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UNIVERSAL INSURANCE HOLDINGS, INC. – 10-K – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") is intended to assist in an understanding of our
financial condition and results of operations and should be read in conjunction
with our consolidated financial statements and accompanying notes in "Item
8-Financial Statements and Supplementary Data" below. Except for the historical
information contained herein, the discussions in this MD&A contain
forward-looking statements that involve risks and uncertainties. Our future
results could differ materially from those discussed herein. Factors that could
cause or contribute to such differences include, but are not limited to, those
discussed above under "Cautionary Note Regarding Forward-Looking Statements" and
"Part I, Item 1A-Risk Factors."
Overview
We are a vertically integrated holding company offering property and casualty insurance and value-added insurance services. We develop, market, and underwrite insurance products for consumers predominantly in the personal residential homeowners lines of business and perform substantially all other insurance-related services for our primary insurance entities, including risk management, claims management and distribution. Our primary insurance entities, UPCIC and APPCIC, offer insurance products through both our appointed independent agent network and our online distribution channels across 19 states (primarily inFlorida ), with licenses to write insurance in an additional two states. The Insurance Entities seek to produce an underwriting profit (defined as earned premium minus losses, LAE, policy acquisition costs and other operating costs) over the long term; maintain a conservative balance sheet to prepare for years in which the Insurance Entities are not able to achieve an underwriting profit; and generate investment income from invested assets.
Revenues
We generate revenue primarily from the collection of insurance premiums. Other sources of revenue include: commissions paid by our reinsurers to our reinsurance intermediary subsidiary BARC on reinsurance it places for the Insurance Entities; policy fees collected from policyholders by our managing general agent subsidiary, ERA (formerlyUniversal Risk Advisors, Inc. ); and financing fees charged to policyholders who choose to defer premium payments. In addition, our subsidiary Alder receives fees from the Insurance Entities for claims-handling services. The Insurance Entities are reimbursed for these fees on claims that are subject to recovery under the Insurance Entities' respective reinsurance programs. These fees, after expenses, are recorded in the consolidated financial statements as an adjustment to LAE. We also generate income by investing our assets. 25 -------------------------------------------------------------------------------- The nature of our business tends to be seasonal during the year, reflecting consumer behaviors in connection with theFlorida residential real estate market and the hurricane season. The amount of direct premiums written tends to increase just prior to the second quarter and tends to decrease approaching the fourth quarter.
Trends and Geographical Distribution
Florida Trends
We are currently working through a cycle to improve long-term rate adequacy and earnings for the Insurance Entities by increasing rates and managing exposures, while taking advantage of what we believe to be opportunities in a dislocated market. TheFlorida personal lines homeowners' market currently can be characterized as a "hard market", where insurance premium rates are escalating, insurers are reducing coverages, and underwriting standards are tightening as insurers closely monitor insurance rates and manage coverage capacity. Due to conditions in theFlorida market and factors more generally affecting theU.S. and global reinsurance markets, reinsurance capacity in recent years has also been subject to less favorable pricing or terms. These market forces decrease competition among admitted insurers, and ultimately result in the increased use of Citizens, which was created to be the State's residual property insurance market. In recent years, in response to adverse behaviors and conditions in theFlorida residential market, most admitted market competitors have sought and often received approval for significant rate increases. Meanwhile, Citizens' rate increases are limited by law, resulting in its policies, in a hard market, becoming priced lower than admitted market policies. This causes Citizens to become viewed as a desirable alternative to the admitted market as admitted market insurers manage through the hard market challenges. Our Insurance Entities likewise have taken and continue to take action to manage through this hard market by increasing rates and prudently managing exposures while also maintaining their competitive position in the market and supporting our current policyholders and agents. While addressing rate adequacy for the Insurance Entities, we continue to experience inflated costs for losses and LAE in theFlorida market, where an industry has developed around the solicitation, filing and litigation of personal residential claims. These dynamics have been made worse by the litigation financing industry which in some cases funds these actions. These behaviors are a chief contributing factor for the rate increases in this market. These behaviors result in a pattern of continued increases in year-over-year levels of represented claims, the inflation of purported claim amounts, and increased demands for attorneys' fees. Active solicitation of personal residential claims inFlorida by policyholder representatives, remediation companies and repair companies has led to an increase in the frequency and severity of personal residential claims inFlorida exceeding historical levels and levels seen in other jurisdictions. Information prepared by theFlorida Office of Insurance Regulation also shows that claims inFlorida are litigated at a substantially disproportionate rate when compared to other states. This is largely due to aFlorida statute providing a one-way right of attorneys' fees against insurers which has, when coupled with certain other statutes and judicial rulings, produced a legal environment inFlorida that encourages litigation, in many cases without regard to the underlying merits of the claims. The one-way right to attorneys' fees essentially means that unless an insurer's position is entirely upheld in litigation, the insurer must pay the plaintiff's attorneys' fees in addition to its own defense costs. This affects not only claims that are litigated to resolution, but also the settlement discussions that take place with nearly all litigated claims. This one-way right to attorney fees creates a nearly risk-free environment, and incentive, for attorneys to pursue litigation against insurers. The result has been a substantial increase in represented and litigated claims inFlorida , far outpacing levels experienced in other states. InApril 2021 , theFlorida legislature passed a bill intending to curtail the adverse claim trends impacting theFlorida homeowners' insurance market. Most provisions of the bill went into effect onJuly 1, 2021 . Among its provisions, the bill creates a new pre-suit notice requirement wherein an insured must make a formal monetary demand of a residential property insurer before commencing suit. The Company has established an internal team to review and respond to these pre-suit demands in a further effort to resolve disputes before litigation ensues. Another provision of the new law reduces the time period in which to file a new or reopened claim to two years following the date of loss. Other changes include attempting to curtail the solicitation of certain roof claims and to limit referral fees in connection with certain types of claims. Opponents of the reforms have challenged certain parts of the new law, including obtaining an injunction against provisions that limit the solicitation of roof claims. In light of the recent enactment of these reforms and the litigation that has ensued, it is premature to assess whether the reforms will have their intended effect. Whether these changes are beneficial to consumers, insurers, insurance company holding systems or the residential property insurance market as a whole may not be fully known for some time. Despite our initiatives, such as those mentioned above, our costs to settle claims inFlorida have increased for the reasons mentioned above. For example, the Company has previously increased its current year loss estimates and increased estimates associated with prior years' claims. Over the past three years, even as we have increased our estimates of prospective losses each year, we have recorded adverse claim development on prior years' loss reserves and further strengthened current year losses during the year to address the increasing impactFlorida's market disruptions, as well as the impact of rising costs of building materials and labor, have had on the claims process and the establishment of reserves for losses and LAE. The full extent and duration of these market disruptions and inflationary pressures are unknown and still unfolding, and we will monitor the impact of such disruptions on the recording and reporting of claim costs. The Company has taken a series of steps over time to mitigate the financial impact of these negative trends in theFlorida market. We also have closely monitored rate levels, especially in theFlorida market, and have submitted rate filings based upon evolving data. However, because rate filings rely upon past loss and expense data and take time to develop, file and implement, we can experience significant delays between identifying needed rate adjustments, gaining approval of rate changes, and ultimately collecting the resulting increased premiums. In addition, the Company has implemented several initiatives in its claims department in response to the adverse market trends. We utilize our process called Fast Track, which is an initiative to handle straightforward, meritorious claims as promptly as possible to mitigate the adverse impacts that can be seen with claims 26 -------------------------------------------------------------------------------- that remain open for longer periods. In addition, we increased our emphasis on subrogation to reduce our net losses while also recovering policyholders' deductibles when losses are attributable to the actions of others. We have an internal staff of trained water remediation experts to address the extraordinary number of purported water damage claims filed by policyholders and vendors. We developed a specialized in-house unit for responding to the unique aspects of represented claims, and we have substantially increased our in-house legal staff in an effort to address the increase in litigated or represented claims as cost-effectively as possible. Additionally, we have taken steps to implement claim settlement rules associated with theFlorida legislation passed in 2019 designed to reduce the negative effects of claims involving assignments of benefits ("AOB"). See "Part I- Item 1-Business-Government Regulation." An AOB is a document signed by a policyholder that allows a third party to be paid for services performed for an insured homeowner who would normally be reimbursed by the insurance company directly after making a claim. Prior to the AOB reform legislation, the Company experienced an increase in the use of AOBs involving litigation byFlorida policyholders. Claims paid under an AOB often involve unnecessary litigation, with the Company required to pay both its own defense costs and those of the plaintiff, and, as a result, cost the Company significantly more than claims settled when an AOB is not involved. In 2019, theFlorida legislature passed legislation designed to increase consumer protections against AOB abuses and reduce AOB-related litigation. While theFlorida legislation addressing abuses associated with AOBs may be beneficial in reducing one aspect of the concerns affecting theFlorida market, the overall impact of the deterioration in claims-related tactics and behaviors, including other first-party litigation, thus far has continued to outpace benefits arising from the 2019 AOB reform legislation. More recently, following legislation adopted inFlorida's 2021 legislative session, we have established procedures and dedicated personnel to a new pre-suit notice and offer process. The new process requires policyholders or their attorneys to notify insurers at least ten days before commencing litigation and allows insurers an opportunity to make pre-suit settlement offers. The policyholders' ability to recover attorneys' fees is determined according to a scale that compares the ultimate outcomes of the cases to the insurers' pre-suit offers. Although this new process is intended to reduce claims litigation and encourage settlements, it is too early to evaluate whether it will be successful in limiting the types of settlement demands and litigation that have plagued theFlorida market or in offsetting other factors adversely affecting the market such as increased costs of building materials and labor.
Geographical Distribution
Direct premiums written continue to increase across the states in which we conduct business. As a result of our business strategy, rate changes and disciplined underwriting initiatives, we have seen a decrease in policy count, but an increase in in-force premium and total insured value in almost all states for the past three years. Direct premiums written for states outside ofFlorida increased 6.1%, representing a$16.2 million increase during 2021. Direct premiums written forFlorida increased 11.0%, representing a$137.6 million increase during 2021. The following table provides direct premiums written forFlorida and other states for the years endedDecember 31, 2021 and 2020 (dollars in thousands): Growth For the Years Ended Year Over Year December 31, 2021 December 31, 2020 Direct Premiums Direct Premiums State Written % Written % $ % Florida$ 1,388,318 83.1 %$ 1,250,748 82.4 %$ 137,570 11.0 % Other states 282,934 16.9 % 266,731 17.6 % 16,203 6.1 % Grand total$ 1,671,252 100.0 %$ 1,517,479 100.0 %$ 153,773 10.1 %
We seek to grow and generate long-term rate adequate premium in each state where
we offer policies. Our diversification strategy seeks to increase business
outside of
Premium growth outside
efforts to meet that objective.
27 -------------------------------------------------------------------------------- The geographical distribution of our policies in force, premium in force and total insured value across all states were as follows, as ofDecember 31, 2021 , 2020 and 2019 (dollars in thousands, rounded to the nearest thousand): As of December 31, 2021 Premium Total Insured State Policy Count % In Force % Value % Florida 695,533 73.7 %$ 1,395,476 83.1 %$ 203,062,948 63.3 % North Carolina 58,644 6.2 % 57,534 3.4 % 22,703,801 7.1 % Georgia 41,097 4.4 % 53,956 3.2 % 19,057,338 5.9 % Massachusetts 16,793 1.8 % 23,790 1.4 % 11,467,490 3.6 % Virginia 23,306 2.5 % 21,069 1.3 % 13,854,648 4.3 % Alabama 14,484 1.5 % 19,966 1.2 % 5,725,381 1.8 % Indiana 17,744 1.9 % 19,018 1.1 % 6,810,107 2.1 % Minnesota 11,934 1.2 % 18,216 1.1 % 6,372,221 2.0 % New Jersey 14,844 1.6 % 18,054 1.1 % 9,523,904 3.0 % South Carolina 17,563 1.8 % 17,976 1.1 % 6,860,210 2.1 % Pennsylvania 13,930 1.5 % 14,688 0.9 % 6,528,352 2.0 % Maryland 6,615 0.7 % 6,003 0.4 % 2,802,756 0.9 % Michigan 3,476 0.4 % 4,572 0.3 % 1,585,940 0.5 % New York 2,808 0.3 % 3,814 0.2 % 1,898,297 0.6 % Delaware 1,819 0.2 % 2,316 0.1 % 1,061,987 0.3 % Hawaii 1,773 0.2 % 1,974 0.1 % 903,844 0.3 % Illinois 786 0.1 % 1,006 - % 409,660 0.1 % New Hampshire 369 - % 301 - % 235,154 0.1 % Iowa 75 - % 92 - % 34,396 - % Total 943,593 100.0 %$ 1,679,821 100.0 %$ 320,898,434 100.0 % As of December 31, 2020 Premium Total Insured State Policy Count % In Force % Value % Florida 728,211 73.9 %$ 1,252,916 82.4 %$ 192,504,430 63.6 % Georgia 46,678 4.7 % 57,251 3.8 % 20,141,751 6.7 % North Carolina 62,849 6.4 % 55,307 3.6 % 21,500,109 7.1 % Virginia 23,546 2.4 % 20,226 1.3 % 12,959,884 4.3 % Massachusetts 15,090 1.5 % 20,161 1.3 % 9,507,917 3.1 % Indiana 19,839 2.0 % 18,328 1.2 % 7,171,623 2.4 % Minnesota 12,730 1.3 % 17,863 1.2 % 6,252,822 2.1 % Alabama 13,632 1.4 % 17,409 1.2 % 4,953,449 1.6 % South Carolina 17,877 1.8 % 16,886 1.1 % 6,297,270 2.1 % Pennsylvania 17,183 1.7 % 14,540 1.0 % 7,394,773 2.4 % New Jersey 11,576 1.2 % 12,915 0.9 % 6,684,386 2.2 % Maryland 5,664 0.6 % 4,816 0.3 % 2,226,324 0.7 % Michigan 3,494 0.4 % 4,290 0.3 % 1,478,595 0.5 % New York 1,936 0.2 % 2,251 0.2 % 1,159,105 0.4 % Hawaii 2,031 0.2 % 1,983 0.1 % 901,401 0.3 % Delaware 1,581 0.2 % 1,908 0.1 % 870,728 0.3 % Illinois 497 0.1 % 580 - % 235,593 0.1 % New Hampshire 409 - % 312 - % 238,121 0.1 % Iowa 7 - % 7 - % 2,774 - % Total 984,830 100.0 %$ 1,519,949 100.0 %$ 302,481,055 100.0 % 28
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As of December 31 ,
2019
Premium Total Insured
State Policy Count % In Force % Value %
Florida 662,343 74.6 % $ 1,070,034 82.5 % $ 164,654,848 64.3 %
Georgia 42,637 4.8 % 49,615 3.8 % 17,536,031 6.9 %
North Carolina 58,283 6.6 % 49,420 3.8 % 19,150,001 7.5 %
Massachusetts 13,596 1.5 % 17,991 1.4 % 8,312,929 3.2 %
Indiana 18,291 2.1 % 16,643 1.3 % 6,458,310 2.5 %
Minnesota 12,466 1.4 % 16,035 1.2 % 5,881,338 2.3 %
South Carolina 16,682 1.9 % 15,705 1.2 % 5,575,934 2.2 %
Virginia 16,313 1.8 % 14,111 1.1 % 8,415,470 3.3 %
Pennsylvania 16,874 1.9 % 13,726 1.1 % 6,922,815 2.7 %
Alabama 11,186 1.3 % 12,998 1.0 % 3,923,446 1.5 %
New Jersey 7,145 0.8 % 7,554 0.6 % 3,824,506 1.5 %
Michigan 3,417 0.4 % 4,089 0.3 % 1,399,470 0.5 %
Maryland 4,181 0.5 % 3,474 0.3 % 1,600,113 0.6 %
Hawaii 2,090 0.2 % 1,930 0.2 % 881,476 0.3 %
Delaware 1,273 0.1 % 1,500 0.1 % 673,331 0.3 %
New York 1,183 0.1 % 1,244 0.1 % 646,130 0.3 %
New Hampshire 249 - % 181 - % 135,254 0.1 %
Illinois 152 - % 166 - % 65,006 - %
Total 888,361 100.0 % $ 1,296,416 100.0
%
Also see "Results of Operations" below and "Part I-Item 1A-Risk Factors-Risks Relating to Our Business and Operations-Because we conduct the majority of our business inFlorida , our financial results depend on the regulatory, economic and weather conditions inFlorida " for discussion on geographical diversification.
KEY PERFORMANCE INDICATORS
The Company considers the measures and ratios in the following discussion to be key performance indicators for its businesses. Management believes that these indicators are helpful in understanding the underlying trends in the Company's businesses. Some of these indicators are reported on a quarterly basis and others on an annual basis. Please also refer to "Item 8-Note 2 (Summary of Significant Accounting Policies)" for definitions of certain other terms we use when describing our financial results.
These indicators may not be comparable to other performance measures used by the
Company's competitors and should only be evaluated together with our
consolidated financial statements and accompanying notes.
Definitions of Key Performance Indicators
Book Value Per Common Share - total stockholders' equity, adjusted for preferred stock liquidation, divided by the number of common shares outstanding as of a reporting period. Book value per common share is the excess of assets over liabilities at a reporting period attributed to each share of stock. Changes in book value per common share informs shareholders of retained equity in the Company on a per share basis which may assist in understanding market value trends for the Company's stock. Combined Ratio - the combined ratio is a measure of underwriting profitability for a reporting period and is calculated by dividing total operating costs and expenses (which is made up of losses and LAE and general and administrative expenses) by premiums earned, net, which is net of ceded premiums earned. Changes to the combined ratio over time provide management with an understanding of costs to operate its business in relation to net premiums it is earning and the impact of rate, underwriting and other business management actions on underwriting profitability. A combined ratio below 100% indicates underwriting profit; a combined ratio above 100% indicates underwriting losses. Core Loss Ratio - a common operational metric used in the insurance industry to describe the ratio of current accident year expected losses and LAE to premiums earned. Core loss ratio is an important measure identifying profitability trends of premiums in force. Core losses consists of all other losses and LAE, excluding weather events beyond those expected and prior years' reserve development. The financial benefit from the management of claims, including claim fees ceded to reinsurers, is recorded in the consolidated financial statements as a reduction to core losses.
Debt-to-Equity Ratio - long-term debt divided by stockholders' equity. This
ratio helps management measure the amount of financing leverage in place in
relation to equity and future leverage capacity.
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Debt-to-Total Capital Ratio - long-term debt divided by the sum of total
stockholders' equity and long-term debt (often referred to as total capital
resources). This ratio helps management measure the amount of financing leverage
in place (long-term debt) in relation to total capital resources and future
leverage capacity.
Direct Premiums Written ("DPW") - reflects the total value of policies issued
during a period before considering premiums ceded to reinsurers. Direct premiums
written, comprised of renewal premiums, endorsements and new business, is
initially recorded as unearned premium in the balance sheet which is then earned
pro-rata over the next year or remaining policy term. Direct premiums written
reflects current trends in the Company's sale of property and casualty insurance
products and amounts that will be recognized as earned premiums in the future.
DPW (
management to analyze growth in our primary market and is also a measure of
business concentration risk.
Expense Ratio (Including Policy Acquisition Cost Ratio and Other Operating Cost
Ratio) - calculated as general and administrative expenses as a percentage of
premiums earned, net. General and administrative expenses is comprised of policy
acquisition costs and other operating costs, which includes such items as
underwriting costs, facilities and corporate overhead. The expense ratio,
including the sub-expense ratios of policy acquisition cost ratio and other
operating cost ratio, are indicators to management of the Company's cost
efficiency in acquiring and servicing its business and the impact of expense
items to overall profitability.
Losses and Loss Adjustment Expense Ratio or Loss and LAE Ratio - a measure of
the cost of claims and claim settlement expenses incurred in a reporting period
as a percentage of premiums earned in that same reporting period. Losses and LAE
incurred in a reporting period includes both amounts related to the current
accident year and prior accident years, if any, referred to as development.
Ultimate losses and LAE are based on actuarial estimates with changes in those
estimates recognized in the period the estimates are revised. Losses and LAE
consist of claim costs arising from claims occurring and settling in the current
period, an estimate of claim costs for reported but unpaid claims, an estimate
of unpaid claim costs for incurred-but-not-reported claims and an estimate of
claim settlement expenses associated with reported and unreported claims which
occurred during the reporting period. The loss and LAE ratio can be measured on
a direct basis, which includes losses and LAE divided by direct earned premiums,
or on a net basis, which includes losses and LAE after amounts have been ceded
to reinsurers divided by net earned premiums (i.e., direct premium earned less
ceded premium earned). The net loss and LAE ratio is a measure of underwriting
profitability after giving consideration to the effect of reinsurance. Trends in
the net loss and LAE ratio are an indication to management of current and future
profitability.
Monthly Weighted Average Renewal Retention Rate - measures the monthly average
of policyholders that renew their policies over the period of a calendar year.
This measure allows management to assess customer retention.
Premiums Earned, Net - the pro-rata portion of current and previously written
premiums that the Company recognizes as earned premium during the reporting
period, net of ceded premium earned. Ceded premiums are premiums paid or payable
by the Company for reinsurance protection. Written premiums are considered
earned and are recognized pro-rata over the policy coverage period. Premiums
earned, net is a measure that allows management to identify revenue trends.
Policies in Force - represents the number of active policies with coverage in
effect as of the end of the reporting period. The change in the number of
policies in force is a growth measure and provides management with an indication
of progress toward achieving strategic objectives. Inherent seasonality in our
business makes this measure more useful when comparing each quarter's balance to
the same quarter in prior years.
Premium in Force - is the amount of the annual direct written premiums
previously recorded by the Company for policies which are still active as of the
reporting date. This measure assists management in measuring the level of
insured exposure and progress toward meeting revenue goals for the current year,
and provides an indication of business available for renewal in the next twelve
months. Inherent seasonality in our business makes this measure more useful when
comparing each quarter's balance to the same quarter in prior years.
Return on Average Equity ("ROAE") - calculated by dividing earnings (loss) per
common share by average book value per common share. Average book value per
common share is computed as the sum of book value per common share at the
beginning and the end of a period, divided by two. ROAE is a capital
profitability measure of how effectively management creates profits per common
share.
Total Insured Value - represents the amount of insurance limits available on a
policy for a single loss based on all policies active as of the reporting date.
This measure assists management in measuring the level of insured exposure.
Unearned Premiums - represents the portion of direct premiums corresponding to
the time period remaining on an insurance policy and available for future
earning by the Company. Trends in unearned premiums generally indicate
expansion, if growing, or contraction, if reducing, which are important
indicators to management. Inherent seasonality in our business makes this
measure more useful when comparing each quarter's balance to the same quarter in
prior years.
Weather events - an estimate of losses and LAE from weather events occurring
during the current accident year that exceed initial estimates of expected
weather events when establishing the core loss ratio for each accident year.
This metric informs management of factors impacting overall current year
profitability.
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REINSURANCE
Reinsurance enables our Insurance Entities to limit potential exposures to catastrophic events. Reinsurance contracts are typically classified as treaty or facultative contracts. Treaty reinsurance provides coverage for all or a portion of a specified group or class of risks ceded by the primary insurer, while facultative reinsurance provides coverage for specific individual risks. Within each classification, reinsurance can be further classified as quota share or excess of loss. Quota-share reinsurance is where the primary insurer and the reinsurer share proportionally or pro-rata in the direct premiums and losses of the insurer. Excess-of-loss reinsurance indemnifies the direct insurer or reinsurer for all or a portion of the loss in excess of an agreed upon amount or retention. Developing and implementing our reinsurance strategy to adequately protect our balance sheet and Insurance Entities in the event of one or more catastrophes while maintaining efficient reinsurance costs has been a key strategic priority for us. In order to limit the Insurance Entities' potential exposure to catastrophic events, we purchase significant reinsurance from third-party reinsurers and theFlorida Hurricane Catastrophe Fund ("FHCF").The Florida Office of Insurance Regulation ("FLOIR") requires the Insurance Entities, like all residential property insurance companies doing business inFlorida , to have a certain amount of capital and reinsurance coverage in order to cover losses upon the occurrence of a single catastrophic event and a series of catastrophic events occurring in the same hurricane season. The Insurance Entities' respective 2021-2022 reinsurance programs meet the FLOIR's requirements, which are based on, among other things, successfully demonstrating cohesive and comprehensive reinsurance programs that protect the policyholders of our Insurance Entities as well as satisfying a series of stress test catastrophe loss scenarios based on past historical events. Similarly, the Insurance Entities' respective 2021-2022 reinsurance programs meet the stress test and review requirements ofDemotech, Inc. , for maintaining Financial Stability Ratings® of A (Exceptional). We believe the Insurance Entities' retentions under their respective reinsurance programs are appropriate and structured to protect policyholders. We test the sufficiency of the reinsurance programs by subjecting the Insurance Entities' personal residential exposures to statistical testing using a third-party hurricane model, RMS RiskLink v18.1 (Build 1945). This model combines simulations of the natural occurrence patterns and characteristics of hurricanes, tornadoes, earthquakes and other catastrophes with information on property values, construction types and occupancy classes. The model outputs provide information concerning the potential for large losses before they occur, so companies can prepare for their financial impact. Furthermore, as part of our operational excellence initiatives, we continually look to enable new technology to refine our data intelligence on catastrophe risk modeling.
Effective
agreements comprising our 2021-2022 reinsurance program. See "Item 1-Note 4
(Reinsurance)."
UPCIC's 2021-2022 Reinsurance Program
•First event All States retention of
hurricane season; first event Non-Florida retention of
•All States first event reinsurance protection extends to
co-participation in any of the layers and no limitation on loss adjustment
expenses for the non-catastrophe bond
reinsurance while maintaining the same favorable historical deposit premium
payment schedules.
•Assuming a first event completely exhausts the
event exhaustion point would be
•Full reinstatement available on$1.06 billion of the$1.356 billion of non-FHCF first event catastrophe coverage for guaranteed second event coverage. For all layers purchased between$45 million and the projected FHCF retention, to the extent that all of our coverage or a portion thereof is exhausted in a catastrophic event and reinstatement premium is due, we have purchased enough reinstatement premium protection ("RPP") limit to pay the premium necessary for the reinstatement of these coverages.
•Specific 3rd and 4th event private market catastrophe excess of loss coverage
of
multiple events during the treaty period.
•For the FHCF Reimbursement Contract effectiveJune 1, 2021 , UPCIC has continued the election of the 90% coverage level. We estimate the FHCF layer will provide approximately$1.963 billion of coverage for UPCIC, which inures to the benefit of the open market coverage secured from private reinsurers. •Secured$383 million of new catastrophe capacity with contractually agreed limits that extend coverage to include the 2022 and 2023 wind seasons. This amount does not include the single limit of$150 million of protection for named windstorm events, which now definitively includes the 2022 wind season and potentially could include the 2023 wind season depending on loss activity in the 2022 wind season, that UPCIC obtained inMarch 2021 when it entered into a three-year reinsurance agreement withCosaint Re Pte. Ltd. , a reinsurance entity incorporated inSingapore that correspondingly issued notes in a Rule 144A offering to raise proceeds to collateralize its obligations under this agreement. The first-event All States program described above for UPCIC includes coverage from a captive insurance arrangement that UVE established which inures to the benefit of UPCIC. This intercompany transaction provides UPCIC approximately$13.2 million of reinsurance protection on the first layer of UPCIC's first-event All States program. This transaction eliminates in consolidation effectively increasing the first event retention noted above to$58.2 million for the consolidated group in the event this limit is exhausted. 31 -------------------------------------------------------------------------------- The captive insurance arrangement effectiveJune 1, 2021 throughMay 31, 2022 was terminated effectiveDecember 1, 2021 , pursuant to the terms of the agreement. In connection with the termination of the agreement, and according to its terms, certain funds held in trust were released to the beneficiary (i.e., UPCIC) and the balance was remitted to the grantor (i.e., UVE) inDecember 2021 . The termination of the agreement results in a first-event All States retention of$58.2 million for UPCIC for the period ofDecember 1, 2021 toMay 31, 2022 , which is outside of the traditionalAtlantic hurricane season.
Reinsurers
The table below provides theA.M. Best and S&P financial strength ratings for each of the largest third-party reinsurers in UPCIC's 2021-2022 reinsurance program: Reinsurer A.M. Best S&P Allianz Risk Transfer A+ AA Everest Re A+ A+ Chubb Tempest Reinsurance Ltd. A++ AA Munich Re A+ AA- Renaissance Re A+ A+ Various Lloyd's of London Syndicates A A+ Florida Hurricane Catastrophe Fund (1) N/A N/A
(1)No rating is available, because the fund is not rated.
APPCIC's 2021-2022 Reinsurance Program
•First event All States retention of
•All States first event tower of$38 million with no co-participation in any of the layers and no limitation on loss adjustment expenses while maintaining the same favorable historical deposit premium payment schedules. •Full reinstatement available for all private market first event catastrophe layers for guaranteed second event coverage. For the layer purchased between$2.5 million and the projected FHCF retention, to the extent that all of our coverage or a portion thereof is exhausted in a catastrophic event and reinstatement premium is due, we have purchased enough RPP limit to pay the premium necessary for the reinstatement of this coverage. •APPCIC also purchases extensive multiple line excess per risk reinsurance with various reinsurers due to the high-value risks it insures in both the personal residential and commercial multiple peril lines of business. Under this multiple line excess per risk contract, APPCIC has coverage of$8.5 million in excess of$0.5 million ultimate net loss for each risk and each property loss, and$1 million in excess of$0.3 million for each casualty loss. A$19.5 million aggregate limit applies to the term of the contract for property-related losses and a$2 million aggregate limit applies to the term of the contract for casualty-related losses. This contract also contains a profit-sharing feature if specific performance measures are met. •For the FHCF Reimbursement Contract effectiveJune 1, 2021 , APPCIC has continued the election of the 90% coverage level. We estimate the FHCF layer will provide approximately$18.4 million of coverage for APPCIC, which inures to the benefit of the open market coverage secured from private reinsurers.
Reinsurers
The table below provides theA.M. Best and S&P financial strength ratings for each of the largest third-party reinsurers in APPCIC's 2021-2022 reinsurance program: Reinsurer A.M. Best S&P Chubb Tempest Reinsurance Ltd. A++ AA Lancashire Insurance Company Limited A A- Various Lloyd's of London Syndicates A A+ Florida Hurricane Catastrophe Fund (1) N/A N/A
(1)No rating is available, because the fund is not rated.
The total cost of the 2021-2022 reinsurance programs for UPCIC and APPCIC,
excluding internal reinsurance discussed above, is projected to be
representing approximately 35% of estimated direct premium earned for the
12-month treaty period.
32
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HANGER, INC. – 10-K – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
SAFETY INSURANCE GROUP INC – 10-K – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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