 

 

 

 

 

Equity Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

1

 

 

 

18

 

 

 

(7

)

 

 

2

 

 

 

75

 

 

 

(115

)

Mutual funds

 

3

 

 

 

28,020

 

 

 

(774

)

 

 

2

 

 

 

11,529

 

 

 

(2,823

)

Total

 

323

 

 

$

430,540

 

 

$

(8,415

)

 

 

15

 

 

$

28,018

 

 

$

(3,195

)

 

306

 

 

$

345,882

 

 

$

(2,359

)

 

 

115

 

 

$

172,524

 

 

$

(3,601

)

 

Evaluating Investments for Other Than Temporary Impairment (“OTTI”)

 

At SeptemberAs of June 30, 2017,2018, the Company held fixed maturity and equityavailable-for-sale debt securities that were in an unrealized loss position as presented in the table above. For fixed maturityavailable-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 fixed maturity and equityavailable-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, we believe that our fixed income portfolio is of high quality and we believe that we


will recover the amortized cost basis of our fixed incomeavailable-for-sale debt securities. We continually monitor the credit quality of our fixed income 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 forof the available-for-sale debt securities available for sale at Septemberas of June 30, 20172018 are other than temporary.

 

As of September 30, 2017, the Company held approximately $9.2 million equity securities that were in an unrealized loss position twelve months or longer. The unrealized loss on these equity securities was $2.1 million. Based on our analysis, the Company believes each equity security will recover in a reasonable period of time and the Company has the intent and ability to hold them until recovery. There were no OTTI losses recognized in the periods presented on the equity portfolio.  

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

 

September 30, 2017

 

Cost or

 

 

 

 

 

June 30, 2018

 

Amortized Cost

 

 

Fair Value

 

Amortized Cost

 

 

Fair Value

 

Due in one year or less

$

42,233

 

 

$

42,233

 

$

49,496

 

 

$

49,286

 

Due after one year through five years

 

229,841

 

 

 

229,898

 

 

216,335

 

 

 

211,886

 

Due after five years through ten years

 

47,716

 

 

 

47,879

 

 

124,206

 

 

 

121,788

 

Due after ten years

 

58,110

 

 

 

57,127

 

 

24,577

 

 

 

24,433

 

Mortgage-backed and asset-backed securities

 

219,321

 

 

 

218,098

 

 

242,492

 

 

 

237,432

 

Perpetual maturity securities

 

13,336

 

 

 

13,944

 

 

11,762

 

 

 

11,937

 

Total

$

610,557

 

 

$

609,179

 

$

668,868

 

 

$

656,762

 

 

Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay with or without penalty.

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

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Proceeds from sales and maturities (fair value)

$

67,818

 

 

$

23,744

 

 

$

175,440

 

 

$

188,896

 

Gross realized gains

$

849

 

 

$

107

 

 

$

2,662

 

 

$

1,369

 

Gross realized losses

$

(46

)

 

$

(6

)

 

$

(212

)

 

$

(25

)

 

Three Months Ended

 

 

Six Months Ended

 

 

June 30,

 

 

June 30,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Proceeds from sales and maturities (fair value):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale debt securities

$

68,875

 

 

$

30,822

 

 

$

193,702

 

 

$

50,651

 

Equity securities

$

3,082

 

 

$

54,471

 

 

$

4,127

 

 

$

56,971

 

Gross realized gains on sale of securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale debt securities

$

10

 

 

$

28

 

 

$

317

 

 

$

28

 

Equity securities

$

177

 

 

$

1,785

 

 

$

301

 

 

$

1,785

 

Gross realized losses on sale of securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale debt securities

$

(42

)

 

$

(4

)

 

$

(3,114

)

 

$

(40

)

Equity securities

$

 

 

$

(99

)

 

$

 

 

$

(126

)

 

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

 

Three Months Ended

 

 

Nine Months Ended

 

Three Months Ended

 

 

Six Months Ended

 

September 30,

 

 

September 30,

 

June 30,

 

 

June 30,

 

2017

 

 

2016

 

 

2017

 

 

2016

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Fixed maturities

$

2,977

 

 

$

2,456

 

 

$

8,893

 

 

$

6,447

 

Available-for-sale debt securities

$

4,095

 

 

$

3,206

 

 

$

7,795

 

 

$

5,916

 

Equity securities

 

348

 

 

 

223

 

 

 

1,068

 

 

 

666

 

 

711

 

 

 

338

 

 

 

1,294

 

 

 

720

 

Short-term investments

 

 

 

 

15

 

 

 

22

 

 

 

60

 

Available-for-sale short-term investments

 

56

 

 

 

7

 

 

 

145

 

 

 

22

 

Other (1)

 

319

 

 

 

166

 

 

 

651

 

 

 

603

 

 

1,605

 

 

 

188

 

 

 

2,659

 

 

 

332

 

Total investment income

 

3,644

 

 

 

2,860

 

 

 

10,634

 

 

 

7,776

 

 

6,467

 

 

 

3,739

 

 

 

11,893

 

 

 

6,990

 

Less: Investment expenses (2)

 

(559

)

 

 

(556

)

 

 

(1,622

)

 

 

(1,725

)

 

(681

)

 

 

(516

)

 

 

(1,322

)

 

 

(1,063

)

Net investment (expense) income

$

3,085

 

 

$

2,304

 

 

$

9,012

 

 

$

6,051

 

$

5,786

 

 

$

3,223

 

 

$

10,571

 

 

$

5,927

 

 

(1)

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

(2)

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

 



Equity Securities

The following table presents the portion of unrealized gains and losses related to equity securities for the periods presented (in thousands):

 

Three Months Ended

 

 

Six Months Ended

 

 

June 30,

 

 

June 30,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net gains and (losses) recognized during the period

     on equity securities

$

(1,344

)

 

$

1,686

 

 

$

(6,329

)

 

$

1,659

 

Less: Net (gains) and losses recognized during the period on

          equity securities sold during the period

 

(177

)

 

 

(1,686

)

 

 

(301

)

 

 

(1,659

)

Unrealized gains and (losses) recognized during the reporting

     period on equity securities still held at the reporting period

$

(1,521

)

 

$

 

 

$

(6,630

)

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment Real Estate

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

 

September 30, 2017

 

 

December 31, 2016

 

June 30, 2018

 

 

December 31, 2017

 

Income Producing:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment real estate(1)

$

6,918

 

 

$

6,918

 

$

14,619

 

 

$

6,918

 

Less: Accumulated depreciation

 

(415

)

 

 

(281

)

 

(664

)

 

 

(460

)

 

6,503

 

 

 

6,637

 

 

13,955

 

 

 

6,458

 

Non-Income Producing:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Properties under development(1)

 

9,821

 

 

 

4,798

 

 

5,584

 

 

 

12,016

 

Investment real estate, net

$

16,324

 

 

$

11,435

 

$

19,539

 

 

$

18,474

 

(1) During the six months ended June 30, 2018, the Company transferred $7.4 million from properties under development to investment real estate.

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

 

Three Months Ended

 

 

Six Months Ended

 

 

June 30,

 

 

June 30,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Depreciation expense on investment real estate

$

101

 

 

$

44

 

 

$

204

 

 

$

89

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


4. Reinsurance

The Company seeks to reduce itstheir risk of loss by reinsuring certain levels of risk in various areas of exposure with other insurance enterprises or reinsurers, generally as of the beginning of the hurricane season on June 1st of each year. The Company’s current reinsurance program consistsprograms consist 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 in excess ofthat exceed coverage provided by itstheir reinsurance program.programs. The Company remains responsible for the settlement of insured losses irrespective of the ability ofwhether any of itstheir reinsurers fail to make payments otherwise due to the Company.due.

Amounts recoverable from reinsurers are estimated in a manner consistent with the terms of the reinsurance contracts. Reinsurance premiums, losses and loss adjustment expenses (“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.

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

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

 

 

Ratings as of September 30, 2017

 

Due from as of

 

 

Ratings as of June 30, 2018

 

Due from as of

 

 

 

 

Standard

 

 

 

 

 

 

 

 

 

 

 

 

 

Standard

 

 

 

 

 

 

 

 

 

 

 

 

 

and Poor's

 

Moody's

 

 

 

 

 

 

 

 

 

 

 

and Poor's

 

Moody's

 

 

 

 

 

 

 

 

 

AM Best

 

Rating

 

Investors

 

September 30,

 

 

December 31,

 

 

AM Best

 

Rating

 

Investors

 

June 30,

 

 

December 31,

 

Reinsurer

 

Company

 

Services

 

Service, Inc.

 

2017

 

 

2016

 

 

Company

 

Services

 

Service, Inc.

 

2018

 

 

2017

 

Lloyd's of London Syndicate

 

A

 

A+

 

n/a

 

$

33,966

 

 

$

 

Allianz Risk Transfer

 

A+

 

AA-

 

n/a

 

$

186,479

 

 

$

 

 

A+

 

AA-

 

n/a

 

 

18,406

 

 

 

105,573

 

AXIS Specialty Limited

 

A+

 

A+

 

A2

 

 

16,929

 

 

 

 

Everest Reinsurance Company

 

A+

 

A+

 

A1

 

 

63,104

 

 

 

 

Florida Hurricane Catastrophe Fund (1)

 

n/a

 

n/a

 

n/a

 

 

 

 

 

46,364

 

 

n/a

 

n/a

 

n/a

 

 

 

 

 

52,054

 

Renaissance Reinsurance Ltd

 

A+

 

AA-

 

A1

 

 

30,604

 

 

 

 

 

n/a

 

n/a

 

n/a

 

 

 

 

 

22,545

 

Total (2)

 

 

 

 

 

 

 

$

297,116

 

 

$

46,364

 

 

 

 

 

 

 

 

$

52,372

 

 

$

180,172

 

 

(1)

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

(2)

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

 

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

 

Three Months Ended September 30,

 

Three Months Ended June 30,

 

2017

 

 

2016

 

2018

 

 

2017

 

 

 

 

 

 

 

 

 

Losses and Loss

 

 

 

 

 

 

 

 

 

 

Losses and Loss

 

 

 

 

��

 

 

 

 

Losses and Loss

 

 

 

 

 

 

 

 

 

 

Losses and Loss

 

Premiums

 

 

Premiums

 

 

Adjustment

 

 

Premiums

 

 

Premiums

 

 

Adjustment

 

Premiums

 

 

Premiums

 

 

Adjustment

 

 

Premiums

 

 

Premiums

 

 

Adjustment

 

Written

 

 

Earned

 

 

Expenses

 

 

Written

 

 

Earned

 

 

Expenses

 

Written

 

 

Earned

 

 

Expenses

 

 

Written

 

 

Earned

 

 

Expenses

 

Direct

$

274,744

 

 

$

254,809

 

 

$

531,268

 

 

$

241,888

 

 

$

234,500

 

 

$

73,487

 

$

342,781

 

 

$

274,027

 

 

$

246,622

 

 

$

296,191

 

 

$

244,623

 

 

$

85,656

 

Ceded

 

(7,303

)

 

 

(80,292

)

 

 

(414,893

)

 

 

(151,432

)

 

 

(74,966

)

 

 

61

 

 

(339,251

)

 

 

(81,755

)

 

 

(156,780

)

 

 

(311,338

)

 

 

(75,614

)

 

 

(5,472

)

Net

$

267,441

 

 

$

174,517

 

 

$

116,375

 

 

$

90,456

 

 

$

159,534

 

 

$

73,548

 

$

3,530

 

 

$

192,272

 

 

$

89,842

 

 

$

(15,147

)

 

$

169,009

 

 

$

80,184

 

 

Nine Months Ended September 30,

 

Six Months Ended June 30,

 

2017

 

 

2016

 

2018

 

 

2017

 

 

 

 

 

 

 

 

 

Losses and Loss

 

 

 

 

 

 

 

 

 

 

Losses and Loss

 

 

 

 

 

 

 

 

 

Losses and Loss

 

 

 

 

 

 

 

 

 

 

Losses and Loss

 

Premiums

 

 

Premiums

 

 

Adjustment

 

 

Premiums

 

 

Premiums

 

 

Adjustment

 

Premiums

 

 

Premiums

 

 

Adjustment

 

 

Premiums

 

 

Premiums

 

 

Adjustment

 

Written

 

 

Earned

 

 

Expenses

 

 

Written

 

 

Earned

 

 

Expenses

 

Written

 

 

Earned

 

 

Expenses

 

 

Written

 

 

Earned

 

 

Expenses

 

Direct

$

816,350

 

 

$

735,807

 

 

$

687,707

 

 

$

741,782

 

 

$

682,571

 

 

$

198,069

 

$

612,765

 

 

$

536,288

 

 

$

323,261

 

 

$

541,606

 

 

$

480,998

 

 

$

156,439

 

Ceded

 

(318,827

)

 

 

(230,722

)

 

 

(420,578

)

 

 

(298,365

)

 

 

(214,128

)

 

 

1,680

 

 

(339,251

)

 

 

(161,439

)

 

 

(157,493

)

 

 

(311,524

)

 

 

(150,430

)

 

 

(5,685

)

Net

$

497,523

 

 

$

505,085

 

 

$

267,129

 

 

$

443,417

 

 

$

468,443

 

 

$

199,749

 

$

273,514

 

 

$

374,849

 

 

$

165,768

 

 

$

230,082

 

 

$

330,568

 

 

$

150,754

 


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

 

September 30,

 

 

December 31,

 

June 30,

 

 

December 31,

 

2017

 

 

2016

 

2018

 

 

2017

 

Prepaid reinsurance premiums

$

212,489

 

 

$

124,385

 

$

310,618

 

 

$

132,806

 

Reinsurance recoverable on paid losses and LAE

$

21,002

 

 

$

 

Reinsurance recoverable on unpaid losses and LAE

$

412,697

 

 

$

106

 

 

96,849

 

 

 

182,405

 

Reinsurance recoverable (payable) on paid losses

 

 

 

 

(1,532

)

Reinsurance receivable, net

 

 

 

 

186

 

 

1,402

 

 

 

 

Reinsurance recoverable (payable) and receivable

$

412,697

 

 

$

(1,240

)

Reinsurance recoverable and receivable

$

119,253

 

 

$

182,405

 

 

 


5. Insurance Operations

Deferred Policy Acquisition Costs

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

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

 

Three Months Ended

 

 

Nine Months Ended

 

Three Months Ended

 

 

Six Months Ended

 

September 30,

 

 

September 30,

 

June 30,

 

 

June 30,

 

2017

 

 

2016

 

 

2017

 

 

2016

 

2018

 

 

2017

 

 

2018

 

 

2017

 

DPAC, beginning of period

$

73,591

 

 

$

67,190

 

 

$

64,912

 

 

$

60,019

 

$

78,007

 

 

$

66,524

 

 

$

73,059

 

 

$

64,912

 

Capitalized Costs

 

36,999

 

 

 

33,227

 

 

 

110,653

 

 

 

100,444

 

 

50,430

 

 

 

39,898

 

 

 

92,369

 

 

 

73,654

 

Amortization of DPAC

 

(34,656

)

 

 

(32,117

)

 

 

(99,631

)

 

 

(92,163

)

 

(39,681

)

 

 

(32,831

)

 

 

(76,672

)

 

 

(64,975

)

DPAC, end of period

$

75,934

 

 

$

68,300

 

 

$

75,934

 

 

$

68,300

 

$

88,756

 

 

$

73,591

 

 

$

88,756

 

 

$

73,591

 

 

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, Universal Insurance Holding Company of Florida (“UVECF”), without prior regulatory approval is limited by the provisions of the Florida Statutes.Insurance Code. These dividends are referred to as “ordinary dividends.” However, if an ordinarythe 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 Statutes,Insurance Code, and based on the calculations performed by the Company as of December 31, 2017, UPCIC has the capacity to pay ordinary dividends of $57.7$36.2 million during 2017.2018. APPCIC does not havecurrently meet the capacityearnings or surplus regulatory requirements to pay ordinary dividends during 2017.2018. For the ninesix months ended SeptemberJune 30, 2017, UPCIC paid dividends of $30.0 million to UVECF. No2018, no dividends were paid from UPCIC or APPCIC to UVECF for the nine months ended September 30, 2017. Dividends paid to the shareholders of UVE in 2017 have been paid from the earnings of UVE and its non-insurance subsidiaries.UVECF.  

The Florida Insurance Code requires insurance companies to maintain capitalization equivalent to the greater of ten percent of the insurer’s total liabilities orbut not less than $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):

 

September 30,

 

 

December 31,

 

June 30,

 

 

December 31,

 

2017

 

 

2016

 

2018

 

 

2017

 

Ten percent of total liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

UPCIC

$

82,923

 

 

$

57,560

 

$

86,454

 

 

$

72,633

 

APPCIC

$

655

 

 

$

464

 

$

624

 

 

$

572

 

Statutory capital and surplus

 

 

 

 

 

 

 

 

 

 

 

 

 

 

UPCIC

$

319,304

 

 

$

313,753

 

$

340,933

 

 

$

307,686

 

APPCIC

$

16,389

 

 

$

17,280

 

$

16,278

 

 

$

16,633

 

 

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 SeptemberJune 30, 2017.2018. UPCIC and APPCIC are also required to adhere to prescribed premium-to-capital surplus ratios and have met those requirements at such dates.

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

 

Three Months Ended

 

 

Six Months Ended

 

 

June 30,

 

 

June 30,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Combined net income

$

29,244

 

 

$

31,433

 

 

$

43,722

 

 

$

43,194

 


The Insurance Entities are required by various state laws and regulations to maintain certain assets in depository accounts. The following table represents assets held by insurance regulators as of the dates presented (in thousands):

 

September 30,

 

 

December 31,

 

June 30,

 

 

December 31,

 

2017

 

 

2016

 

2018

 

 

2017

 

Restricted cash and cash equivalents

$

2,635

 

 

$

2,635

 

$

2,635

 

 

$

2,635

 

Investments

$

3,922

 

 

$

3,952

 

$

3,908

 

 

$

3,910

 

 


6. Liability for Unpaid Losses and Loss Adjustment Expenses

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

 

Three Months Ended

 

 

Nine Months Ended

 

Three Months Ended

 

 

Six Months Ended

 

September 30,

 

 

September 30,

 

June 30,

 

 

June 30,

 

2017

 

 

2016

 

 

2017

 

 

2016

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Balance at beginning of period

$

22,645

 

 

$

60,144

 

 

$

58,494

 

 

$

98,840

 

$

129,637

 

 

$

31,463

 

 

$

248,425

 

 

$

58,494

 

Less: Reinsurance recoverable

 

(1,393

)

 

 

(2,958

)

 

 

(106

)

 

 

(13,540

)

Less: Reinsurance (recoverable)/payable

 

(70,351

)

 

 

2,353

 

 

 

(182,405

)

 

 

(106

)

Net balance at beginning of period

 

21,252

 

 

 

57,186

 

 

 

58,388

 

 

 

85,300

 

 

59,286

 

 

 

33,816

 

 

 

66,020

 

 

 

58,388

 

Incurred (recovered) related to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current year

 

116,262

 

 

 

73,721

 

 

 

265,811

 

 

 

199,907

 

 

87,532

 

 

 

79,075

 

 

 

163,502

 

 

 

149,549

 

Prior years

 

113

 

 

 

(173

)

 

 

1,318

 

 

 

(158

)

 

2,310

 

 

 

1,109

 

 

 

2,266

 

 

 

1,205

 

Total incurred

 

116,375

 

 

 

73,548

 

 

 

267,129

 

 

 

199,749

 

 

89,842

 

 

 

80,184

 

 

 

165,768

 

 

 

150,754

 

Paid related to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current year

 

93,969

 

 

 

73,352

 

 

 

179,000

 

 

 

146,012

 

 

50,572

 

 

 

62,141

 

 

 

67,979

 

 

 

85,031

 

Prior years

 

15,912

 

 

 

5,077

 

 

 

118,771

 

 

 

86,732

 

 

43,373

 

 

 

30,607

 

 

 

108,626

 

 

 

102,859

 

Total paid

 

109,881

 

 

 

78,429

 

 

 

297,771

 

 

 

232,744

 

 

93,945

 

 

 

92,748

 

 

 

176,605

 

 

 

187,890

 

Net balance at end of period

 

27,746

 

 

 

52,305

 

 

 

27,746

 

 

 

52,305

 

 

55,183

 

 

 

21,252

 

 

 

55,183

 

 

 

21,252

 

Plus: Reinsurance recoverable

 

412,697

 

 

 

1,904

 

 

 

412,697

 

 

 

1,904

 

Plus: Reinsurance recoverable/(payable)

 

96,733

 

 

 

1,393

 

 

 

96,733

 

 

 

1,393

 

Balance at end of period

$

440,443

 

 

$

54,209

 

 

$

440,443

 

 

$

54,209

 

$

151,916

 

 

$

22,645

 

 

$

151,916

 

 

$

22,645

 

The Company’s losses incurred for the three and six months ended June 20, 2018 include prior year net reserve development of $2.3 million which was principally caused by loss reserve development of $5.3 million on a direct basis ($2.6 million on a net basis) for the fourth quarter 2016 storm, Hurricane Matthew. Reserve strengthening on Hurricane Matthew is based on our revised estimate to settle the remaining 78 open claims. The three and six months ended June 30, 2017 included prior year loss reserve development of $6.6 million on a direct basis ($1.1 million on a net basis), also reflecting strengthening of reserves for the fourth quarter 2016 storm, Hurricane Matthew.

Also, during the second quarter in 2018, the Company increased its estimate of ultimate losses on the third quarter 2017 storm Hurricane Irma to $603.5 million for both Insurance Entities from $447.4 million recorded in the first quarter in 2018. The prior year development of $156.1 million in gross losses resulted in a net retention benefit of $0.3 million after cessions to the Company’s reinsurers. The increase in the ultimate loss and LAE for Hurricane Irma was the result of continuation of new reported claims and the aggressive nature of plaintiff attorneys on claims in Florida.

 

 

 

 


7. Long-Term Debt

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

 

 

September 30,

 

 

December 31,

 

 

2017

 

 

2016

 

Surplus note

$

13,235

 

 

$

14,338

 

Promissory note

 

 

 

 

690

 

Total

$

13,235

 

 

$

15,028

 

 

June 30,

 

 

December 31,

 

 

2018

 

 

2017

 

Surplus note

$

12,132

 

 

$

12,868

 

 

In 2006, UPCIC entered into a $25.0 million surplus note with the State Board of Administration of Florida (the “SBA”) under Florida’s Insurance Capital Build-Up Incentive Program (the “ICBUI”). The surplus note has a twenty-year term and accrues interest, adjusted quarterly based on the 10-year Constant Maturity Treasury Index.

 

UPCIC was in compliance with the terms of the surplus note as of SeptemberJune 30, 2017.2018.

 

 

 

 


8. Stockholders’ Equity

Common Stock

The following table summarizes the activity relating to shares of the Company’s common stock during the ninesix months ended SeptemberJune 30, 20172018 (in thousands):

 

Issued

 

 

Treasury

 

 

Outstanding

 

Issued

 

 

Treasury

 

 

Outstanding

 

Shares

 

 

Shares

 

 

Shares

 

Shares

 

 

Shares

 

 

Shares

 

Balance, as of December 31, 2016

 

45,324

 

 

 

(10,272

)

 

 

35,052

 

Balance, as of December 31, 2017

 

45,778

 

 

 

(11,043

)

 

 

34,735

 

Shares repurchased

 

 

 

 

(761

)

 

 

(761

)

 

 

 

 

(342

)

 

 

(342

)

Vesting of performance share units

 

115

 

 

 

 

 

 

115

 

 

127

 

 

 

 

 

 

127

 

Stock option exercises

 

71

 

 

 

 

 

 

71

 

 

1,156

 

 

 

 

 

 

1,156

 

Common stock issued

 

26

 

 

 

 

 

 

26

 

Restricted stock grants

 

50

 

 

 

 

 

 

50

 

Shares acquired through cashless exercise (1)

 

 

 

 

(63

)

 

 

(63

)

 

 

 

 

(854

)

 

 

(854

)

Shares cancelled

 

(63

)

 

 

63

 

 

 

 

 

(854

)

 

 

854

 

 

 

 

Balance, as of September 30, 2017

 

45,473

 

 

 

(11,033

)

 

 

34,440

 

Balance, as of June 30, 2018

 

46,257

 

 

 

(11,385

)

 

 

34,872

 

 

(1)

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

 

In June 2016, UVE announced that itsSeptember 2017, UVE’s Board of Directors authorized a share repurchase program under which UVE may repurchase in the open market in compliance with Exchange Act Rule 10b-18, up to $20 million of its outstanding shares of common stock through December 31, 2017. During the nine months ended September 30, 2017, UVE repurchased 760,559 shares, at an aggregate price of approximately $17.9 million, pursuant to such repurchase program.

In September 2017, the Board of Directors authorized a share repurchase program under which UVE may repurchase in the open market in compliance with Exchange Act Rule 10b-18 up to $20 million of itsCompany’s outstanding shares of common stock through December 31, 2018. There were noDuring the six months ended June 30, 2018, UVE repurchased 342,749 shares, at an aggregate price of common stock repurchased under this program in September 2017.approximately $11.1 million, pursuant to such repurchase program.

Dividends

On January 23, 2017, UVEThe following table summarizes the dividends declared a cash dividend of $0.14 per share on its outstanding common stockand paid on March 2, 2017, toby the shareholders of record at the close of business on February 17, 2017.Company:

 

On April 12, 2017, UVE declared a cash dividend of $0.14 per share on its outstanding common stock paid on July 3, 2017, to the shareholders of record at the close of business on June 14, 2017.

 

 

Dividend

 

Shareholders

 

Dividend

 

Cash Dividend

 

2018

 

Declared Date

 

Record Date

 

Payable Date

 

Per Share Amount

 

First Quarter

 

January 22, 2018

 

February 28, 2018

 

March 12, 2018

 

$

0.14

 

Second Quarter

 

April 12, 2018

 

April 27, 2018

 

May 4, 2018

 

$

0.14

 

Third Quarter

 

May 29, 2018

 

July 2, 2018

 

July 16, 2018

 

$

0.16

 

 

On August 31, 2017, UVE declared a cash dividend of $0.14 per share on its outstanding common stock payable on October 24, 2017, to the shareholders of record at the close of business on September 12, 2017.

 

 

 

 


9. Income Taxes

During the three months ended SeptemberJune 30, 20172018 and 2016,2017, the Company recorded approximately $6.6$15.2 million and $17.3$18.5 million of income tax expense, respectively. The effective tax rate for(“ETR”)for the three months ended SeptemberJune 30, 20172018 was 40.0%24.8% compared to a 39.1% effective tax rate38.7% ETR for the same period in the prior year.2017.

During the ninesix months ended SeptemberJune 30, 20172018 and 2016,2017, the Company recorded approximately $41.4$26.8 million and $54.4$34.7 million of income tax expense, respectively. The effective tax rateETR for the ninesix months ended SeptemberJune 30, 20172018 was 37.0%23.7% compared to a 38.8% effective tax rate36.4% ETR for the same period in the prior year.

During the nine months ended September 30, 2017, the Company’s excess tax benefit of $0.8 million was reflected as an income tax benefit in the condensed consolidated statements of income as a component of the provision for income taxes as a result of the adoption of the accounting guidance for share-based payment transactions. See “Note 2 – Significant Accounting Policies – Recently Adopted Accounting Pronouncements” for more information. In addition, during the nine months ended September 30, 2017, the Company recorded another discrete item as a credit to income tax expense of $1.2 million resulting from anticipated recoveries of income taxes paid for the 2014-2015 tax years.

2017.

In arriving at these rates, the Company considers a variety of factors including the forecasted full year pre-tax results, the U.S. federal tax rate of 35%, expected non-deductible expenses, and estimated state income taxes. The Company’s final effective tax rateETR for the full year will be dependent on the level of pre-tax income, discrete items, the apportionment of taxable income among state tax jurisdictions and the extent of non-deductible expenses in relation to pre-tax income.

Income tax expense for the three months ended June 30, 2018 included a net credit for discrete items of $0.6 million primarily driven by the excess tax benefits resulting from stock-based compensation awards that were exercised during the second quarter of 2018, benefitting the current quarter’s ETR. For the second quarter of 2017, there were no discrete items.

Income tax expense for the six months ended June 30, 2018 included a net credit of $2.3 million primarily driven by the excess tax benefits resulting from stock-based compensation awards that had vested and/or were exercised during that period. The prior year’s discrete items for the six months ended June 30, 2017 were $0.8 million for excess tax benefits resulting from stock-based compensation awards that had vested and/or were exercised during that period, and a credit to income tax expense of $1.2 million resulting from anticipated recoveries of income taxes paid for the 2014-2015 tax years.

The Company's income tax provision for the current reporting period reflects an estimated annual ETR of 25.7%, calculated before the impact of discrete items. The statutory tax rate consists of a federal income tax rate of 21% and a state income tax rate, net of federal benefit, of 3.7%. The difference in the statutory tax rate, 24.7%, and the annual ETR, 25.7%, is largely attributable to the new tax law’s impact on Internal Revenue Code Section 162(m). The effect of reporting discrete items in the three months and six months ended June 30, 2018 amounts to an additional decrease to the annual ETR rate of 1.0% and 2.0%, respectively, resulting in a total estimated ETR of 24.8% and 23.7%, respectively.

The Company files its tax returns as prescribed by the tax laws of the jurisdictions in which it operates. The Company’s 2014 through 2016 tax years are still subject to examination by the Internal Revenue Service and variousvarious tax years remain open to examination in certain state jurisdictions. In February 2018, the Company received notification from the Internal Revenue Service with respect to an examination of the 2015 tax return. The Company is anticipating no adjustments from the examination which is expected to conclude in the third quarter of 2018.

 

 


10. Earnings Per Share

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

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

 

Three Months Ended

 

 

Nine Months Ended

 

Three Months Ended

 

 

Six Months Ended

 

September 30,

 

 

September 30,

 

June 30,

 

 

June 30,

 

2017

 

 

2016

 

 

2017

 

 

2016

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Numerator for EPS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

$

9,964

 

 

$

26,882

 

 

$

70,539

 

 

$

85,756

 

$

46,084

 

 

$

29,376

 

 

$

86,139

 

 

$

60,575

 

Less: Preferred stock dividends

 

(3

)

 

 

(3

)

 

 

(8

)

 

 

(8

)

 

(2

)

 

 

(2

)

 

 

(5

)

 

 

(5

)

Income available to common stockholders

$

9,961

 

 

$

26,879

 

 

$

70,531

 

 

$

85,748

 

$

46,082

 

 

$

29,374

 

 

$

86,134

 

 

$

60,570

��

Denominator for EPS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

34,686

 

 

 

35,042

 

 

 

34,927

 

 

 

34,878

 

 

34,909

 

 

 

34,959

 

 

 

34,874

 

 

 

35,049

 

Plus: Assumed conversion of stock-based

compensation (1)

 

904

 

 

 

656

 

 

 

965

 

 

 

691

 

Plus: Assumed conversion of share-based

compensation (1)

 

655

 

 

 

974

 

 

 

737

 

 

 

987

 

Assumed conversion of preferred stock

 

25

 

 

 

25

 

 

 

25

 

 

 

25

 

 

25

 

 

 

25

 

 

 

25

 

 

 

25

 

Weighted average diluted common shares

outstanding

 

35,615

 

 

 

35,723

 

 

 

35,917

 

 

 

35,594

 

 

35,589

 

 

 

35,958

 

 

 

35,636

 

 

 

36,061

 

Basic earnings per common share

$

0.29

 

 

$

0.77

 

 

$

2.02

 

 

$

2.46

 

$

1.32

 

 

$

0.84

 

 

$

2.47

 

 

$

1.73

 

Diluted earnings per common share

$

0.28

 

 

$

0.75

 

 

$

1.96

 

 

$

2.41

 

$

1.29

 

 

$

0.82

 

 

$

2.42

 

 

$

1.68

 

 

(1)

Represents the dilutive effect of unvested Restricted Stock,restricted stock, unvested Performance Share Unitsperformance share units and unexercised Stock Options.stock options.

 

 


11. Other Comprehensive Income (Loss)

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

 

 

Three Months Ended September 30,

 

 

2017

 

 

2016

 

 

Pre-tax

 

 

Tax

 

 

After-tax

 

 

Pre-tax

 

 

Tax

 

 

After-tax

 

Net unrealized gains (losses) on investments available for sale

   arising during the period

$

1,207

 

 

$

461

 

 

$

746

 

 

$

(694

)

 

$

(265

)

 

$

(429

)

Less: Amounts reclassified from accumulated other

   comprehensive income (loss)

 

(803

)

 

 

(308

)

 

 

(495

)

 

 

(101

)

 

 

(39

)

 

 

(62

)

Net current period other comprehensive income (loss)

$

404

 

 

$

153

 

 

$

251

 

 

$

(795

)

 

$

(304

)

 

$

(491

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

2017

 

 

2016

 

 

Pre-tax

 

 

Tax

 

 

After-tax

 

 

Pre-tax

 

 

Tax

 

 

After-tax

 

Net unrealized gains (losses) on investments available for sale

   arising during the period

$

9,248

 

 

$

3,535

 

 

$

5,713

 

 

$

10,460

 

 

$

3,998

 

 

$

6,462

 

Less: Amounts reclassified from accumulated other

   comprehensive income (loss)

 

(2,450

)

 

 

(938

)

 

 

(1,512

)

 

 

(1,344

)

 

 

(513

)

 

 

(831

)

Net current period other comprehensive income (loss)

$

6,798

 

 

$

2,597

 

 

$

4,201

 

 

$

9,116

 

 

$

3,485

 

 

$

5,631

 

 

Three Months Ended June 30,

 

 

2018

 

 

2017

 

 

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

$

(2,488

)

 

$

(618

)

 

$

(1,870

)

 

$

4,116

 

 

$

1,574

 

 

$

2,542

 

Less: Reclassification adjustment for (gains) losses

           realized in net income

 

32

 

 

 

11

 

 

 

21

 

 

 

(1,710

)

 

 

(654

)

 

 

(1,056

)

Other comprehensive income (loss)

 

(2,456

)

 

 

(607

)

 

 

(1,849

)

 

 

2,406

 

 

 

920

 

 

 

1,486

 

Reclassification adjustments to retained earnings (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in accumulated other comprehensive income (loss)

$

(2,456

)

 

$

(607

)

 

$

(1,849

)

 

$

2,406

 

 

$

920

 

 

$

1,486

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

 

2018

 

 

2017

 

 

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

$

(10,522

)

 

$

(2,507

)

 

$

(8,015

)

 

$

8,041

 

 

$

3,074

 

 

$

4,967

 

Less: Reclassification adjustment for (gains) losses

           realized in net income

 

2,797

 

 

 

681

 

 

 

2,116

 

 

 

(1,647

)

 

 

(630

)

 

 

(1,017

)

Other comprehensive income (loss)

 

(7,725

)

 

 

(1,826

)

 

 

(5,899

)

 

 

6,394

 

 

 

2,444

 

 

 

3,950

 

Reclassification adjustments to retained earnings (1)

 

5,830

 

 

 

2,811

 

 

 

3,019

 

 

 

 

 

 

 

 

 

 

Change in accumulated other comprehensive income (loss)

$

(1,895

)

 

$

985

 

 

$

(2,880

)

 

$

6,394

 

 

$

2,444

 

 

$

3,950

 

 

(1)

This amount represents reclassifications to retained earnings associated with the disproportional income tax effects of the Tax Act on items within AOCI and Unrealized Losses in AOCI relating to Available for Sale equity security investments. See “—Note 2 — Significant Accounting Policies – Recently Adopted Accounting Pronouncements” for more information.

 

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

 

 

 

 

Amounts Reclassified from Accumulated

 

 

 

 

 

Other Comprehensive Income (Loss)

 

 

 

Details about Accumulated Other

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

Affected Line Item in the Statement

Comprehensive Income (Loss) Components

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

Where Net Income is Presented

Unrealized gains (losses) on

   investments available for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

803

 

 

$

101

 

 

$

2,450

 

 

$

1,344

 

 

Net realized gains (losses) on investments

 

 

 

(308

)

 

 

(39

)

 

 

(938

)

 

 

(513

)

 

Income taxes

 

 

$

495

 

 

$

62

 

 

$

1,512

 

 

$

831

 

 

Net of tax

 

 

 

 

 

 

 

 

Amount Reclassified from Accumulated

 

 

 

 

 

Other Comprehensive Income (Loss)

 

 

 

Details about Accumulated

Other Comprehensive

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

Affected Line Item in the Statement

Income (Loss) Components

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

Where Net Income is Presented

Unrealized gains (losses) on

   available-for-sale debt securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

(32

)

 

$

1,710

 

 

$

(2,797

)

 

$

1,647

 

 

Net realized gains (losses) sale of

   securities

 

 

 

11

 

 

 

(654

)

 

 

681

 

 

 

(630

)

 

Income taxes

Total reclassification for the period

 

$

(21

)

 

$

1,056

 

 

$

(2,116

)

 

$

1,017

 

 

Net of tax

 

 


12. Commitments and Contingencies

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 believe that the resolution of these claims will not have a material adverse effect on our financial condition or results of operations. We are also involved in various other legal proceedings and litigation unrelated to claims under our policies that arise in the ordinary course of business operations. Management believes that any liabilities that may arise as a result of these legal matters will not have a material adverse effect on our financial condition or results of operations. The Company contests liability and/or the amount of damages as appropriate in each pending matter.

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

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

 

 


13. Fair Value Measurements

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

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

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

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

Summary of significant valuation techniques for assets measured at fair value on a recurring basis

Level 1

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

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

Level 2

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

Corporate bonds: Comprise investment-grade fixed income 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.

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

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


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

 

Fair Value Measurements

 

Fair Value Measurements

 

September 30, 2017

 

June 30, 2018

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Available-For-Sale Debt Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed Maturities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government obligations and agencies

$

 

 

$

55,016

 

 

$

 

 

$

55,016

 

$

 

 

$

57,712

 

 

$

 

 

$

57,712

 

Corporate bonds

 

 

 

 

215,831

 

 

 

 

 

 

215,831

 

 

 

 

 

333,964

 

 

 

 

 

 

333,964

 

Mortgage-backed and asset-backed securities

 

 

 

 

218,098

 

 

 

 

 

 

218,098

 

 

 

 

 

237,432

 

 

 

 

 

 

237,432

 

Municipal bonds

 

 

 

 

106,290

 

 

 

 

 

 

106,290

 

 

 

 

 

15,717

 

 

 

 

 

 

15,717

 

Redeemable preferred stock

 

 

 

 

13,944

 

 

 

 

 

 

13,944

 

 

 

 

 

11,937

 

 

 

 

 

 

11,937

 

Equity Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

5,683

 

 

 

 

 

 

 

 

 

5,683

 

 

22,320

 

 

 

 

 

 

 

 

 

22,320

 

Mutual funds

 

20,392

 

 

 

 

 

 

 

 

 

20,392

 

 

48,546

 

 

 

 

 

 

 

 

 

48,546

 

Total assets accounted for at fair value

$

26,075

 

 

$

609,179

 

 

$

 

 

$

635,254

 

$

70,866

 

 

$

656,762

 

 

$

 

 

$

727,628

 

 

Fair Value Measurements

 

Fair Value Measurements

 

December 31, 2016

 

December 31, 2017

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Available-For-Sale Debt Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed Maturities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government obligations and agencies

$

 

 

$

74,267

 

 

$

 

 

$

74,267

 

$

 

 

$

59,604

 

 

$

 

 

$

59,604

 

Corporate bonds

 

 

 

 

191,430

 

 

 

 

 

 

191,430

 

 

 

 

 

227,504

 

 

 

 

 

 

227,504

 

Mortgage-backed and asset-backed securities

 

 

 

 

214,776

 

 

 

 

 

 

214,776

 

 

 

 

 

219,452

 

 

 

 

 

 

219,452

 

Municipal bonds

 

 

 

 

91,197

 

 

 

 

 

 

91,197

 

 

 

 

 

120,295

 

 

 

 

 

 

120,295

 

Redeemable preferred stock

 

 

 

 

12,691

 

 

 

 

 

 

12,691

 

 

 

 

 

12,479

 

 

 

 

 

 

12,479

 

Equity Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

93

 

 

 

 

 

 

 

 

 

93

 

 

18,811

 

 

 

 

 

 

 

 

 

18,811

 

Mutual funds

 

50,710

 

 

 

 

 

 

 

 

 

50,710

 

 

43,404

 

 

 

 

 

 

 

 

 

43,404

 

Short-term investments

 

 

 

 

5,002

 

 

 

 

 

 

5,002

 

Available-for-sale short-term investments

 

 

 

 

10,000

 

 

 

 

 

 

10,000

 

Total assets accounted for at fair value

$

50,803

 

 

$

589,363

 

 

$

 

 

$

640,166

 

$

62,215

 

 

$

649,334

 

 

$

 

 

$

711,549

 

 

The Company utilizes third-party independent pricing services that provide a price quote for each fixed maturity,available-for-sale debt security, equity security and available-for-sale short-term investment. Management reviews the methodology used by the pricing services. If management believes that the price used by the pricing service does not reflect an orderly transaction between participants, management will use an alternative valuation methodology. There were no adjustments made by the Company to the prices obtained from the independent pricing source for any fixed maturitiesavailable-for-sale debt securities, equity securities or equity securitiesavailable-for-sale short-term investments included in the tables above.

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

 

 

September 30, 2017

 

 

December 31, 2016

 

 

 

 

 

 

(Level 3)

 

 

 

 

 

 

(Level 3)

 

 

 

 

 

 

Estimated Fair

 

 

 

 

 

 

Estimated Fair

 

 

Carrying Value

 

 

Value

 

 

Carrying Value

 

 

Value

 

Liabilities (debt):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Surplus note

$

13,235

 

 

$

11,949

 

 

$

14,338

 

 

$

13,282

 

Promissory note

$

 

 

$

 

 

$

690

 

 

$

690

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2018

 

 

December 31, 2017

 

 

 

 

 

 

(Level 3)

 

 

 

 

 

 

(Level 3)

 

 

 

 

 

 

Estimated Fair

 

 

 

 

 

 

Estimated Fair

 

 

Carrying Value

 

 

Value

 

 

Carrying Value

 

 

Value

 

Liabilities (debt):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Surplus note

$

12,132

 

 

$

10,823

 

 

$

12,868

 

 

$

11,630

 

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 State Board of Administration of Florida (“SBA”)SBA is the holder of the surplus note and the quoted interest rate is below prevailing rates quoted by private lending institutions. However, as the Company’s use of funds from the surplus note is limited by the terms of the agreement, the Company has determined the interest rate quoted by the SBA to be appropriate for purposes of establishing the fair value of the note.

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

 

 


14. 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 Financial Statements as of SeptemberJune 30, 2017.2018.

 

 

 

 

 


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

Unless the context otherwise requires, all references to “we,” “us,” “our,” and “Company” refer to Universal Insurance Holdings, Inc. and its wholly-owned subsidiaries. You should read the following discussion together with our condensed consolidated financial statements (“Financial Statements”) and the related notes thereto included in Part I, Item 1 “Financial Statements.” Operating results for any one quarter are not necessarily indicative of results to be expected for any other quarter or for the year.

Forward-Looking Statements

In addition to historical information, the following discussion may contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act. Forward-looking statements are based on various factors and assumptions that include known and unknown risks and uncertainties, some of which are beyond our control and cannot be predicted or quantified. Certain statements made in this report reflect management’s expectations regarding future events, and the words “expect,” “estimate,” “anticipate,” “believe,” “intend,” “project,” “plan” and similar expressions and variations thereof, speak only as of the date the statement was made and are intended to identify forward-looking statements. Such statements may include, but not be limited to, projections of revenues, income or loss, expenses, plans, as well as assumptions relating to the foregoing. Future results could differ materially from those in the following discussion and those described in forward-looking statements as a result of the risks set forth below which are a summary of those set forth in our Annual Report on Form 10-K for the year ended December 31, 2016.2017.

Risks Relating to our Business

As a property and casualty insurer, we may face significant losses from catastrophes and severe weather events,

Actual claims incurred may exceed current reserves established for claims and may adversely affect our operating results and financial condition,

Our success depends in part on our ability to accurately and adequately price the risks we underwrite,

Unanticipated increases in the severity or frequency of claims may adversely affect our profitability and financial condition,

The failure of the risk mitigation strategies we utilize could have a material adverse effect on our financial condition or results of operations,

Because we rely on independent insurance agents, the loss of these independent agent relationships and the business they control or our ability to attract new independent agents could have an adverse impact on our business,

The inherent uncertainty of models and our reliance on such models as a tool to evaluate risksrisk may have an adverse effect on our financial results,

Reinsurance may be unavailable in the future at current levels and prices, which may limit our ability to write new business or to adequately mitigate our exposure to loss,

Reinsurance subjects us to the credit risk of our reinsurers, which could have a material adverse effect on our operating results and financial condition,

Our financial condition and operating results and the financial condition and operating results of our Insurance Entities (as defined below) may be adversely affected by the cyclical nature of the property and casualty business,

Because we conduct the substantial majority of our business in Florida, our financial results depend on the regulatory, economic and weather conditions in Florida,

Changing climate conditions may adversely affect our financial condition, profitability or cash flows,

We have entered and in the future, may enter new markets, but there can be no assurance that our diversification and growth strategy will be effective,

Loss of key executives or our inability to otherwise attract and retain talent could affect our operations,

We could be adversely affected if our controls designed to ensure compliance with guidelines, policies and legal regulatory standards are not effective,

The failure of our claims department to effectively manage claims could adversely affect our insurance business, financial results and capital requirements,

Litigation or regulatory actions could have a material adverse impact on us,

Our future results are dependent in part on our ability to successfully operate in a highly competitive insurance industry,


 

A downgrade in our Financial Stability Rating® may have an adverse effect on our competitive position, the marketability of our product offerings, and our liquidity, operating results and financial condition,


Breaches of our information systems or denial of service on our website could have an adverse impact on our business and reputation,

We may not be able to effectively implement or adapt to changes in technology, and

Lack of effectiveness of exclusions and other loss limitation methods in the insurance policies we write could have a material adverse effect on our financial condition or our results of operations.

Risks Relating to Investments

We are subject to market risk, which maycould adversely affect investment income, and

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

Risks Relating to the Insurance Industry

We are subject to extensive regulation and potential further restrictive regulation may increase our operating costs and limit our growth and profitability,

UVE is a holding company and, consequently, its cash flow is dependent on dividends and other permissible payments from its subsidiaries,

Regulations limiting rate changes and requiring us to participate in loss sharing or assessments may decrease our profitability,

The amount of statutory capital and surplus that each of the Insurance Entities has and the amount of statutory capital eachand surplus it must hold can vary and are sensitive to a number of factors outside of our control, including market conditions and the regulatory environment and rules, and

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

Risks Relating to Debt Obligations

Our revolving line of credit has restrictive terms, and our failure to comply with any of these terms could have an adverse effect on our business and prospects, and

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

Risks Relating to Ownership of Our Common Stock

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

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

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

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand the results of operations and financial condition of Universal Insurance Holdings, Inc. and its wholly-owned consolidated subsidiaries. MD&A is provided as a supplement to, and should be read in conjunction with, our financial statements and accompanying notes in Item 1 above.

Overview

Universal Insurance Holdings, Inc. (“UVE,” and together with its wholly-owned subsidiaries, “we,” “our,” “us,” or “the Company”) is the largest private personal residential insurance company in Florida by direct written premium in-force, with approximately 9.9%10.3% market share as of June 30, 2017,March 31, 2018, according to the most recent data reported by the Florida Office of Insurance Regulation (“FLOIR”). We perform substantially all aspects of insurance underwriting, policy issuance, general administration and claims processing and settlement internally through our vertically integrated operations. Our wholly-owned licensed insurance subsidiaries, Universal Property & Casualty Insurance Company (“UPCIC”) and American Platinum Property and Casualty Insurance Company (“APPCIC”


and together with UPCIC, the “Insurance Entities”), currently write personal residential insurance policies, predominantly in Florida with $718.2$529.5 million in direct written premium for the ninesix months ended SeptemberJune 30, 2017.2018. UPCIC also writes residential homeowners insurance policies in Alabama, Delaware, Georgia, Hawaii, Indiana, Maryland, Massachusetts, Michigan, Minnesota, New Hampshire, New Jersey, New York, North Carolina, Pennsylvania, South Carolina, and Virginia with $98.2$83.3 million in direct written premium for the ninesix months ended SeptemberJune 30, 2017, generated in those states.2018. UPCIC is also licensed to issue policies in Illinois, Iowa, New Hampshire, New York, and West Virginia. In October 2017, UPCIC wrote its first homeowners policyAPPCIC also is currently writing Fire, Commercial Multi-Peril, and Other Liability lines of business in New York.Florida. We believe that our longevity in the Florida market and our resulting depth of experience will enable us to continue to successfully grow our business in both hard and soft markets.


We generate revenues primarily from the collection of premiums. The nature of our business tends to be seasonal, reflecting consumer behaviors in connection with the Florida residential real estate market and the hurricane season. The amount of direct written premium tends to increase just prior to the second quarter of our fiscal year and tends to decrease approaching the fourth quarter. Other sources of revenue include: commissions paid by our reinsurers to our reinsurance intermediary subsidiary, Blue Atlantic Reinsurance, on reinsurance it places for the Insurance Entities; policy fees collected from policyholders by our managing general agencyagent subsidiary, Universal Risk Advisors; earnings from claims handling on ceded claims by our subsidiary, Universal Adjusting Corporation (“UAC”); and financing fees charged to policyholders who choose to defer premium payments. We also generate income by investing our assets.

Over the past several years, we have grown our business both within Florida and elsewhere in the United States through our distribution network of approximately 8,6009,200 licensed independent agents. Our goals are to profitably grow our business, invest in our vertically integrated structure, expand our independent agent network, and return value to shareholders. Some of our key strategies include increasing our policies in force in Florida through continued profitable and organic growth; expanding into other states to diversify our revenue and risk; optimizing our reinsurance program; and continuing to provide high quality service to our policyholders.policyholders and reinsurers through our vertically integrated structure. We believe each of these strategies in recent years has contributed towardsto an increase in earnings and earnings per share as well as an improvement in our overall financial condition. See “—Results of Operations” below for a discussion of our results for the three and ninesix months ended SeptemberJune 30, 20172018 compared to the same periods in 2016.2017.

Our overall organic growth strategy emphasizes taking prudent measures to increase our footprint, and increasegrow our policy count and to improve the quality of our business rather than merely increasing our policy count.market share. Our focus on long-term capital strength and organic growth allows us to be selective in the risks we accept. Our goal is to write risks that are priced adequately and meet our underwriting standards. We believe that our strategy of organically expanding our premium growth through our independent agent distribution network and through our unique direct-to-consumer online platform called Universal DirectSM (which enables homeowners to directly purchase, pay for and bind homeowners policies online without the need to directly interface with any intermediaries), streamlining claims management and balancing appropriate pricing with disciplined underwriting standards will maximize our profitable growth. We also intend to continue our expansion outside of Florida in markets that allow us to write profitable business and to diversify our revenue and risk. Upon entering new markets, we leverage our existing independent agent network to generate new local relationships and business, and we take the time to learn about each new market and any of its unique risks in order to carefully develop our own policy forms, rates and informed underwriting standards. Our expansion efforts differ from many of our competitors that have grown in recent years primarily through assumption of policies from Citizens Property Insurance Corporation, Florida’s statutory residual property insurance market.market and through mergers and acquisitions.

As a result of our organic growth strategy and initiatives, we have seen increases in policy count and insured value in all states for over twothree years. The percentage of our total insured value for states outside of Florida increased from 19.7%23.7% as of SeptemberJune 30, 20162017 to 24.9%28.9% as of SeptemberJune 30, 2017.2018. The following table provides direct written premium for Florida and other states for the three and ninesix months ended SeptemberJune 30, 20172018 and 20162017 (dollars in thousands):

 

For the Three Months Ended

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

 

 

 

 

 

 

 

 

September 30, 2017

 

 

September 30, 2016

 

 

Growth

year over year

 

June 30, 2018

 

 

June 30, 2017

 

 

Growth

year over year

 

State

Direct Written Premium

 

 

%

 

 

Direct Written Premium

 

 

%

 

 

$

 

 

%

 

Direct Written Premium

 

 

%

 

 

Direct Written Premium

 

 

%

 

 

$

 

 

%

 

Florida

$

238,309

 

 

 

86.7

%

 

$

215,634

 

 

 

89.1

%

 

$

22,675

 

 

 

10.5

%

$

295,337

 

 

 

86.2

%

 

$

261,430

 

 

 

88.3

%

 

$

33,907

 

 

 

13.0

%

Other states

 

36,435

 

 

 

13.3

%

 

 

26,254

 

 

 

10.9

%

 

 

10,181

 

 

 

38.8

%

 

47,444

 

 

 

13.8

%

 

 

34,761

 

 

 

11.7

%

 

 

12,683

 

 

 

36.5

%

Total

$

274,744

 

 

 

100.0

%

 

$

241,888

 

 

 

100.0

%

 

$

32,856

 

 

 

13.6

%

$

342,781

 

 

 

100.0

%

 

$

296,191

 

 

 

100.0

%

 

$

46,590

 

 

 

15.7

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Nine Months Ended

 

 

 

 

 

 

 

 

 

For the Six Months Ended

 

 

 

 

 

 

 

 

 

September 30, 2017

 

 

September 30, 2016

 

 

Growth

year over year

 

June 30, 2018

 

 

June 30, 2017

 

 

Growth

year over year

 

State

Direct Written Premium

 

 

%

 

 

Direct Written Premium

 

 

%

 

 

$

 

 

%

 

Direct Written Premium

 

 

%

 

 

Direct Written Premium

 

 

%

 

 

$

 

 

%

 

Florida

$

718,177

 

 

 

88.0

%

 

$

672,477

 

 

 

90.7

%

 

$

45,700

 

 

 

6.8

%

$

529,515

 

 

 

86.4

%

 

$

479,868

 

 

 

88.6

%

 

$

49,647

 

 

 

10.3

%

Other states

 

98,173

 

 

 

12.0

%

 

 

69,305

 

 

 

9.3

%

 

 

28,868

 

 

 

41.7

%

 

83,250

 

 

 

13.6

%

 

 

61,738

 

 

 

11.4

%

 

 

21,512

 

 

 

34.8

%

Total

$

816,350

 

 

 

100.0

%

 

$

741,782

 

 

 

100.0

%

 

$

74,568

 

 

 

10.1

%

$

612,765

 

 

 

100.0

%

 

$

541,606

 

 

 

100.0

%

 

$

71,159

 

 

 

13.1

%

 

Third-Quarter 2017


Second-Quarter 2018 Highlights

 

Gross direct written premiums overall grew by $32.9$46.6 million, or 13.6%15.7%, to $274.7$342.8 million compared to the thirdsecond quarter in 2016.2017.

Highest quarterlyTotal direct written premium in the Company’s history, and highest quarterly rate of growth (total 13.6%) both inside Florida (10.5%) andimproved from 8.9% in other states (38.8%).2017 to 15.7% in 2018, quarter over quarter.

Net earned premiums grew by $15.0$23.3 million, or 9.4%13.8%, to $174.5$192.3 million compared to the thirdsecond quarter in 2016.2017.

Total revenues increased by $17.8$24.3 million, or 10.3%13.1%, to $190.2$209.8 million compared to the thirdsecond quarter in 2016.

Hurricane Irma, weather events and increases to the core loss ratio affected results during the third quarter of 2017.

ExpenseLoss ratio improved from 34.3% in 2016 to 32.8%47.4% as of the end of the second quarter in 2017 to 46.7% as of the end of the second quarter over quarter.in 2018.

Expense ratio improved from 33.9% as of the end of the second quarter in 2017 to 30.4% as of the end of the second quarter in 2018.

UAC generated $8.4 million of estimated pretax profits principally from the handling of Hurricane Irma claims.

Primarily as a result of the Tax Cuts and Jobs Act of 2017 (“Tax Act”), our effective tax rate decreased from 38.7% in 2017 to 24.8% in 2018.

Completed negotiation and execution of contracts representing our 2018 – 2019 reinsurance program.

Declared and paid dividends of $0.14 per share.share during the second quarter in 2018 and declared dividends of $0.16 per share payable in the third quarter in 2018.

Repurchased approximately 406 thousand250,000 shares during the quarter at an aggregate cost of $9.0$8.4 million pursuant to the Company’s 2016 stock buyback2018 share repurchase program.

Wrote our first policy in New $20 million stock buyback program authorized by the Board of Directors.Hampshire.

 

UPCIC’s 2017-20182018-2019 Reinsurance Program

Third-Party Reinsurance

Our annual reinsurance program, which is segmented into layers of coverage, as is industry practice, protects us against excess property catastrophe losses. Our 2017-20182018-2019 reinsurance program includes the mandatory coverage required by law to be placed with the Florida Hurricane Catastrophe Fund (“FHCF”), in which we have elected to participate at 90%, or the highest level, and also includes private reinsurance below, alongside and above the FHCF layer. In placing our 2017-20182018-2019 reinsurance program, we obtained multiple years of coverage for an additional portion of the program. We believe this multi-year arrangement will allow us to capitalize on favorable pricing and contract terms and conditions and allow us to mitigate uncertainty with respect to the price of future reinsurance coverage, one of our single largest cost.costs.

The total cost of UPCIC’s private catastrophe reinsurance program for all states as described below, effective June 1, 20172018 through May 31, 2018,2019, is $155.5$175.30 million. In addition, UPCIC has purchased reinstatement premium protection as described below, the cost of which is $25.7$14.97 million. The largest private participants in UPCIC’s reinsurance program include leading reinsurance companies and providers such as Nephila Capital, Everest Re, RenaissanceRe, Chubb Tempest Re and Lloyd’s of London syndicates.

UPCIC’s Retention

UPCIC has a net retention of $35 million per catastrophe event for losses incurred, in all states, up to a first event loss of $2.71$3.00 billion. UPCIC also purchases a separate underlying catastrophe program to further reduce its retention for all losses occurring in any state other than Florida (the “Other States Reinsurance Program”). UPCIC retains only $5 million under its Other States Reinsurance Program in the first event, $3 million in the second event and only $1 million under its Other States Reinsurance Program for the secondthird through fourthfifth events. These retention amounts are gross of any potential tax benefit we would receive in paying such losses.

First Layer

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

68.33%59% of $76 million in excess of $35 million provides coverage for the 2018-2019 period;

20% of $55 million in excess of $35 million provides coverage on a multi-year basis through May 31, 2019;2021;

31.67%21% of $55 million in excess of $35 million provides coverage for the 2017-20182018-2019 period; and

100% of $55$76 million in excess of $35 million and in excess of $110$152 million otherwise recoverable (from the first and second events) provides the third and fourth event coverage for the 2017-20182018-2019 period.


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


Second Layer

Above the first layer,layers, for losses exceeding $90 million and $111 million, we have purchased a second layer of coverage for losses up to $445 million – in other words, for the next $355 or $334 million of losses. This coverage has been obtained from twothree contracts as follows:

58% of $355 million in excess of $90 million provides coverage on a multi-year basis through May 31, 2020; and

42%19.5% of $355$334 million in excess of $90$111 million provides coverage on a multi-year basis through May 31, 2021; and

22.5% of $334 million in excess of $111 million provides coverage for the 2017-2018 period2018-2019 period.

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

Third Layer

Above the first and second layers, we have purchased a third layer of coverage for losses up to $540$529 million – in other words, for the next $95$84 million of losses. This coverage was obtained from two contracts as follows:

68.33%65% of $95$84 million in excess of $445 million provides coverage on a multi-year basis through May 31, 2019;2021; and

31.67%35% of $95$84 million in excess of $445 million provides coverage for the 2017-20182018-2019 period.

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

Fourth FifthLayer

Above the first, second and Sixth Layers

In the fourth, fifth and sixththird layers, we have purchased reinsurancea fourth layer of coverage for $55losses up to $635 million – in other words, for the next $106 million of losses. This coverage was obtained from two contracts as follows:

65% of $106 million in excess of $540$529 million in losses incurred by us (netprovides coverage for the 2018-2019 period; and

35% of the FHCF layer), $193$106 million of coverage in excess of $595$529 million in losses incurred by us (net ofprovides coverage for the FHCF layer), and $125 million of coverage in excess of $788 million, respectively, for a total of $878 million of coverage (net of the FHCF layer) by third-party reinsurers. With respect to the fourth layer,2018-2019 period.

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

Fifth Layer

Above the first, second, third and fourth layers, we have purchased a fifth layer of coverage for losses up to $680 million – in other words, for the next $45 million of losses. This coverage was obtained from two contracts as follows:

65% of $45 million in excess of $635 million provides coverage on a multi-year basis through May 31, 2021; and

35% of $45 million in excess of $635 million provides coverage for the 2018-2019 period.

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

Sixth and Seventh Layers

In the sixth and seventh layers, we have purchased reinsurance for $218 million of coverage in excess of $680 million in losses incurred by us (net of the FHCF layer), and $140 million of coverage in excess of $898 million (net of the FHCF layer), respectively, for a total of $1.0 billion of coverage (net of the FHCF layer) by third-party reinsurers. In these layers, to the extent that all of our coverage or a portion thereof is exhausted in a catastrophic event and reinstatement premium is due, we have purchased reinstatement premium protection to pay the required premium necessary for the reinstatement of these coverages. Both of these contracts extend coverage to all states.


UPCIC structures its reinsurance coverage into layers and utilizes a cascading feature such that the second, third, fourth, fifth, sixth and sixthseventh reinsurance layers all attach at $90$111 million. Any layers above the $90$111 million attachment point are excess of loss over the immediately preceding layer. If the aggregate limit of the preceding layer is exhausted, the next layer cascades down in its place for future events. This means that, unless losses exhaust the top layer of our coverage, we are exposed to only $35 million in losses, pre-tax, per catastrophe for each of the first four events. In addition to tax benefits that could reduce our ultimate loss, we anticipate that certaincertain fees paid to our subsidiary service providers by our Insurance Entities and, indirectly, our reinsurers, would also increase during an active hurricane season, which could also offset claim-related losses we would have to pay on our insurance policies.season.

Other States Reinsurance Program

The total cost of UPCIC’s private catastrophe reinsurance program for other states as described below, effective June 1, 20172018 through May 31, 2018,2019, is $8.9$9.74 million. In addition, UPCIC has purchased reinstatement premium protection as described below, the cost of which is $1.85$2.25 million.

Effective June 1, 20172018 through June 1, 2018,2019, under an excess catastrophe contract specifically covering risks located outside the state of Florida and intended to further reduce UPCIC’s $35 million net retention, as noted above, UPCIC has obtained catastrophe coverage of $30 million in excess of $5 million covering certain loss occurrences, including hurricanes, in states outside of Florida. This catastrophe coverage has a second full limit available with additional premium calculated pro rata as to amount and 100% as to time, as applicable. For this catastrophe coverage, which is placed in three layers, to the extent that all of our coverage or a portion thereof is exhausted in a catastrophic event and reinstatement premium is due, we have purchased reinstatement premium protection to pay the required premium necessary for the reinstatement of this coverage. All catastrophe layers are placed with a cascading feature so that all capacity could be made available in excess of $5 million under certain loss scenarios. Further, UPCIC purchased subsequent catastrophe event excess of loss reinsurance specifically covering risks outside of Florida to cover certain levels of loss through fourfive catastrophe events including hurricanes. Specifically, UPCIC obtained catastrophe coverage that covers 100% of $4,000,000 excess of $1,000,000 in excess of $4,000,000$6,000,000 otherwise recoverable. This coverage has two and a half free reinstatements and a total of $12,000,000$14,000,000 of coverage available to UPCIC.

In certain circumstances involving a first catastrophic event impacting both Florida and other states, UPCIC’s retention could result in pre-tax net liability as low as $5,000,000 – the $35 million net retention under the all states reinsurance program could be offset by as much as $30 million in coverage under the Other States Reinsurance Program – or 1.6%1.5% of UPCIC’s statutory policyholders’ surplus as of SeptemberJune 30, 2017.2018.


FHCF

UPCIC’s third-party reinsurance program supplements the FHCF coverage we are required to purchase every year. The limit and retention of the FHCF coverage we receive each year is subject to upward or downward adjustment based on, among other things, submitted exposures to the FHCF by all participants. As of June 1, 2017,2018, we estimate our FHCF coverage includes a maximum provisional limit of 90% of $1,996.5 million,$2.18 billion, or $1,797 million,$1.96 billion, in excess of $618$680 million. The estimated premium that UPCIC plans to cede to the FHCF for the 20172018 hurricane season is $124$128.3 million.

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

The third-party reinsurance we purchase for UPCIC is therefore net of FHCF recovery. When our FHCF and third-party reinsurance coverages are taken together, UPCIC has reinsurance coverage of up to $2,710 million$3.00 billion for the first event, as illustrated by the graphic below. Should a catastrophic event occur, we would retain up to $35 million pre-tax for each catastrophic event, and would also be responsible for any additional losses that exceed our top layer of coverage.


UPCIC All States 1st Event


UPCIC Other States (Non-Florida) 1st Event

 



Non-Florida 1st Event

APPCIC’s 2017-20182018-2019 Reinsurance Program

Third-Party Reinsurance

The total cost of APPCIC’s private catastrophe and multiple line excess reinsurance program, effective June 1, 20172018 through May 31, 2018,2019, is $1.88$2.27 million. In addition, APPCIC has purchased reinstatement premium protection as described below, the cost of which is $59,500.$103,950. The largest private participants in APPCIC’s reinsurance program include leading reinsurance companies such as Everest Re, Chubb Tempest Re, Hiscox, Hannover Ruck, and Lloyd’s of London syndicates.

APPCIC’s Retention

APPCIC has a net retention of $2 million for all losses per catastrophe event for losses incurred up to a first event loss of $27.6$36.2 million. This retention amount is gross of any potential tax benefit we would receive in paying such losses.

First Layer

Immediately above APPCIC’s net retention we have $3.2$4.2 million of reinsurance coverage from third-party reinsurers. Specifically, we have purchased reinsurance coverage for the first event, and such coverage allows for one reinstatement upon the payment of reinstatement premiums, which would cover the second and potentially more catastrophic events. We have purchased reinstatement premium protection to pay the required premium necessary for the initial reinstatement of this coverage for a second catastrophic event.


Second, Third and ThirdFourth Layers

In the second, third and thirdfourth layers, we have purchased reinsurance for $1.7$2.0 million of coverage in excess of $5.2$6.2 million in losses incurred by us (net of the FHCF layer) and $7, $5 million of coverage in excess of $6.9$8.2 million in losses incurred by us (net of the FHCF layer), and $5 million of coverage in excess of $13.2 million in losses incurred by us (net of the FHCF layer), respectively.


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

FHCF

APPCIC’s third-party reinsurance program is used to supplement the FHCF reinsurance we are required to purchase every year. The limit and retention of the FHCF coverage we receive each year is subject to upward or downward adjustment based on, among other things, submitted exposures to the FHCF by all participants. As of June 1, 2017,2018, we estimate our FHCF coverage includes a maximum provisional limit of 90% of $15.2$20 million, or $13.7$18 million, in excess of $4.7$6.2 million. The estimated premium that APPCIC plans to cede to the FHCF for the 20172018 hurricane season is $943 thousand.$1.2 million. Factoring in our estimated coverage under the FHCF, we purchase coverage alongside our FHCF coverage from third-party reinsurers as described above, which adjusts to provide coverage for certain losses not otherwise covered by the FHCF. The FHCF coverage cannot be reinstated once exhausted, but it does provide coverage for multiple events. The FHCF coverage extends only to losses to our portfolio due toimpacted by a declared hurricane that causes storm losses in Florida.land falling hurricane.

The third-party reinsurance we purchase for APPCIC is therefore net of FHCF recovery. When our FHCF and third-party reinsurance coverages are taken together, APPCIC has reinsurance coverage of up to $27.6$36.2 million, as illustrated by the graphic below. Should a catastrophic event occur, we would retain $2 million pre-tax for each catastrophic event, and would also be responsible for any additional losses that exceed our top layer of coverage.

 


APPCIC 1st Event

 


Multiple Line Excess of Loss

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

 

Results of Operations — Three Months Ended SeptemberJune 30, 20172018 Compared to Three Months Ended SeptemberJune 30, 20162017

Net income decreased by $16.9was $46.1 million, an increase of $16.7 million, or 62.9%56.9%, for the three months ended June 30, 2018, compared to $10.0$29.4 million for the three months ended SeptemberJune 30, 2017, compared2017. The increase is the result of double digit revenue growth, continued underwriting profitability, and a reduced effective tax rate. Diluted earnings per common share increased by $0.47 to $26.9 million$1.29 for the three months ended SeptemberJune 30, 2016. The decrease in net income was primarily the result of $37 million of net pre-tax storm losses incurred as a result of Hurricane Irma, a Category 4 storm making landfall in the Florida Keys on September 10, 2017. Total premiums earned and other revenues which increased $17.8 million, or 10.3%, over the same period in 2016, were more than offset by an increase in losses and loss adjustment expenses for the quarter2018, compared to the same period in 2016. General and administrative expenses increased 4.6% over the same quarter in 2016 to $57.3 million as compared to $54.7 million, but as a percentage of earned premium decreased from 34.3% to 32.8% this quarter. Diluted earnings$0.82 per common share decreased by $0.47 to $0.28 for the three months ended SeptemberJune 30, 2017, compared to $0.75 forreflecting the three months ended September 30, 2016, as a result of the decreaseincrease in net income.income and a slight reduction in our weighted average diluted common shares outstanding. A more detailed discussion of this and other factorsour results of operations follows the table below.


 

(in thousands)

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

September 30,

 

 

Change

 

June 30,

 

 

Change

 

2017

 

 

2016

 

 

$

 

 

%

 

2018

 

 

2017

 

 

$

 

 

%

 

PREMIUMS EARNED AND OTHER REVENUES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct premiums written

$

274,744

 

 

$

241,888

 

 

$

32,856

 

 

 

13.6

%

$

342,781

 

 

$

296,191

 

 

$

46,590

 

 

 

15.7

%

Change in unearned premium

 

(19,935

)

 

 

(7,388

)

 

 

(12,547

)

 

 

169.8

%

 

(68,754

)

 

 

(51,568

)

 

 

(17,186

)

 

 

33.3

%

Direct premium earned

 

254,809

 

 

 

234,500

 

 

 

20,309

 

 

 

8.7

%

 

274,027

 

 

 

244,623

 

 

 

29,404

 

 

 

12.0

%

Ceded premium earned

 

(80,292

)

 

 

(74,966

)

 

 

(5,326

)

 

 

7.1

%

 

(81,755

)

 

 

(75,614

)

 

 

(6,141

)

 

 

8.1

%

Premiums earned, net

 

174,517

 

 

 

159,534

 

 

 

14,983

 

 

 

9.4

%

 

192,272

 

 

 

169,009

 

 

 

23,263

 

 

 

13.8

%

Net investment income (expense)

 

3,085

 

 

 

2,304

 

 

 

781

 

 

 

33.9

%

 

5,786

 

 

 

3,223

 

 

 

2,563

 

 

 

79.5

%

Net realized gains (losses) on investments

 

803

 

 

 

101

 

 

 

702

 

 

 

695.0

%

Net realized gains (losses) on sale of securities

 

145

 

 

 

1,710

 

 

 

(1,565

)

 

NM

 

Net change in unrealized gains (losses) of equity securities

 

(1,521

)

 

 

 

 

 

(1,521

)

 

NM

 

Commission revenue

 

5,304

 

 

 

4,603

 

 

 

701

 

 

 

15.2

%

 

5,709

 

 

 

4,644

 

 

 

1,065

 

 

 

22.9

%

Policy fees

 

4,861

 

 

 

4,226

 

 

 

635

 

 

 

15.0

%

 

5,764

 

 

 

5,250

 

 

 

514

 

 

 

9.8

%

Other revenue

 

1,673

 

 

 

1,668

 

 

 

5

 

 

 

0.3

%

 

1,633

 

 

 

1,651

 

 

 

(18

)

 

 

-1.1

%

Total premiums earned and other revenues

 

190,243

 

 

 

172,436

 

 

 

17,807

 

 

 

10.3

%

 

209,788

 

 

 

185,487

 

 

 

24,301

 

 

 

13.1

%

OPERATING COSTS AND EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Losses and loss adjustment expenses

 

116,375

 

 

 

73,548

 

 

 

42,827

 

 

 

58.2

%

 

89,842

 

 

 

80,184

 

 

 

9,658

 

 

 

12.0

%

General and administrative expenses

 

57,269

 

 

 

54,725

 

 

 

2,544

 

 

 

4.6

%

 

58,698

 

 

 

57,380

 

 

 

1,318

 

 

 

2.3

%

Total operating costs and expenses

 

173,644

 

 

 

128,273

 

 

 

45,371

 

 

 

35.4

%

 

148,540

 

 

 

137,564

 

 

 

10,976

 

 

 

8.0

%

INCOME BEFORE INCOME TAXES

 

16,599

 

 

 

44,163

 

 

 

(27,564

)

 

 

-62.4

%

 

61,248

 

 

 

47,923

 

 

 

13,325

 

 

 

27.8

%

Income tax expense

 

6,635

 

 

 

17,281

 

 

 

(10,646

)

 

 

-61.6

%

 

15,164

 

 

 

18,547

 

 

 

(3,383

)

 

 

-18.2

%

NET INCOME

$

9,964

 

 

$

26,882

 

 

$

(16,918

)

 

 

-62.9

%

$

46,084

 

 

$

29,376

 

 

$

16,708

 

 

 

56.9

%

Other comprehensive income (loss), net of taxes

 

251

 

 

 

(491

)

 

 

742

 

 

NM

 

 

(1,849

)

 

 

1,486

 

 

 

(3,335

)

 

NM

 

COMPREHENSIVE INCOME

$

10,215

 

 

$

26,391

 

 

$

(16,176

)

 

 

-61.3

%

$

44,235

 

 

$

30,862

 

 

$

13,373

 

 

 

43.3

%

DILUTED EARNINGS PER SHARE DATA:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per common share

$

1.29

 

 

$

0.82

 

 

$

0.47

 

 

 

57.3

%

Weighted average diluted common shares outstanding

 

35,589

 

 

 

35,958

 

 

 

(369

)

 

 

-1.0

%

 

ForNM – Not Meaningful

Direct premiums written increased by $46.6 million, or 15.7%, for the three monthsquarter ended SeptemberJune 30, 2017,2018, driven by growth within our Florida business of $33.9 million, or 13.0%, as compared to the prior period, and growth in writtenour Other States business of $12.7 million, or 36.5%, as compared to the prior period. Florida growth was driven by growth in policy count as well as the impact of an average statewide rate increase of 3.4%, which was approved in early December and effective for new business beginning on December 7, 2017 and for renewal business beginning on January 26, 2018. Geographic expansion efforts in our Other States business continued to add to overall premium levels, and we are now actively writing policies in Florida16 states other than our home state of Florida. We commenced operations and wrote our first policy in New Hampshire in early April 2018.

Direct premium earned increased 10.5% to $238.3by $29.4 million, and in states outside Florida increased 38.8% to $36.4 million. Premiums earned, net inor 12.0%, for the current period reflectquarter ended June 30, 2018, reflecting the earning of premiums written over the past 12 months and any changes in rates or policy count during that time.

Ceded premium earned increased by $6.1 million, or 8.1%, for the quarter ended June 30, 2018, reflecting an increase in total insured value covered by our reinsurance program and the coverage terms of the reinsurance agreements in effect during the treaty periods which begin on June 1 of each year and extend through May 31 of the following year. Ceded premium earned as a percent of direct premiums earned was 29.8% for the three months ended June 30, 2018 compared to 30.9% for the three months ended June 30, 2017.

Premiums earned, net were $174.5grew by 13.8%, or $23.3 million, to $192.3 million for the three months ended SeptemberJune 30, 2017, compared to $159.52018, reflecting the increase in direct premium earned discussed above.

Net investment income was $5.8 million for the three months ended SeptemberJune 30, 2016. The increase in net earned premiums of $15.02018, compared to $3.2 million or 9.4%, includes an increase in direct earned premiums of $20.3 million offset by an increase in ceded earned premiums of $5.3 million. Direct written premiums increased $32.9 million, or 13.6%, due in part to an increase in Florida business of $22.7 million, or 10.5%, over the prior period and an increase in other states of $10.2 million, or 38.8% overfor the same period in 2016. In each state the Company writes business, direct premiums increased month over month during 2017 as compared to 2016. At September 30, 2017, direct premium in-force was $1.035 billion versus $945 million at September 30, 2016.


Our reinsurance programs run from June 1 to May 31 of the following year. The net increase in ceded earned premiums of $5.3 million is attributable to increased costs associated with our 2017/2018 reinsurance program. The increase in ceded premiums earned was due to increased ceded exposure from policy growth, which increased total policy insured value, our reinsurance limits and costs associated with lower reinsurance attachment points for our growth. In addition, during the third quarter of 2017 the Company recorded ceded written premium of $7.3 million to adjust the Company’s participation in the Florida Hurricane Catastrophe Fund of which $2.4 million was earned during the quarter as compared to an insignificant adjustment in 2016.

Net investment income was $3.1 million for the three months ended September 30, 2017, compared to $2.3 million for the same three months in 2016.2017. The increase in net investment income of $0.8$2.6 million is primarily the result of an increase in fixed maturities,investment income from our available-for-sale debt securities, which grew as a result of growth in total invested assets, favorable market trends and actions taken to increase yield by investing funds along with maturities in higher yielding securities while maintaining high credit quality. Also contributing to the increase in investment income is a higher level of return from our cash and cash equivalents due to actions taken to optimize treasury management coupled with an increase in interest rates on short-term investments. Total average investmentsinvested assets were $644.1$747.2 million with an average credit rating of AA- during the three months ended SeptemberJune 30, 20172018 compared to $634.4$634.9 million with an average credit rating of AA- for the same period in 2016.2017.


We sell investment securities from our investment portfolio of securities, including equity securities and available for sale debt securities, from time to time when opportunities arise or circumstances could result in greater losses or lower yields if held. We sold investment securities available for sale and equity securities during the three months ended SeptemberJune 30, 2017,2018, generating net realized gainsgain of $803 thousand$0.1 million compared to net realized gainsgain of $101 thousand$1.7 million for the three months ended SeptemberJune 30, 2016.2017.

In the second quarter of 2018, the net change in unrealized gains (losses) of equity securities was a loss of $1.5 million, driven by a decline in value of our equity securities portfolio. We highlight that this line item was added during the quarter ended March 31, 2018 because of the adoption of new accounting guidance for equity securities. See “Note 2 - Significant Accounting Policies – Recently Adopted Accounting Pronouncements” for more information. The comparable change in unrealized gains (losses) within our equity portfolio for the prior period in 2017 was $0.6 million of pretax losses, which was not included in net income in the prior period, but was included in other comprehensive income (loss), which is presented net of taxes.

Commission revenue is comprised principally of brokerage commissions we earn from reinsurers on reinsurance placed for the Insurance Entities. For the three months ended SeptemberJune 30, 2017,2018, commission revenue was $5.3$5.7 million, compared to $4.6 million for the three months ended SeptemberJune 30, 2016.2017. The increase in commission revenue of $701 thousand,$1.1 million, or 15.2%22.9%, for the three months ended SeptemberJune 30, 2017,2018 compared to the three months ended SeptemberJune 30, 20162017 was primarily the result of overall changes in$873 thousand of reinstatement commissions received by Blue Atlantic Reinsurance Corporation during the structuresecond quarter of the reinsurance programs in effect, the amount of premiums paid for reinsurance on our growing exposures and the types of reinsurance contracts used in each program.2018.

Policy fees for the three months ended SeptemberJune 30, 2017,2018, were $4.9$5.8 million compared to $4.2$5.3 million for the same period in 2016.2017. The increase of $635$514 thousand, or 15.0%9.8%, was the result of an increase in the number of new and renewal policies written during the three months ended SeptemberJune 30, 20172018 compared to the same period in 2016.2017.

Other revenue, for each of the three months ended September 30, 2017 and for the same period in 2016 was $1.7 million. Other revenuewhich represents revenue from premium financing and other miscellaneous income.income, was $1.6 million for the three months ended June 30, 2018 compared to $1.7 million for the same period in 2017.

Losses and LAE, net of reinsurance, were $116.4$89.8 million for the three months ended SeptemberJune 30, 2017,2018, compared to $73.5$80.2 million during the same period in 20162017 as follows (dollars in thousands):

 

Three Months Ended September 30, 2017

 

Three Months Ended June 30, 2018

 

Direct

 

 

Loss Ratio

 

 

Ceded

 

 

Loss Ratio

 

 

Net

 

 

Loss Ratio

 

Direct

 

 

Loss Ratio

 

 

Ceded

 

 

Loss Ratio

 

 

Net

 

 

Loss Ratio

 

Premiums earned

$

254,809

 

 

 

 

 

 

$

80,292

 

 

 

 

 

 

$

174,517

 

 

 

 

 

$

274,027

 

 

 

 

 

 

$

81,755

 

 

 

 

 

 

$

192,272

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss and loss adjustment expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hurricane Irma losses and loss adjustment

expenses

$

452,000

 

 

 

177.4

%

 

$

415,000

 

 

 

516.8

%

 

$

37,000

 

 

 

21.2

%

Weather events*

$

5,000

 

 

 

1.8

%

 

$

 

 

 

 

 

$

5,000

 

 

 

2.6

%

Prior year adverse/(favorable) reserve

development

 

161,400

 

 

 

58.9

%

 

 

159,090

 

 

 

194.6

%

 

 

2,310

 

 

 

1.2

%

All other losses and loss adjustment

expenses

 

79,268

 

 

 

31.1

%

 

 

(107

)

 

 

(0.1

%)

 

 

79,375

 

 

 

45.5

%

 

80,222

 

 

 

29.3

%

 

 

(2,310

)

 

 

(2.8

%)

 

 

82,532

 

 

 

42.9

%

Total losses and loss adjustment expenses

$

531,268

 

 

 

208.5

%

 

$

414,893

 

 

 

516.7

%

 

$

116,375

 

 

 

66.7

%

$

246,622

 

 

 

90.0

%

 

$

156,780

 

 

 

191.8

%

 

$

89,842

 

 

 

46.7

%

 

Three Months Ended September 30, 2016

 

Three Months Ended June 30, 2017

 

Direct

 

 

Loss Ratio

 

 

Ceded

 

 

Loss Ratio

 

 

Net

 

 

Loss Ratio

 

Direct

 

 

Loss Ratio

 

 

Ceded

 

 

Loss Ratio

 

 

Net

 

 

Loss Ratio

 

Premiums earned

$

234,500

 

 

 

 

 

 

$

74,966

 

 

 

 

 

 

$

159,534

 

 

 

 

 

$

244,623

 

 

 

 

 

 

$

75,614

 

 

 

 

 

 

$

169,009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss and loss adjustment expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weather events*

$

6,000

 

 

 

2.5

%

 

$

 

 

 

 

 

$

6,000

 

 

 

3.6

%

Prior year adverse/(favorable) reserve

development

 

6,581

 

 

 

2.7

%

 

 

5,472

 

 

 

7.2

%

 

 

1,109

 

 

 

0.7

%

All other losses and loss

adjustment expenses

 

73,075

 

 

 

29.9

%

 

 

 

 

 

 

 

 

73,075

 

 

 

43.2

%

Total losses and loss adjustment expenses

$

73,487

 

 

 

31.3

%

 

$

(61

)

 

 

(0.1

%)

 

$

73,548

 

 

 

46.1

%

$

85,656

 

 

 

35.1

%

 

$

5,472

 

 

 

7.2

%

 

$

80,184

 

 

 

47.4

%

*Includes only weather events beyond those expected.

 

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

LossesFor the quarter ended June 30, 2018, we experienced $5.0 million of weather events beyond expectations (on both a direct and net basis), related to the eruption of the Kilauea volcano in Hawaii and several other meaningful weather-related events that occurred in


2018. This compares to losses and LAE were significantly affected this(on both a direct and net basis) of $6.0 million from weather events beyond those expected for the quarter byended June 30, 2017, which was the result of an increase to our underlying core loss ratio in 2017 to reflect an increase of unexpected weather-related losses.

During the second quarter in 2018, the Company increased its estimate of ultimate losses on Hurricane Irma. ForIrma to $603.5 million for both the thirdInsurance Entities from $447.4 million recorded in the first quarter in 2018. The prior year development of 2017$156.1 million in gross losses resulted in a net retention benefit of $0.3 million after cessions to the Company’s reinsurers. The increase in the ultimate loss and LAE for Hurricane Irma was the result of a continuation of new reported claims and the aggressive nature of plaintiff attorneys on claims in Florida.

Also, the Company recorded gross losses and LAEprior year loss reserve development of $452.0$5.3 million resulting from Hurricane Irma. The Company’s reinsurance program limitedon a direct basis ($2.6 million on a net losses from Hurricane Irma to $37 million adding 21.2 percentage points to the net losses and LAE ratiobasis) for the quarter. Under the Company’s reinsurance program UPCIC cedes losses and LAE greater than $35 million in all states up to a maximumquarter ended June 30, 2018, reflecting strengthening of $2.71 billion and


APPCIC cedes losses and LAE greater than $2 million up to a maximum amount of $27.6 million. The Company’s reinsurance protection performed as expected by reducing the net loss and LAE exposure to the maximum retained limits, as stated above, and will provide full reinsurance capacity of $2.71 billion for UPCIC and $27.6 million for APPCICreserves for the remainderfourth quarter 2016 storm, Hurricane Matthew. Reserve strengthening on Hurricane Matthew is based on our revised estimate to settle the remaining 78 open claims. The three months ending June 30, 2017 included prior period loss reserve development of $6.6 million on a direct basis ($1.1 million on a net basis), also reflecting strengthening of reserves for the 2017/2018 hurricane season. See UPCIC’s and APPCIC’s 2017-2018 Reinsurance Program for a discussion of the Company’s reinsurance program.fourth quarter 2016 storm, Hurricane Matthew.

All other net losses and LAE net was $79.4were $82.5 million for the three months ended SeptemberJune 30, 2017,2018, compared to $73.5$73.1 million during the same period in 2016, which reflects $112017. Our service company subsidiaries, particularly UAC, generated additional revenues servicing Hurricane Irma claims and during the second quarter ended June 30, 2018 generated $8.4 million of incrementalearnings which reduced amounts recorded as losses and LAE recorded for severe weather events occurring during 2016 through September, including Hurricane Hermine. The severe weather events in 2016 added 6.9 percentage points to the net lossesthis quarter. This had a favorable effect on our underlying loss and LAE ratio for the three months ended September 30, 2016. Beginning in the second quarter of 2017, the Company added 1.8approximately 3.4 percentage points to itson a direct basis (or 5.0 percentage points on a net basis). The Company’s underlying quarterly net lossesloss and LAE ratio to account for the increased frequency of severe weather experienced in recent years.

The trend in the Company’s underlying losses and LAE ratio also reflects continued geographic expansion into states outside of Florida where non-catastrophe loss ratios are generally higher than in Florida, and the marketplace dynamicsas well as claims trends inside of Florida including the growth in claim costs and challenges faced by insurers when policyholders assign benefits underlying their policiespolicy benefits to third parties.parties and including the increased litigation arising from these claims.

General and administrative expenses were $57.3$58.7 million for the three months ended SeptemberJune 30, 2017,2018, compared to $54.7$57.4 million during the same period in 20162017 as follows (dollars in thousands):

 

Three Months Ended

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

September 30,

 

 

Change

 

June 30,

 

 

Change

 

2017

 

 

2016

 

 

$

 

 

%

 

2018

 

 

2017

 

 

$

 

 

%

 

$

 

 

Ratio

 

 

$

 

 

Ratio

 

 

 

 

 

 

 

 

 

$

 

 

Ratio

 

 

$

 

 

Ratio

 

 

 

 

 

 

 

 

 

Premiums earned, net

$

174,517

 

 

 

 

 

 

$

159,534

 

 

 

 

 

 

$

14,983

 

 

 

9.4

%

$

192,272

 

 

 

 

 

 

$

169,009

 

 

 

 

 

 

$

23,263

 

 

 

13.8

%

General and administrative expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Policy acquisition costs

 

35,304

 

 

 

20.2

%

 

 

32,216

 

 

 

20.2

%

 

 

3,088

 

 

 

9.6

%

 

33,545

 

 

 

17.4

%

 

 

33,022

 

 

 

19.5

%

 

 

523

 

 

 

1.6

%

Other operating costs

 

21,965

 

 

 

12.6

%

 

 

22,509

 

 

 

14.1

%

 

 

(544

)

 

 

(2.4

%)

 

25,063

 

 

 

13.0

%

 

 

24,272

 

 

 

14.4

%

 

 

791

 

 

 

3.3

%

Total general and administrative expenses

$

57,269

 

 

 

32.8

%

 

$

54,725

 

 

 

34.3

%

 

$

2,544

 

 

 

4.6

%

Interest expense

 

90

 

 

 

 

 

 

86

 

 

 

 

 

 

4

 

 

 

4.7

%

Total general and administrative expenses (1)

$

58,698

 

 

 

30.4

%

 

$

57,380

 

 

 

33.9

%

 

$

1,318

 

 

 

2.3

%

(1)

Total general and administrative expense ratio does not include interest expense.

 

For the three months ended September 30, 2017, general and administrative expenses were $57.3 million, compared to $54.7 million for the same period in 2016. The increase in general and administrative costsexpenses of $2.6$1.3 million was the result of increases in acquisition costs of $3.1 million due to increased premium volume. The increases were, offset by decreases in other operating costs of $0.5 million due to a decrease in performance bonuses, consulting fees and a reduction in amounts spent on insurance swap contracts which was offset by an increase in stock-based compensation. Overall, the expense ratio (general and administrative expenses as a percentage of net earned premiums) benefited from economies of scale as general and administrative expenses did not increase at the same rate as revenues. As a result, the expense ratio as a percentage of net earnings decreased to 32.8% for the three months ended September 30, 2017 compared to 34.3% for the same period in 2016.

Income tax expense decreased by $10.6 million, or 61.6%, for the three months ended September 30, 2017, when compared with the three months ended September 30, 2016. The decrease in income tax is primarily the result of a decrease in income before income taxes. The effective tax rate increased slightly to 40.0% for the three months ended September 30, 2017 as compared to 39.1% for the three months ended September 30, 2016.

Other comprehensive income, net of taxes for the three months ended September 30, 2017 was $0.3 million compared to a loss of $0.5 million for the same period in 2016. Other comprehensive income (loss) represents after tax changes to equity which are not recognized in net income, including changes in the fair value of securities available for sale held in our portfolio and any reclassifications out of cumulative other comprehensive income for securities sold. See “Item 1 — Note 11 (Other Comprehensive Income (Loss)).”


Results of Operations—Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016

Net income decreased by $15.2 million, or 17.7%, to $70.5 million for the nine months ended September 30, 2017, compared to $85.7 million for the nine months ended September 30, 2016. The decrease in net income was primarily the result of $37 million of net pre-tax storm losses incurred as a result of Hurricane Irma. Total premiums earnedmodest increases in both policy acquisition costs and other revenues increased by $43.9 million or 8.7% over the prior year these revenues were offset by total operating costs, and expenses, which increased by $72.2 million, or 19.7% over the prior year. Expenses for the nine months ended September 30, 2017, include losses and LAE of $37 million net for Hurricane Irma and an increase to the Company’s core loss ratio for accident year 2017. Diluted earnings per common share decreased by $0.45 to $1.96 for the nine months ended September 30, 2017, compared to $2.41 for the nine months ended September 30, 2016, as a result of the decrease in net income. A more detailed discussion of this and other factors follows the table below.

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

Change

 

 

2017

 

 

2016

 

 

$

 

 

%

 

PREMIUMS EARNED AND OTHER REVENUES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct premiums written

$

816,350

 

 

$

741,782

 

 

$

74,568

 

 

 

10.1

%

Change in unearned premium

 

(80,543

)

 

 

(59,211

)

 

 

(21,332

)

 

 

36.0

%

Direct premium earned

 

735,807

 

 

 

682,571

 

 

 

53,236

 

 

 

7.8

%

Ceded premium earned

 

(230,722

)

 

 

(214,128

)

 

 

(16,594

)

 

 

7.7

%

Premiums earned, net

 

505,085

 

 

 

468,443

 

 

 

36,642

 

 

 

7.8

%

Net investment income (expense)

 

9,012

 

 

 

6,051

 

 

 

2,961

 

 

 

48.9

%

Net realized gains (losses) on investments

 

2,450

 

 

 

1,344

 

 

 

1,106

 

 

 

82.3

%

Commission revenue

 

14,546

 

 

 

12,927

 

 

 

1,619

 

 

 

12.5

%

Policy fees

 

14,594

 

 

 

13,093

 

 

 

1,501

 

 

 

11.5

%

Other revenue

 

4,917

 

 

 

4,827

 

 

 

90

 

 

 

1.9

%

Total premiums earned and other revenues

 

550,604

 

 

 

506,685

 

 

 

43,919

 

 

 

8.7

%

OPERATING COSTS AND EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Losses and loss adjustment expenses

 

267,129

 

 

 

199,749

 

 

 

67,380

 

 

 

33.7

%

General and administrative expenses

 

171,582

 

 

 

166,780

 

 

 

4,802

 

 

 

2.9

%

Total operating costs and expenses

 

438,711

 

 

 

366,529

 

 

 

72,182

 

 

 

19.7

%

INCOME BEFORE INCOME TAXES

 

111,893

 

 

 

140,156

 

 

 

(28,263

)

 

 

-20.2

%

Income tax expense

 

41,354

 

 

 

54,400

 

 

 

(13,046

)

 

 

-24.0

%

NET INCOME

$

70,539

 

 

$

85,756

 

 

$

(15,217

)

 

 

-17.7

%

Other comprehensive income, net of taxes

 

4,201

 

 

 

5,631

 

 

 

(1,430

)

 

 

-25.4

%

COMPREHENSIVE INCOME

$

74,740

 

 

$

91,387

 

 

$

(16,647

)

 

 

-18.2

%

For the nine months ended September 30, 2017, our growth in written premium in both Florida increased 6.8% to $718.2$0.5 million and in states outside Florida increased 41.7% to $98.2 million. Premiums earned, net in the current period reflect premiums written over the past 12 months and any changes in rates or policy count during that time. Premiums earned, net were $505.1$0.8 million, for the nine months ended September 30, 2017, compared to $468.4 million for the nine months ended September 30, 2016. The increase in net earned premiums of $36.6 million, or 7.8%, includes an increase in direct earned premiums of $53.2 million and an increase in ceded earned premiums of $16.6 million. Direct written premiums increased $74.6 million, or 10.1%, which consisted of an increase in Florida business of $45.7 million, or 6.8% over the prior year, and an increase in other states business of $28.9 million, or 41.7%, over the same period in 2016. In each state the Company writes business, direct premiums increased month over month during 2017respectively, as compared to 2016. At September 30, 2017, direct premium in-force was $1.035 billion versus $945 million at September 30, 2016.

Our reinsurance programs run from June 1 to May 31 of the following year. Ceded premium earned was $230.7 millionprior year’s quarter. General and administrative expenses for the nine monthsquarter ended SeptemberJune 30, 2017, compared2018 included a $6.5 million benefit (included within policy acquisition costs) related to $214.1 million for the nine months ended September 30, 2016. The net increase in ceded earned premiumsa settlement of $16.6 million is attributable to increased costs associatedprior year premium tax audits with our 2017/2018 reinsurance program. The increase in ceded premiums earned was due to increased ceded exposure from policy growth. In addition, during the third quarter of 2017 the Company recorded ceded written premium of $7.3 million to adjust the Company’s participation in the Florida Hurricane Catastrophe FundDepartment of Revenue, which $2.4 million was earned duringreduced the quarter as compared to an insignificant adjustment in 2016.

Net investment income was $9.0 million for the nine months ended September 30, 2017, compared to $6.0 million for the same nine months in 2016. The increase in net investment income of $3.0 million is the result of an increase in fixed maturities, favorable market trends and actions taken to increase yieldexpense ratio by investing funds along with maturities in higher yielding securities while maintaining high credit quality. Total average investments were $651.7 million with an average credit rating of AA- during the nine months ended September 30, 2017 compared to $576.1 million with an average credit rating of AA- for the same period in 2016.


We sell investment securities from our portfolio of securities available for sale from time to time when opportunities arise or circumstances could result in greater losses if held. We sold investment securities available for sale during the nine months ended September 30, 2017 generating net realized gains of $2.5 million compared to net realized gains of $1.3 million for the nine months ended September 30, 2016.

Commission revenue is comprised principally of brokerage commissions we earn from reinsurers on reinsurance placed for the Insurance Entities. For the nine months ended September 30, 2017 commission revenue was $14.5 million, compared to $12.9 million for the nine months ended September 30, 2016. The increase in commission revenue of $1.6 million, or 12.5%, for the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016 was the result of overall changes in the structure of the reinsurance programs in effect, the amount of premiums paid for reinsurance on our growing exposures and the types of reinsurance contracts used in each program.

Policy fees for the nine months ended September 30, 2017, were $14.6 million as compared to $13.1 million for the same period in 2016. The increase of $1.5 million, or 11.5%, was the result of an increase in the number of policies written during the nine months ended September 30, 2017 compared to the same period in 2016.

Other revenue for the nine months ended September 30, 2017 was $4.9 million and for the same period in 2016 was $4.8 million. Other revenue represents revenue from premium financing and other miscellaneous income. The increase of $90 thousand, or 1.9%, was the result of an increase in the number of financed policies.

Losses and LAE, net of reinsurance were $267.1 million for the nine months ended September 30, 2017, compared to $199.7 million during the same period in 2016 as follows (dollars in thousands):

 

Nine Months Ended September 30, 2017

 

 

Direct

 

 

Loss Ratio

 

 

Ceded

 

 

Loss Ratio

 

 

Net

 

 

Loss Ratio

 

Premiums earned

$

735,807

 

 

 

 

 

 

$

230,722

 

 

 

 

 

 

$

505,085

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss and loss adjustment expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hurricane Irma losses and loss adjustment

    expenses

$

452,000

 

 

 

61.4

%

 

$

415,000

 

 

 

179.9

%

 

$

37,000

 

 

 

7.3

%

All other losses and loss adjustment

    expenses

 

235,707

 

 

 

32.0

%

 

 

5,578

 

 

 

2.4

%

 

 

230,129

 

 

 

45.6

%

Total losses and loss adjustment expenses

$

687,707

 

 

 

93.4

%

 

$

420,578

 

 

 

182.3

%

 

$

267,129

 

 

 

52.9

%

 

Nine Months Ended September 30, 2016

 

 

Direct

 

 

Loss Ratio

 

 

Ceded

 

 

Loss Ratio

 

 

Net

 

 

Loss Ratio

 

Premiums earned

$

682,571

 

 

 

 

 

 

$

214,128

 

 

 

 

 

 

$

468,443

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total losses and loss adjustment expenses

$

198,069

 

 

 

29.0

%

 

$

(1,680

)

 

 

(0.8

%)

 

$

199,749

 

 

 

42.6

%

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

During the nine months ended September 30, 2017 the Company recorded gross losses and LAE of $452.0 million resulting from Hurricane Irma. The Company’s reinsurance program limited losses from Hurricane Irma to $37 million adding 7.3 percentage points to the net losses and LAE ratio for the nine-month period ended September 30, 2017. Under the Company’s reinsurance program UPCIC cedes losses and LAE greater than $35 million in all states up to a maximum of $2.71 billion and APPCIC cedes all losses and LAE greater than $2 million up to a maximum amount of $27.6 million. The Company’s reinsurance protection performed as expected by reducing the net loss and LAE exposure to the maximum retained limits, as stated above, and will provide full reinsurance capacity of $2.71 billion for UPCIC and $27.6 million for APPCIC for the remainder of the 2017/2018 hurricane season. See UPCIC’s and APPCIC’s 2017-2018 Reinsurance Program for a discussion of the Company’s reinsurance program.

All other net losses and LAE, net was $230.1 million for the nine months ended September 30, 2017, compared to $199.7 million during the same period in 2016. The increase reflects general growth and an increase in the underlying losses and LAE ratio of 3.03.4 percentage points.

The trend in the Company’s Our underlying lossespolicy acquisition costs continued to be driven by increased premium volume and LAE ratio presented in the table above reflects continued geographic expansion into states outside of Florida where non-catastrophe loss ratios are generallythat typically have higher than in Florida and the marketplace dynamics inside of Florida including challenges faced by insurers when policyholders assign benefits underlying their policies to third parties.


General and administrative expenses were $171.6 million for the nine months ended September 30, 2017,commission rates as compared to $166.8 million during the same period in 2016 as follows (dollars in thousands):

 

Nine Months Ended

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

Change

 

 

2017

 

 

2016

 

 

$

 

 

%

 

 

$

 

 

Ratio

 

 

$

 

 

Ratio

 

 

 

 

 

 

 

 

 

Premiums earned, net

$

505,085

 

 

 

 

 

 

$

468,443

 

 

 

 

 

 

$

36,642

 

 

 

7.8

%

General and administrative expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Policy acquisition costs

 

100,754

 

 

 

20.0

%

 

 

92,455

 

 

 

19.7

%

 

 

8,299

 

 

 

9.0

%

Other operating costs

 

70,828

 

 

 

14.0

%

 

 

74,325

 

 

 

15.9

%

 

 

(3,497

)

 

 

(4.7

%)

Total general and administrative expenses

$

171,582

 

 

 

34.0

%

 

$

166,780

 

 

 

35.6

%

 

$

4,802

 

 

 

2.9

%

For the nine months ended September 30, 2017, general and administrative expenses were $171.6 million, compared to $166.8 million for the same period in 2016. The net increase in total general and administrative expenses of $4.8 million was the result of increases in acquisition costs of $8.3 million, due to increased premium volume, offset by a net decrease in other operating costs of $3.5 million, due to a reduction in stock-based compensation, a reduction in amounts spent on insurance swap contracts and lower consulting and legal fees, partially offset by increases in advertising to promote growth within and outside Florida. Overall, the expense ratio (general and administrative expenses as a percentage of net earned premiums) benefited from economies of scale as general and administrative expenses did not increase at the same rate as revenues. As a result of the above items, the expense ratio as a percentage of net earnings decreased to 34.0%30.4% for the ninethree months ended SeptemberJune 30, 20172018 compared to 35.6%33.9% for the same period in 2016.2017.

 

Income tax expense decreased by $3.4 million, or 18.2%, for the ninethree months ended SeptemberJune 30, 2017 decreased by $13.0 million, or 24.0%,2018, when compared towith the ninethree months ended SeptemberJune 30, 2017,2017. Our effective tax rate decreased to 24.8% for the three months ended June 30, 2018, as compared to 38.7% for the three months ended June 30, 2017. The decrease in both income tax expense and our effective tax rate is primarily as athe result of the enactment of the Tax Act. The second quarter of 2018 included a decrease in income before income taxes, offset by the benefit derived from two discrete items. The first was anet credit to income tax expense of $0.8$0.6 million forprimarily driven by the excess tax benefits resulting from stock-based awards that vested and/or were exercised during the ninesecond quarter, thereby benefitting the quarter’s effective tax rate by 1.0 percentage points. See “Item 1 – Note 9 (Income Taxes)” for an explanation of the change in our effective tax rates.


Other comprehensive loss, net of taxes for the three months ended SeptemberJune 30, 2018 was $1.8 million compared to other comprehensive income of $1.5 million for the same period in 2017. See “Item 1 — Note 11 (Other Comprehensive Income (Loss))” for additional information about the amounts comprising other comprehensive income and loss for these periods.

Results of Operations — Six Months Ended June 30, 2018 Compared to Six Months Ended June 30, 2017

Net income was $86.1 million, an increase of $25.6 million, or 42.2%, for the six months ended June 30, 2018, compared to $60.6 million for the six months ended June 30, 2017. The increase is the result of double digit revenue growth, continued underwriting profitability, and a reduced effective tax rate. Diluted earnings per common share increased by $0.74 to $2.42 for the six months ended June 30, 2018, compared to $1.68 per share for the six months ended June 30, 2017, reflecting the increase in net income and a slight reduction in our weighted average diluted common shares outstanding. A detailed discussion of our results of operations follows the table below.

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

 

 

 

 

 

 

 

June 30,

 

 

Change

 

 

2018

 

 

2017

 

 

$

 

 

%

 

PREMIUMS EARNED AND OTHER REVENUES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct premiums written

$

612,765

 

 

$

541,606

 

 

$

71,159

 

 

 

13.1

%

Change in unearned premium

 

(76,477

)

 

 

(60,608

)

 

 

(15,869

)

 

 

26.2

%

Direct premium earned

 

536,288

 

 

 

480,998

 

 

 

55,290

 

 

 

11.5

%

Ceded premium earned

 

(161,439

)

 

 

(150,430

)

 

 

(11,009

)

 

 

7.3

%

Premiums earned, net

 

374,849

 

 

 

330,568

 

 

 

44,281

 

 

 

13.4

%

Net investment income (expense)

 

10,571

 

 

 

5,927

 

 

 

4,644

 

 

 

78.4

%

Net realized gains (losses) on sale of securities

 

(2,496

)

 

 

1,647

 

 

 

(4,143

)

 

NM

 

Net change in unrealized gains (losses) of equity securities

 

(6,630

)

 

 

 

 

 

(6,630

)

 

NM

 

Commission revenue

 

10,980

 

 

 

9,242

 

 

 

1,738

 

 

 

18.8

%

Policy fees

 

10,539

 

 

 

9,733

 

 

 

806

 

 

 

8.3

%

Other revenue

 

3,475

 

 

 

3,244

 

 

 

231

 

 

 

7.1

%

Total premiums earned and other revenues

 

401,288

 

 

 

360,361

 

 

 

40,927

 

 

 

11.4

%

OPERATING COSTS AND EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Losses and loss adjustment expenses

 

165,768

 

 

 

150,754

 

 

 

15,014

 

 

 

10.0

%

General and administrative expenses

 

122,573

 

 

 

114,313

 

 

 

8,260

 

 

 

7.2

%

Total operating costs and expenses

 

288,341

 

 

 

265,067

 

 

 

23,274

 

 

 

8.8

%

INCOME BEFORE INCOME TAXES

 

112,947

 

 

 

95,294

 

 

 

17,653

 

 

 

18.5

%

Income tax expense

 

26,808

 

 

 

34,719

 

 

 

(7,911

)

 

 

-22.8

%

NET INCOME

$

86,139

 

 

$

60,575

 

 

$

25,564

 

 

 

42.2

%

Other comprehensive income (loss), net of taxes

 

(5,899

)

 

 

3,950

 

 

 

(9,849

)

 

NM

 

COMPREHENSIVE INCOME

$

80,240

 

 

$

64,525

 

 

$

15,715

 

 

 

24.4

%

DILUTED EARNINGS PER SHARE DATA:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per common share

$

2.42

 

 

$

1.68

 

 

$

0.74

 

 

 

44.0

%

Weighted average diluted common shares outstanding

 

35,636

 

 

 

36,061

 

 

 

(425

)

 

 

-1.2

%

NM – Not Meaningful

Direct premiums written increased by $71.2 million, or 13.1%, for the six months ended June 30, 2018, driven by growth within our Florida business of $49.6 million, or 10.3%, as compared to the prior period, and growth in our Other States business of $21.5 million, or 34.8%, as compared to the prior period. Florida growth was driven by growth in policy count as well as the impact of an average statewide rate increase of 3.4%, which was approved in early December and effective for new business beginning on December 7, 2017 and for renewal business beginning on January 26, 2018. Geographic expansion efforts in our Other States business continued to add to overall premium levels, and we are now actively writing policies in 16 states other than our home state of Florida. We commenced operations and wrote our first policy in New Hampshire in early April 2018.

Direct premium earned increased by $55.3 million, or 11.5%, for the six months ended June 30, 2018, reflecting the earning of premiums written over the past 12 months and any changes in rates or policy count during that time.

Ceded premium earned increased by $11.0 million, or 7.3%, for the six months ended June 30, 2018, reflecting an increase in total insured value covered by our reinsurance program and the coverage terms of the reinsurance agreements in effect during the treaty


periods which begin on June 1 of each year and extend through May 31 of the following year. Ceded premium earned as a percent of direct premiums earned was 30.1% for the six months ended June 30, 2018 compared to 31.3% for the six months ended June 30, 2017.

Premiums earned, net grew by 13.4%, or $44.3 million, to $374.8 million for the six months ended June 30, 2018, reflecting the increase in direct earned premiums discussed above.

Net investment income was $10.6 million for the six months ended June 30, 2018, compared to $5.9 million for the same six-month period in 2017. The increase in net investment income of $4.6 million is primarily the result of an increase in investment income from our available-for-sale debt securities, which grew as a result of growth in total invested assets, favorable market trends and actions taken to increase yield while maintaining high credit quality. Also contributing to the increase in investment income is a higher level of return from our cash and cash equivalents due to actions taken to optimize treasury management coupled with an increase in interest rates on short-term investments. Total invested assets were $747.2 million with an average credit rating of AA- during the six months ended June 30, 2018 compared to $634.9 million with an average credit rating of AA- for the same period in 2017.

We sell investment securities from our investment portfolio including, equity securities and available for sale debt securities, from time to time when opportunities arise or circumstances could result in greater losses or lower yields if held. We sold investment securities available for sale and equity securities during the six months ended June 30, 2018, generating net realized losses of $2.5 million compared to net realized gains of $1.6 million for the six months ended June 30, 2017. The investment securities sold during the six months ended June 30, 2018 were comprised primarily of municipal securities, which were liquidated in light of their diminished after-tax returns following the enactment of the Tax Act.

During the first six months in 2018, the net change in unrealized gains (losses) of equity securities, was a loss of $6.6 million, driven by a decline in value of our equity securities portfolio. We highlight that this line item was added during the six months ended June 30, 2018, because of the adoption of new accounting guidance for equity securities. See “Note 2 - Significant Accounting Policies – Recently Adopted Accounting Pronouncements” for more information. The comparable change in unrealized gains (losses) within our equity portfolio for the prior period in 2017 was $1.1 million of pretax gains, which was not included in net income in the prior period, but was included in other comprehensive income (loss), which is presented net of taxes.

Commission revenue is comprised principally of brokerage commissions we earn from reinsurers on reinsurance placed for the Insurance Entities. For the six months ended June 30, 2018, commission revenue was $11.0 million, compared to $9.2 million for the six months ended June 30, 2017. The increase in commission revenue of $1.7 million, or 18.8%, for the six months ended June 30, 2018 compared to the six months ended June 30, 2017 was primarily the result of $1.4 million of reinstatement commissions received by Blue Atlantic Reinsurance Corporation during the first six months ended of 2018.

Policy fees for the six months ended June 30, 2018, were $10.5 million compared to $9.7 million for the same period in 2017. The increase of $0.8 million, or 8.3%, was the result of an increase in the number of new and renewal policies written during the six months ended June 30, 2018 compared to the same period in 2017.

Other revenue, which represents revenue from premium financing and other miscellaneous income, was $3.5 million for the six months ended June 30, 2018 compared to $3.2 million for the same period in 2017.

Losses and LAE, net of reinsurance were $165.8 million for the six months ended June 30, 2018, compared to $150.8 million during the same period in 2017 as follows (dollars in thousands):

 

Six Months Ended June 30, 2018

 

 

Direct

 

 

Loss Ratio

 

 

Ceded

 

 

Loss Ratio

 

 

Net

 

 

Loss Ratio

 

Premiums earned

$

536,288

 

 

 

 

 

 

$

161,439

 

 

 

 

 

 

$

374,849

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss and loss adjustment expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weather events*

$

5,000

 

 

 

0.9

%

 

$

 

 

 

 

 

$

5,000

 

 

 

1.3

%

Prior year adverse/(favorable) reserve

    development

 

162,050

 

 

 

30.2

%

 

 

159,784

 

 

 

99.0

%

 

 

2,266

 

 

 

0.6

%

All other losses and loss

    adjustment expenses

 

156,211

 

 

 

29.1

%

 

 

(2,291

)

 

 

(1.4

%)

 

 

158,502

 

 

 

42.3

%

Total losses and loss adjustment expenses

$

323,261

 

 

 

60.2

%

 

$

157,493

 

 

 

97.6

%

 

$

165,768

 

 

 

44.2

%


 

Six Months Ended June 30, 2017

 

 

Direct

 

 

Loss Ratio

 

 

Ceded

 

 

Loss Ratio

 

 

Net

 

 

Loss Ratio

 

Premiums earned

$

480,998

 

 

 

 

 

 

$

150,430

 

 

 

 

 

 

$

330,568

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss and loss adjustment expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weather events*

$

9,000

 

 

 

1.9

%

 

$

 

 

 

 

 

$

9,000

 

 

 

2.7

%

Prior year adverse/(favorable) reserve

    development

 

6,890

 

 

 

1.4

%

 

 

5,685

 

 

 

3.8

%

 

 

1,205

 

 

 

0.4

%

All other losses and loss

    adjustment expenses

 

140,549

 

 

 

29.2

%

 

 

 

 

 

 

 

 

140,549

 

 

 

42.5

%

Total losses and loss adjustment expenses

$

156,439

 

 

 

32.5

%

 

$

5,685

 

 

 

3.8

%

 

$

150,754

 

 

 

45.6

%

* Includes only weather events beyond those expected.

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

For the six months ended June 30, 2018, we experienced $5.0 million of weather events beyond expectations (on both a direct and net basis), related to the eruption of the Kilauea volcano in Hawaii and several other meaningful weather-related events that occurred in 2018. This compares to losses and LAE (on both a direct and net basis) of $9.0 million from weather events beyond those expected for the six months ended June 30, 2017, including an increase to our underlying core loss ratio in 2017 to reflect an increase of unexpected weather-related losses.

During the second quarter in 2018, the Company increased its estimate of ultimate losses on Hurricane Irma to $603.5 million for both Insurance Entities from $446.7 million recorded in 2017. The prior year development of $156.8 million in gross losses resulted in a net retention benefit of $0.3 million after cessions to the Company’s reinsurers. The increase in the ultimate loss and LAE for Hurricane Irma was the result of a continuation of new reported claims and the aggressive nature of plaintiff attorneys on claims in Florida.

Also, the Company recorded prior year loss reserve development of $5.3 million on a direct basis, $2.6 million on a net basis, for the six months ended June 30, 2018, reflecting strengthening of reserves for the fourth quarter 2016 storm, Hurricane Matthew. Reserve strengthening on Hurricane Matthew is based on our revised estimate to settle the remaining 78 open claims. The six months ended June 30, 2017 included prior period loss reserve development of $6.9 million on a direct basis ($1.2 million on a net basis), also primarily reflecting strengthening of reserves for the fourth quarter 2016 storm, Hurricane Matthew.

All other net losses and LAE were $158.5 million for the six months ended June 30, 2018, compared to $140.5 million during the same period in 2017. Our service company subsidiaries, particularly UAC, generated additional revenues servicing Hurricane Irma claims and during the six months ended June 30, 2018 generated $18.9 million of earnings which reduced amounts recorded as losses and LAE in 2018. This had a favorable effect on our underlying loss and LAE ratio of approximately 3.5 percentage points on a direct basis (or 5.0 percentage points on a net basis). The Company’s underlying loss and LAE ratio reflects continued geographic expansion into states outside of Florida where non-catastrophe loss ratios are generally higher than in Florida, as well as the marketplace dynamics inside of Florida including challenges faced when policyholders assign their policy benefits to third parties including the increased litigation from these claims.

General and administrative expenses were $122.6 million for the six months ended June 30, 2018, compared to $114.3 million during the same period in 2017 as follows (dollars in thousands):

 

Six Months Ended

 

 

 

 

 

 

 

 

 

 

June 30,

 

 

Change

 

 

2018

 

 

2017

 

 

$

 

 

%

 

 

$

 

 

Ratio

 

 

$

 

 

Ratio

 

 

 

 

 

 

 

 

 

Premiums earned, net

$

374,849

 

 

 

 

 

 

$

330,568

 

 

 

 

 

 

$

44,281

 

 

 

13.4

%

General and administrative expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Policy acquisition costs

 

71,588

 

 

 

19.1

%

 

 

65,450

 

 

 

19.8

%

 

 

6,138

 

 

 

9.4

%

Other operating costs

 

50,816

 

 

 

13.6

%

 

 

48,674

 

 

 

14.7

%

 

 

2,142

 

 

 

4.4

%

Interest expense

 

169

 

 

 

 

 

 

189

 

 

 

 

 

 

(20

)

 

 

(10.6

%)

Total general and administrative expenses (1)

$

122,573

 

 

 

32.7

%

 

$

114,313

 

 

 

34.5

%

 

$

8,260

 

 

 

7.2

%

(1)

Total general and administrative expense ratio does not include interest expense.


The increase in general and administrative expenses of $8.3 million was primarily the result of increases in policy acquisition costs of $6.1 million, which were driven by increased premium volume and continued geographic expansion into states that have higher typical commission rates compared to our home state of Florida, and to a lesser extent due to an increase in other operating costs of $2.1 million. General and administrative expenses for the six months ended June 30, 2018 included a $6.5 million benefit (included within policy acquisition costs) related to a settlement of prior year premium tax audits with the Florida Department of Revenue, which reduced the expense ratio by 1.7 percentage points. Our underlying policy acquisition costs continued to be driven by increased premium volume and continued geographic expansion into states where the comparable commission rates are higher than Florida. Overall, the expense ratio (general and administrative expenses as a percentage of net earned premiums) benefited from economies of scale as general and administrative expenses did not increase at the same rate as revenues. As a result of the above items, the expense ratio decreased to 32.7% for the six months ended June 30, 2018 compared to 34.5% for the same period in 2017.

Income tax expense decreased by $7.9 million, or 22.8%, for the six months ended June 30, 2018, when compared with the six months ended June 30, 2017. Our effective tax rate decreased to 23.7% for the six months ended June 30, 2018, as compared to 36.4% for the six months ended June 30, 2017. The decrease in both income tax expense and our effective tax rate is primarily the result of the enactment of the Tax Act. The six months ended June 30, 2018 included a net credit to income tax expense representsof $2.3 million primarily driven by excess tax benefits resulting from stock-based awards that vested and/or were exercised during the applicationsix months ended June 30, 2018, thereby benefitting the six month ended June 30, 2018 effective tax rate by 2.0 percentage points. Discrete items for the six months ended June 30, 2017 included $0.8 million of a new accounting pronouncement. Prior to 2017, excess tax benefit benefits resulting from stock-based awards that had vested and/or were recorded in stockholders’ equity. The other discrete item isexercised during that period and a credit to income tax expense of $1.2 million resulting from anticipated recoveries of income taxes paid from 2014 and 2015, thereby benefitting the six months ended June 30, 2017 effective tax rate by 1.9 percentage points. See “Item 1 – Note 9 (Income Taxes)” for an explanation of the 2014-2015 tax years. Collectively, these discrete items, loweredchange in our effective tax rate to 37.0% for the nine months ended September 30, 2017 as compared to 38.8% for the nine months ended nine months ended September 30, 2016.rates.

Other comprehensive income,loss, net of taxes for the ninesix months ended SeptemberJune 30, 20172018 was $4.2$5.9 million compared to $5.6other comprehensive income of $4.0 million for the same period in 2016. Other comprehensive income (loss) represents after tax changes to equity which are not recognized in net income, including changes in the fair value of securities available for sale held in our portfolio and any reclassifications out of cumulative other comprehensive income for securities sold.2017. See “Item 1 — Note 11 (Other Comprehensive Income (Loss)). for additional information about the amounts comprising other comprehensive income and loss for these periods.

 

 


Analysis of Financial Condition—As of SeptemberJune 30, 20172018 Compared to December 31, 20162017

We believe that cash flows generated from operations will be sufficient to meet our working capital requirements for at least the next twelve months. Our policy is to invest amounts considered to be in excess of current working capital requirements.

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

 

 

As of

 

 

September 30,

 

 

December 31,

 

 

June 30,

 

 

December 31,

 

Type of Investment

 

2017

 

 

2016

 

 

2018

 

 

2017

 

Fixed maturities

 

$

609,179

 

 

$

584,361

 

Available-for-sale debt securities

 

$

656,762

 

 

$

639,334

 

Available-for-sale short-term investments

 

 

 

 

 

10,000

 

Equity securities

 

 

26,075

 

 

 

50,803

 

 

 

70,866

 

 

 

62,215

 

Short-term investments

 

 

 

 

 

5,002

 

Investment real estate, net

 

 

16,324

 

 

 

11,435

 

 

 

19,539

 

 

 

18,474

 

Total

 

$

651,578

 

 

$

651,601

 

 

$

747,167

 

 

$

730,023

 

 

See “Item 1 —Condensed Consolidated Statements of Cash Flows” for explanations of changes in investments.

Prepaid reinsurance premiums represent the portion of unearned ceded written premiums that will be earned pro-rata over the coverage period inof our reinsurance program, which runs from June 1 to May 31 of the future.following year. The increase of $88.1$177.8 million to $212.5$310.6 million as of SeptemberJune 30, 2017,2018 was due primarily to additional ceded written premium of $338.9 million recorded this quarter for the reinsurance costs relating to our 2017-2018new 2018-2019 catastrophe reinsurance program beginning June 1, 2017.2018 less amortization recorded during the period.

Reinsurance recoverable represents the estimated amount of losses and LAEloss adjustment expenses that are recoverable from reinsurers. The increasedecrease of $412.6$64.6 million to $412.7$117.9 million as of SeptemberJune 30, 20172018 was primarily due to the settlement of amounts due from reinsurers for claims ceded to reinsurers relating to Hurricane Irma.Irma and to a lesser extent Hurricane Matthew.

Premiums receivable, net represents amounts receivable from policyholders. The increase in premiums receivable, net of $12.9$10.7 million to $66.7$67.2 million as of SeptemberJune 30, 20172018 relates to both the growth in and seasonality of the Company’s business including increased consumer demand during storm periods.business.

Deferred income tax assets and liabilities represent temporary differences between U.S. GAAP and the tax basis of the Company's assets and liabilities. During the ninesix months ended SeptemberJune 30, 2017,2018, deferred tax assets decreased by $5.4$9.1 million to $5.3$0.2 million, primarily due to an increase in deferred policy acquisition costs and decreasean increase in unrealized gains and losses.ceded unearned premiums.

Deferred policy acquisition costs increased $11.0by $15.7 million to $75.9$88.8 million as of SeptemberJune 30, 2017,2018, which is in line with the underlying premium growth. See “Item 1 — Note 5 (Insurance Operations)” for a roll-forward in the balance of our deferred policy acquisition costs.

Income taxes recoverable increased $15.9by $2.4 million to $19.2$11.8 million as of SeptemberJune 30, 2017,2018, from $3.3$9.5 million as of December 31, 2016.2017. The increase represents amounts due from taxing jurisdictions within one year and arise when income tax payments exceed income tax liabilities. Income taxes recoverable as of SeptemberJune 30, 20172018 were $19.2$11.8 million, which represents amounts recoverable or to be applied to future periods for federal and state income taxes.

See “Item 1 — Note 6 (Liability for Unpaid Losses and Loss Adjustment Expenses)” for a roll-forward in the balance of our unpaid losses and LAE.loss adjustment expenses. Unpaid losses and LAE increased $381.9loss adjustment expenses decreased by $96.5 million to $440.4$151.9 million as of SeptemberJune 30, 2017.2018. The increasereduction in unpaid losses and loss adjustment expenses was principally due to the settlement of Hurricane Irma claims that were unpaid as of December 31, 2017, was a result ofoffset from losses recordedincurred from weather related activity and other claims in the third quarter of 2017 for Hurricane Irma.2018. Unpaid losses and LAEloss adjustment expenses are net of estimated subrogation recoveries. The Company is continuing its initiatives to expedite claims payments including the ability of our mobile claims teams to rapidly settle certain claims, which we refer to as “Fast Track,” and pursuing the anticipated benefits from subrogation collections.

Unearned premiums represent the portion of direct written premiumspremium that will be earned pro rata in the future. The increase of $80.5$76.5 million to $556.3$608.9 million as of SeptemberJune 30, 20172018 reflects both organic growth and seasonality of our businessincluding increased consumer demand during storm periods as described under “– Overview”.

Advance premium represents premium payments made by policyholders ahead of the effective date of the policies. The increase of $10.9$12.0 million to $28.7$38.2 million as of SeptemberJune 30, 20172018 reflects both organic growth and seasonality of our business including increased consumer demand during storm periodsas described under “– Overview”.


Book overdrafts represent outstanding checks or drafts in excess of cash on deposit and are examined to determine if a legal right of offset exists for accounts within the same banking institution at each balance sheet date. The Company maintains a short-term cash investment sweep to maximize investment returns on cash balances. Due to sweep activities, certain outstanding items are recorded as book overdrafts which totaled $3.0 million as of June 30, 2018 compared to $36.7 million as of December 31, 2017. The decrease of $33.7 million is the result of higher cash balances available for offset as of June 30, 2018 and to a lesser amount less outstanding items as of June 30, 2018 compared to December 31, 2017 due to lower Hurricane Irma drafts outstanding.

Reinsurance payable, net increased $260.5 million to $341.4 million as of September 30, 2017 and is comprised ofrepresents the unpaid amountsceded written premiums owed to reinsurers in connection with the renewal of the Company’s 2017/20182018-2019 catastrophe reinsurance program which beganon June 1, 2017. It also includes $114 million in2018, unpaid reinstatement premiums and cash advances received from reinsurers in connection with Hurricane Irma’s anticipated recoveries.


Other liabilities and accrued expenses  The balance increased $10.0by $231.5 million to $341.9 million as of June 30, 2018 as a result of increased expenses that relatethe above items. Ceded premiums for the 2018-2019 catastrophe reinsurance program are paid in installments over the June 1 to Hurricane Irma and costs, such as commissions and taxes, related to increases in our business.

Dividend payable represents the unpaid dividends liability of $0.14 per share declared on AugustMay 31 2017, based on shareholders of record on September 12, 2017 and payable on October 24, 2017.policy term.

Capital Resourcesresources, net increased net $47.6by $51.3 million and includes increases in stockholders’ equity of $49.4$52.0 million, offset by reduction in long-term debt of $1.8$0.7 million. The increases in stockholders’ equity was principally the result of 2017$86.1 million of 2018 net income and $4.7 million of stock-based compensation, offset by $11.1 million in treasury stock purchases, and $15.4 million in dividends to shareholders and stock based compensation.shareholders. The reduction in long-term debt was the result of principal payments on debt during 2017.2018. See “– Liquidity and Capital Resources” and “Item 1 – Note 8 (Stockholders’ Equity)” for explanation of changes in treasury stock.

 

Liquidity and Capital Resources

Liquidity

Liquidity is a measure of a company’s ability to generate sufficient cash flows to meet its short and long-term obligations. Funds generated from operations have been sufficient to meet our liquidity requirements and we expect that, in the future, funds from operations will continue to meet such requirements.

The balance of cash and cash equivalents as of SeptemberJune 30, 20172018 was $366.2$311.1 million compared to $105.7$213.5 million at December 31, 2016.2017. See “Item 1 — Condensed Consolidated Statements of Cash Flows” for a reconciliation of the balance of cash and cash equivalents between SeptemberJune 30, 20172018 and December 31, 2016.2017. The increase in cash and cash equivalents was driven by significant cash flows generated from operating and investing activities in excess of those used for investing and financing activities. The increaseCompany maintains a short-term investment cash sweep to maximize investment returns on cash balances. Due to the sweep activities, certain outstanding items were recorded as “Book Overdraft” in cash balances at September 30, 2017 also includes $114.0 million of advance payments received from reinsurers, (“cash calls”) available under the Company’s reinsurance program. Most of the balance of cashConsolidated Financial Statements. Cash and cash equivalents maintained isbalances are available for the payment of claimsto settle book overdrafts, pay expenses and operation of the Company.pay claims.

The balance of restricted cash and cash equivalents as of SeptemberJune 30, 20172018 and December 31, 20162017 includes cash equivalents on deposit with regulatory agencies in the various states in which our Insurance Entities do business.

Liquidity for UVE and its non-insurance subsidiaries is required to cover the payment of general operating expenses, dividends to shareholders (if and when authorized and declared by our Board of Directors), payment for the possible repurchase of our common stock (if and when authorized by our Board of Directors), payment of income taxes, and interest and principal payments on outstanding debt obligations, if any. The declaration and payment of future dividends by UVE to its shareholders, and any future repurchases of UVE common stock, will be at the discretion of our Board of Directors and will depend upon many factors, including our operating results, financial condition, debt covenants and any regulatory constraints. Principal sources of liquidity for UVE and its non-insurance subsidiaries include revenues generated from fees paid by the Insurance Entities to affiliated companies for policy administration, inspections and claims adjusting services. Additional sources of liquidity include brokerage commissions earned on reinsurance contracts and policy fees and any unused credit lines.fees. UVE also maintains certain other investments, in equity securities, which are a source of ongoing interest and dividend income and would generate funds upon sale. As discussed in “Item 1 – Note 5 (Insurance Operations),” there are limitations on the dividends the Insurance Entities may pay to their immediate parent company, Universal Insurance Holding Company of Florida (“UVECF”).

The maximum amount of dividends that can be paid by Florida insurance companies without prior approval of the Commissioner of the FLOIR is subject to restrictions as referenced in “Item I – Note 5 – Insurance Operations.” During the ninesix months ended SeptemberJune 30, 2017, UPCIC paid $30.0 million in dividends to UVECF. The2018, the Insurance Entities did not pay dividends to UVECF during the year ended December 31, 2016.UVECF. During 2017 UPCIC paid a $30 million dividend to UVECF.

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


Our insurance operations provide liquidity in that premiums are generally received months or even years before losses are paid under the policies written. In the event of catastrophic events, many of the Company’s reinsurance agreements provide for “cash calls”advance” whereby reinsurers advance or prepay amounts to the Company, providing liquidity, which the Company utilizes in the claim settlement process. At September 30, 2017 reinsurers advanced $114 million toIn addition, the Company for Hurricane Irma claims. The Insurance Entities maintain substantial investments in highly liquid, marketable securities, which would generate funds upon sale.


The Insurance Entities are responsible for losses related to catastrophic events in excess of coverage provided by the Insurance Entities’ reinsurance programs andor retentions before the Company’s reinsurance protection commences. Also, the Insurance Entities are responsible for all other losses that otherwise may not be covered by the reinsurance programs.programs and any amounts arising in the event of a reinsurer default. Losses or a reinsurer default may have a material adverse effect on either of the Insurance Entities or our business, financial condition, results of operations and liquidity.

Capital Resources

Capital resources provide protection for policyholders, provide forfurnish the financial strength to support the business of underwriting insurance risks, and supportfacilitate continued business growth. At September 30, 2017, we had total capital of $433.8 million, comprised of stockholders’The following table provides our stockholder equity, of $420.6 million and total long-term debt, of $13.2 million. Our debt-to-total-capitaltotal capital, debt-to-equity capital ratio and debt-to-equity ratio were 3.0% and 3.1%, respectively, at September 30, 2017. At December 31, 2016, we had total capital of $386.2 million, comprised of stockholders’ equity of $371.2 million and total long-term debt of $15.0 million. Our debt-to-total-capital ratio and debt-to-equity ratio were 3.9% and 4.0%, respectively, at December 31, 2016.for the periods presented (dollars in thousands):

 

 

As of

 

 

 

June 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Stockholders' equity

 

$

492,073

 

 

$

439,988

 

Total long-term debt

 

 

12,132

 

 

 

12,868

 

Total capital

 

$

504,205

 

 

$

452,856

 

 

 

 

 

 

 

 

 

 

Debt-to-total capital ratio

 

 

2.4

%

 

 

2.8

%

Debt-to-equity ratio

 

 

2.5

%

 

 

2.9

%

As described in our Form 10-K for the year ended December 31, 2016,2017, UPCIC entered into a surplus note with the State Board of Administration of Florida under Florida’s Insurance Capital Build-Up Incentive Program on November 9, 2006. The surplus note has a twenty-year term, with quarterly payments of principal and interest that accruesaccrue per the terms of the note agreement. At SeptemberJune 30, 2017,2018, UPCIC was in compliance with the terms of the surplus note. Total adjusted capital surplus, which includes the surplus note, was in excess of regulatory requirements for both UPCIC and APPCIC.

On September 5, 2017, our Board of Directors authorized the repurchase of up to $20 million of the Company’s outstanding common stock through December 31, 2018. The Company may repurchase shares from time to time at its discretion, based on ongoing assessments of the capital needs of the Company, the market price of its common stock and general market conditions. The Company will fund the share repurchase program with cash from operations. At September 30, 2017, there were two authorized repurchase plans in effect:

On June 13, 2016, the Company announced that its Board of Directors authorized the repurchase of up to $20 million of the Company’s outstanding common stock through December 31, 2017 (the “2017 Share Repurchase Program”) of which $47 thousand was remaining as of September 30, 2017.

On September 5, 2017, our Board of Directors authorized the repurchase of up to $20 million of the Company’s outstanding common stock through December 31, 2018 (the “2018 Share Repurchase Program”). This new authorization follows the Board authorized 2017 Share Repurchase Program which is close to being exhausted. There were no shares of common stock repurchased under 2018 Share Repurchase Program in September 2017.

During the ninesix months ended SeptemberJune 30, 2017,2018, we repurchased an aggregate of 760,559342,749 shares of UVE’s common stock in the open market at an aggregate cost of $17.9$11.1 million. Also, see “Part II, Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds” for share repurchase activity during the three months ended SeptemberJune 30, 2017.2018.

Cash Dividends

On January 23, 2017, weThe following table summarizes the dividends declared a cash dividend of $0.14 per share on our outstanding common stock, which was paid on March 2, 2017, toby the shareholders of record at the close of business on February 17, 2017.Company:

On April 12, 2017, we declared a cash dividend of $0.14 per share on our outstanding common stock, which was paid on July 3, 2017, to the shareholders of record at the close of business on June 14, 2017.

 

 

Dividend

 

Shareholders

 

Dividend

 

Cash Dividend

 

2018

 

Declared Date

 

Record Date

 

Payable Date

 

Per Share Amount

 

First Quarter

 

January 22, 2018

 

February 28, 2018

 

March 12, 2018

 

$

0.14

 

Second Quarter

 

April 12, 2018

 

April 27, 2018

 

May 4, 2018

 

$

0.14

 

Third Quarter

 

May 29, 2018

 

July 2, 2018

 

July 16, 2018

 

$

0.16

 


On August 31, 2017, we declared a cash dividend of $0.14 per share on our outstanding common stock, payable on October 24, 2017, to the shareholders of record at the close of business on September 12, 2017.

Contractual Obligations

The following table represents our contractual obligations for which cash flows are fixed or determinable as of SeptemberJune 30, 20172018 (in thousands):

 

 

 

 

 

Less than

 

 

 

 

 

 

 

 

 

 

Over

 

 

 

 

 

Less than

 

 

 

 

 

 

 

 

 

 

Over

 

Total

 

 

1 year

 

 

1-3 years

 

 

3-5 years

 

 

5 years

 

Total

 

 

1 year

 

 

1-3 years

 

 

3-5 years

 

 

5 years

 

Unpaid losses and LAE, direct (1)

$

440,443

 

 

$

281,884

 

 

$

127,288

 

 

$

22,903

 

 

$

8,368

 

$

151,916

 

 

$

77,477

 

 

$

43,904

 

 

$

23,851

 

 

$

6,684

 

Long-term debt

 

14,624

 

 

 

1,322

 

 

 

5,100

 

 

 

3,233

 

 

 

4,969

 

 

13,561

 

 

 

1,347

 

 

 

5,160

 

 

 

3,237

 

 

 

3,817

 

Total contractual obligations

$

455,067

 

 

$

283,206

 

 

$

132,388

 

 

$

26,136

 

 

$

13,337

 

$

165,477

 

 

$

78,824

 

 

$

49,064

 

 

$

27,088

 

 

$

10,501

 

 

(1)

There are generally no notional or stated amounts related to unpaid losses and LAE. Both the amounts and timing of future loss and LAE payments are estimates and subject to the inherent variability of legal and market conditions affecting the obligations and makingmake the timing of cash outflows uncertain. The ultimate amount and timing of unpaid losses and LAE could differ materially from the amounts in the table above. Further, the unpaid losses and LAE do not represent all the obligations that will arise under the contracts, but rather only the estimated liability incurred through SeptemberJune 30, 2017.2018.


Critical Accounting Policies and Estimates

Other than as disclosed in “Item 1 — Note 2 (Significant Accounting Policies),” there have been no material changes during the period covered by this Quarterly Report on Form 10-Q to Critical Accounting Policies and Estimates previously disclosed in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2016.2017.

Recent Accounting Pronouncements Not Yet Adopted

In March 2017,June 2016, the Financial Accounting Standards Board (“FASB”) issued guidancerevised U.S. GAAP with the issuance of Accounting Standards Update (“ASU”) 2016-13, Financial Instruments -Credit Losses (Topic 326) that introduces a new process for recognizing credit losses on financial instruments based on an estimate of current expected credit losses. The new ASU will apply to: 1) loans, accounts receivable, trade receivables, and other financial assets measured at amortized cost, 2) loan commitments and certain other off-balance sheet credit exposures, 3) debt securities and other financial assets measured at fair value through other comprehensive income, and 4) beneficial interests in securitized financial assets. The ASU changes the current practice of recording a permanent write down, (other than temporary impairment), for probable credit losses, which is more restrictive than the new ASU requirement that would estimate credit losses, then recorded through a temporary allowance account that can be re-measured as estimated credit losses change. The ASU further limited estimated credit losses relating to available for sale securities to the amount which fair value is below amortized cost. The ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. We are currently evaluating the impact that this standard will have on our consolidated financial statements.

In March 2017, FASB revised U.S. GAAP with the issuance of ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs to amend the amortization period for certain purchased callable debt securities held at a premium. Current U.S. GAAP excludes certain callable debt securities from consideration of early repayment of principal even if the holder is certain that the call will be exercised. Thus, the exercise of a call on a callable debt security held at a premium can result in the unamortized premium recorded at a loss in earnings. The guidancenew ASU shortens the amortization period of certain purchased callable debt securities to the earliest call date. The guidanceASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. Under the current guidance,U.S. GAAP, you could consider the call dates and estimate if you had a large number of similar securities and you were basing your judgment on actual experience. Our service provider (who processes the accounting for our investment transactions) has many similar securities on their system and can make that type of determination. As a result, we currently account for the amortization under the proposed guidanceASU and there will be no impact to our results of operations, financial position or liquidity.

In November 2016, the FASB issued guidance intended to reduce diversity in the classification and presentation of changes in restricted cash in the statement of cash flows. The new standard requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Entities will also be required to reconcile such total to amounts on the balance sheet and disclose the nature of the restrictions. The guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The balance of restricted cash is currently not material and is not expected to be material and we will comply with the new guidance requirements at the time of adoption. The adoption of this guidance will result in a change in the presentation only in the statement of cash flows and will impact our results of operations, financial position or liquidity.

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

In June 2016, the FASB issued guidance that introduces a new model for recognizing credit losses on financial instruments based on an estimate of current expected credit losses. The new guidance will apply to: 1) loans, accounts receivable, trade receivables, and other financial assets measured at amortized cost, 2) loan commitments and certain other off-balance sheet credit exposures, 3) debt securities and other financial assets measured at fair value through other comprehensive income, and 4) beneficial interests in securitized financial assets. The guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. We are currently evaluating the impact that this standard will have on our consolidated financial statements.

In January 2016, the FASB issued guidance on recognition and measurement of financial instruments. The new guidance requires certain equity investments to be measured at fair value with changes in fair value reported in earnings and requires changes in instrument-specific credit risk for financial liabilities recorded at fair value under the fair value option to be reported in other comprehensive income (“OCI”). The new guidance is effective for fiscal years beginning after December 15, 2017, with early adoption permitted for the provisions related to record fair value changes for financial liabilities under the fair value option resulting from instrument-specific credit risk in OCI. The adoption of this guidance will impact how we account for unrealized gains and losses for equity investments and may result in a change of presentation in the statement of cash flows and is expected to impact our results of operations.


ItemItem 3. Quantitative and Qualitative Disclosures about Market Risk

Market risk is the potential for economic losses due to adverse changes in fair value of fixed maturities,available-for-sale debt securities, available-for-sale short-term investments and equity securities and short-term investments (“Financial Instruments”) and investment real estate. We carry all of our Financial Instruments at market value and investment real estate at net book value in our statement of financial condition. Our investment portfolio as of SeptemberJune 30, 20172018 is comprised of fixed maturitiesavailable-for-sale debt securities and equities securities, which thereby expose us to changes in interest rates and equity prices.

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

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


Interest Rate Risk

Interest rate risk is the sensitivity of a fixed-rate Financial Instrument to changes in interest rates. WhenGenerally, when interest rates rise, the fair value of our fixed-rate Financial Instruments declines.

The following table provides information about our fixed income Financial Instruments, which are sensitive to changes in interest rates. The table presents cash flows of principal amounts and related weighted average interest rates by expected maturity dates for fixed income Financial Instruments available for sale as of the dates presented (in thousands):

 

September 30, 2017

 

June 30, 2018

 

Amortized Cost

 

 

Fair Value

 

Amortized Cost

 

 

Fair Value

 

2017

 

 

2018

 

 

2019

 

 

2020

 

 

2021

 

 

Thereafter

 

 

Other (1)

 

 

Total

 

 

Total

 

2018

 

 

2019

 

 

2020

 

 

2021

 

 

2022

 

 

Thereafter

 

 

Other (1)

 

 

Total

 

 

Total

 

Fixed income Financial

Instruments

$

5,063

 

 

$

45,502

 

 

$

84,654

 

 

$

57,499

 

 

$

59,236

 

 

$

125,946

 

 

$

232,657

 

 

$

610,557

 

 

$

609,179

 

$

12,530

 

 

$

77,593

 

 

$

54,579

 

 

$

66,940

 

 

$

23,587

 

 

$

179,385

 

 

$

254,254

 

 

$

668,868

 

 

$

656,762

 

Weighted average

interest rate

 

2.10

%

 

 

2.36

%

 

 

1.95

%

 

 

2.16

%

 

 

2.19

%

 

 

4.16

%

 

 

3.06

%

 

 

2.90

%

 

 

2.90

%

 

1.81

%

 

 

1.76

%

 

 

2.04

%

 

 

2.15

%

 

 

2.46

%

 

 

3.53

%

 

 

3.22

%

 

 

2.88

%

 

 

2.88

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

December 31, 2017

 

Amortized Cost

 

 

Fair Value

 

Amortized Cost

 

 

Fair Value

 

2017

 

 

2018

 

 

2019

 

 

2020

 

 

2021

 

 

Thereafter

 

 

Other (1)

 

 

Total

 

 

Total

 

2018

 

 

2019

 

 

2020

 

 

2021

 

 

2022

 

 

Thereafter

 

 

Other (1)

 

 

Total

 

 

Total

 

Fixed income Financial

Instruments

$

48,919

 

 

$

46,183

 

 

$

84,855

 

 

$

41,500

 

 

$

57,071

 

 

$

88,861

 

 

$

229,072

 

 

$

596,461

 

 

$

589,363

 

$

51,846

 

 

$

85,309

 

 

$

61,215

 

 

$

60,968

 

 

$

27,832

 

 

$

132,530

 

 

$

234,015

 

 

$

653,715

 

 

$

649,334

 

Weighted average

interest rate

 

2.03

%

 

 

2.41

%

 

 

1.87

%

 

 

2.15

%

 

 

2.26

%

 

 

4.53

%

 

 

2.96

%

 

 

2.79

%

 

 

2.78

%

 

1.87

%

 

 

1.82

%

 

 

2.18

%

 

 

2.16

%

 

 

2.76

%

 

 

4.02

%

 

 

3.08

%

 

 

2.83

%

 

 

2.83

%

 

(1)

Comprised of mortgage-backed and asset-backed securities thatwhich have multiple maturity dates, and perpetual maturity securities, and are presented separately for the purposes of this table.

The tables above represent average contract rates that differ from the book yield of the fixed maturities.available-for-sale debt securities. The fixed income Financial Instruments in our available for sale portfolio are comprised of United States government and agency securities, corporate bonds, municipal bonds, redeemable preferred stock, mortgage-backed and asset-backed securities, municipal securities and certificates of deposit. Duration is a measure of interest rate sensitivity expressed as a number of years. The weighted average duration of the fixed maturityincome Financial Instruments in our available for sale portfolio at SeptemberJune 30, 20172018 was 2.9 years.2.8 years.

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

Equity Price Risk

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


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

 

September 30, 2017

 

 

December 31, 2016

 

June 30, 2018

 

 

December 31, 2017

 

Fair Value

 

 

Percent

 

 

Fair Value

 

 

Percent

 

Fair Value

 

 

Percent

 

 

Fair Value

 

 

Percent

 

Equity Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

$

5,683

 

 

 

21.8

%

 

$

93

 

 

 

0.2

%

$

22,320

 

 

 

31.5

%

 

$

18,811

 

 

 

30.2

%

Mutual funds

 

20,392

 

 

 

78.2

%

 

 

50,710

 

 

 

99.8

%

 

48,546

 

 

 

68.5

%

 

 

43,404

 

 

 

69.8

%

Total equity securities

$

26,075

 

 

 

100.0

%

 

$

50,803

 

 

 

100.0

%

$

70,866

 

 

 

100.0

%

 

$

62,215

 

 

 

100.0

%

 

A hypothetical decrease of 20% in the market prices of each of the equity securities held at SeptemberJune 30, 20172018 and December 31, 20162017 would have resulted in a decrease of $5.2$14.2 million and $10.2$12.4 million, respectively, in the fair value of those securities.


ItemItem 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company carried out an evaluation under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 as of the end of the period covered by this report. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that disclosure controls and procedures were effective as of SeptemberJune 30, 2017,2018, to ensure that information required to be disclosed by the Company in its reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

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

 

 

PART II — OTHER INFORMATION

 

Item 1. Legal Proceedings

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

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

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


Item 1A. Risk Factors

In the opinion of management, thereThere have been no material changes during the period covered by this Quarterly Report on Form 10-Q to the risk factors previously disclosed in Part I, Item 1A, “Risk Factors,” included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.2017.

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

A summaryThe table below presents our purchases of UVE’s repurchases ofUVE common stock forduring the three months ended SeptemberJune 30, 2017 is as follows:2018.

 

 

 

 

 

 

 

 

 

 

Total Number of

 

 

Maximum Number

 

 

 

 

 

 

 

 

 

 

Shares Purchased

 

 

of Shares That

 

 

 

 

 

 

 

 

 

 

As Part of

 

 

May Yet be

 

 

 

 

 

 

 

 

 

 

Publicly

 

 

Purchased Under

 

 

Total Number of

 

 

Average Price

 

 

Announced

 

 

the Plans or

 

 

Shares Purchased

 

 

Paid per Share (1)

 

 

Plans or Programs

 

 

Programs (2)

 

7/1/17 - 7/31/17

 

 

 

$

 

 

 

 

 

 

 

8/1/17 - 8/31/17

 

306,091

 

 

$

22.91

 

 

 

306,091

 

 

 

 

9/1/17 - 9/30/17

 

100,175

 

 

$

19.32

 

 

 

100,175

 

 

 

873,082

 

Total

 

406,266

 

 

$

22.03

 

 

 

406,266

 

 

 

873,082

 

 

 

 

 

 

 

 

 

 

Total Number of

 

 

Maximum Number

 

 

 

 

 

 

 

 

 

 

Shares Purchased

 

 

of Shares That

 

 

 

 

 

 

 

 

 

 

As Part of

 

 

May Yet be

 

 

 

 

 

 

 

 

 

 

Publicly

 

 

Purchased Under

 

 

Total Number of

 

 

Average Price

 

 

Announced

 

 

the Plans or

 

 

Shares Purchased

 

 

Paid per Share (1)

 

 

Plans or Programs

 

 

Programs (2)

 

4/1/18 - 4/30/18

 

40,000

 

 

$

32.91

 

 

 

40,000

 

 

 

 

5/1/18 - 5/31/18

 

200,000

 

 

$

33.46

 

 

 

200,000

 

 

 

 

6/1/18 - 6/30/18

 

10,000

 

 

$

35.41

 

 

 

10,000

 

 

 

247,436

 

Total

 

250,000

 

 

$

33.45

 

 

 

250,000

 

 

 

247,436

 

(1)

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

(2)

Number of shares was calculated using a closing price at SeptemberJune 29, 20172018 of $23.00$35.10 per share.

In June 2016, we announced thatWe may repurchase shares from time to time at our discretion, based on ongoing assessments of our capital needs, the Boardmarket price of Directors authorized aour common stock and general market conditions. The Company will fund the share repurchase program under which the Company may repurchase in the open market in compliance with Exchange Act Rule 10b-18 under the Securities Exchange Act of 1934, as amended, up to $20 million of its outstanding shares of common stock through December 31, 2017. Since June 2016, we have repurchased 859,488 shares of common stock pursuant to this program through September 30, 2017.cash from operations.

In September 2017, our Board of Directors authorizedapproved a share repurchase program under which the Company may repurchaseauthorizing us to purchase up to $20 million of our outstanding common stock in the open market in compliance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended, up to $20 million of its outstanding shares of common stock through December 31, 2018. We did not repurchase any

Since September 2017, we repurchased 350,941 shares of our shares of common stock underpursuant to this program in September 2017.through June 30, 2018 at an aggregate cost of approximately $11.3 million.

 


Item 6. Exhibits

 

Exhibit No.

 

Exhibit

   3.1

Amended and Restated Bylaws of Universal Insurance Holdings, Inc. (1)

 

 

 

 15.1

 

Accountants’ Acknowledgment

 

 

 

 31.1

 

Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

 31.2

 

Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

 32

 

Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

101.INS-XBRL

 

Instance Document

 

 

 

101.SCH-XBRL

 

Taxonomy Extension Schema Document

 

 

 

101.CAL-XBRL

 

Taxonomy Extension Calculation Linkbase Document

 

 

 

101.DEF-XBRL

 

Taxonomy Extension Definition Linkbase Document

 

 

 

101.LAB-XBRL

 

Taxonomy Extension Label Linkbase Document

 

 

 

101.PRE-XBRL

 

Taxonomy Extension Presentation Linkbase Document

 

(1) Incorporated by reference to the Registrant’s Current Report on Form 8-K, filed on June 19, 2017.

 

 

 


SIGNATURES

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

 

 

 

 

 

 

UNIVERSAL INSURANCE HOLDINGS, INC.

 

 

 

 

 

 

Date: November 9, 2017July 27, 2018

 

 

 

 

/s/ Sean P. Downes

 

 

 

 

 

Sean P. Downes, Chief Executive Officer and Principal Executive Officer

 

 

 

 

 

 

Date: November 9, 2017July 27, 2018

 

 

 

 

/s/ Frank C. Wilcox

 

 

 

 

 

Frank C. Wilcox, Chief Financial Officer and Principal Accounting Officer

 

4852