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UNIVERSAL INSURANCE HOLDINGS, INC. – 10-Q – 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 toUniversal Insurance Holdings, Inc. ("UVE") and its wholly-owned subsidiaries. You should read the following discussion together with our unaudited condensed consolidated financial statements ("Financial Statements") and the related notes thereto included in "Part I, Item 1-Financial Statements," and our audited condensed consolidated financial statements and the related notes thereto included in "Part II, Item 8-Financial Statements and Supplementary Data" in our Annual Report on Form 10-K for the year endedDecember 31, 2021 . Operating results for any one quarter are not necessarily indicative of results to be expected for any other quarter or for the year.
Cautionary Note Regarding Forward-Looking Statements
In addition to historical information, this report may contain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The forward-looking statements anticipate results based on our estimates, assumptions and plans that are subject to uncertainty. These forward-looking statements may be identified by their use of words like "plans," "seeks," "expects," "will," "should," "anticipates," "estimates," "intends," "believes," "likely," "targets," and other words with similar meanings. These statements may address, among other things, our strategy for growth, catastrophe exposure and other risk management, product development, investment results, regulatory approvals, market position, expenses, financial results, litigation and reserves. We believe that these statements are based on reasonable estimates, assumptions and plans. However, if the estimates, assumptions or plans underlying the forward-looking statements prove inaccurate or if other risks or uncertainties arise, actual results could differ materially from those communicated in these forward-looking statements as a result of the risks set forth below, which are a summary of those set forth in our Annual Report on Form 10-K for the year endedDecember 31, 2021 . We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.
Risks and uncertainties that may affect, or have affected, our financial
condition and operating results include, but are not limited to, the following:
•Unanticipated increases in the severity or frequency of claims, including those relating to catastrophes, severe weather events and changing climate conditions, which, in some instances, have exceeded, and in the future may exceed our reserves established for claims; •Failure of our risk mitigation strategies, including failure to accurately and adequately price the risks we underwrite and to include effective exclusions and other loss limitation methods in our insurance policies;
•Loss of independent insurance agents and inability to attract new independent
agents;
•Reliance on models, which are inherently uncertain, as a tool to evaluate
risks;
•The continued availability of reinsurance at current levels and prices, and our
ability to collect payments due from our reinsurers;
•Changes in industry trends, including changes due to the cyclical nature of the
industry and increased competition;
•Geographic concentration of our business in
our growth and diversification strategy in new markets;
•Loss of key personnel and inability to attract and retain talented employees;
•Failure to comply with existing and future guidelines, policies and legal and
regulatory standards;
•The ability of our claims professionals to effectively manage claims;
•Litigation or regulatory actions that could result in significant damages,
fines or penalties;
•A downgrade in our Financial Stability Rating® and its impact on our
competitive position, the marketability of our product offerings, our liquidity
and profitability;
•The impact on our business and reputation of data and security breaches due to
cyber-attacks or our inability to effectively adapt to changes in technology;
•Our dependence on the returns of our investment portfolio, which are subject to
market risk;
•Legal, regulatory or tax changes that increase our operating costs and decrease
our profitability, such as limitations on rate changes or requirements to
participate in loss sharing;
•Our dependence on dividends and permissible payments from our subsidiaries;
•The ability of our Insurance Entities to comply with statutory capital and
surplus minimums and other regulatory and licensing requirements; and
•The ongoing impact of the COVID-19 pandemic on our business and the economy in
general.
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Table of Contents OVERVIEW We are a vertically integrated holding company offering property and casualty insurance and value-added insurance services. We develop, market and underwrite insurance products for consumers predominantly in the personal residential homeowners' line of business and perform substantially all other insurance-related services for our primary insurance entities, including risk management, claims management, and distribution. Our primary insurance entities,Universal Property & Casualty Insurance Company ("UPCIC") andAmerican Platinum Property and Casualty Insurance Company ("APPCIC" and together with UPCIC, the "Insurance Entities"), offer insurance products through both our appointed independent agent network and our online distribution channels across 19 states (primarily inFlorida ), with licenses to write insurance in two additional states. The Insurance Entities seek to produce an underwriting profit (defined as earned premium minus losses, loss adjustment expense ("LAE"), policy acquisition costs and other operating costs) over the long term; maintain a conservative balance sheet to prepare for years in which the Insurance Entities are not able to achieve an underwriting profit; and generate investment income on assets. The following Management's Discussion and Analysis ("MD&A") is intended to assist in an understanding of our financial condition and results of operations. This MD&A should be read in conjunction with our Financial Statements and accompanying Notes appearing elsewhere in this Report (the "Notes"). In addition, reference should be made to our audited Consolidated Financial Statements and accompanying Notes to Consolidated Financial Statements and "Item 7-Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K for the year endedDecember 31, 2021 . Except for the historical information contained herein, the discussions in this MD&A contain forward-looking statements that involve risks and uncertainties. Our future results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include, but are not limited to, those discussed above under "Cautionary Note Regarding Forward-Looking Statements."
Trends
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 ofCitizens Property Insurance Corporation ("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 also affects a large number of claims from inception or during the adjusting process as a substantial and growing percentage of policyholders obtain representation early in the process, and sometimes even before notifying insurers of their claims. These market conditions also add, and will continue to add, complexity to efforts to efficiently and expeditiously adjust claims. This is due to an increasing number of policyholders who have one or more recent prior losses with the Insurance Entities or with other insurers, which then require evaluation during subsequent claims and determinations regarding whether property has been repaired consistently with the scope and amount of damage previously asserted. The 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 33
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Table of Contents 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. Even after the 2021 legislation, theFlorida property market has been distressed and continues to experience rising rate levels coupled with reduced underwriting capacity among admitted insurers. Although theFlorida legislature considered additional potential reforms in its 2022 regular session, it did not pass any of those reforms.Florida's Governor subsequently called a special legislative session, expected to be held in late May, during which the legislature again will consider property insurance reforms. It is unclear whether the legislature will pass additional reforms in the special session, and if so, whether those reforms will be effective. History has shown that reforms that do not address the underlying cause of problems in theFlorida market and instead only address symptoms such as the proliferation of mold, sinkhole or roof claims at best provide only temporary relief and eventually result in the underlying cause manifesting through other perils. 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 and earning the resulting increased premiums. This is particularly the case in an era of rising costs such as the currentFlorida market, in which the costs of losses and loss adjustment expenses continue to increase due toFlorida's outsized claims litigation environment and inflationary pressure. 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 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" in our Annual Report on Form 10-K for the year endedDecember 31, 2021 . 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 AOB-related litigation initiated by vendors, in many cases unbeknownst to 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. Impact of COVID-19 Subsequent toMarch 2020 , we have not seen a direct material impact from COVID-19 on our business, our financial position, our liquidity, or our ability to service our policyholders and maintain critical operations. Indirectly, inflationary pressures, in part due to supply chain and labor constraints during the pandemic, have affected and continue to affect claims costs and, to a lesser degree, other expenses. As a provider of services that have been deemed essential under most directives and guidelines, we are confident in our ability to maintain consistent operations and believe we can continue to manage with our remote workforce as a result of our disaster preparedness planning, with little impact on our business and service levels and our standards of care for 34
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Table of Contents both underwriting and claims. We continue to monitor local, state and federal guidance and will adjust workforce activities as appropriate. Although we have not experienced a direct material impact from COVID-19 since its onset in 2020, the ultimate impact of the COVID-19 pandemic, or future pandemics, on our business and on the economy in general cannot be predicted.
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. These indicators may not be comparable to other performance measures used by the Company's competitors and should only be evaluated together with our condensed 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 condensed 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.
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.
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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.
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)."
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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. 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+
(1)No rating is available, because the fund is not rated.
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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$2.0 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+
(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.
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RESULTS OF OPERATIONS AND ANALYSIS OF FINANCIAL CONDITION
Highlights for the quarter ended
•Approved rate filings are increasing written and earned premium as they take
effect and earn in over the policy period
•Rate increases for
a number of rate filings underway
•Exposure management efforts designed to improve underwriting results are
resulting in a reduction in policy count and related fees
•Net investment income increased as market interest rates rise, however the rising interest rates have lowered the market value of our investments resulting in unrealized losses •Losses and LAE, net were higher this quarter compared to the same period last year primarily due to a higher rate of accrual for the current accident year reserves to address trends inFlorida
•Expense management efforts lowered the expense ratio including lower commission
rates on renewals and spending discipline
•The company continued to return shareholder value with quarterly dividends and
modest share repurchases
•Demotech, Inc. affirmed the Financial Stability Rating® of A, Exceptional for
each of the Insurance Entities
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First quarter of fiscal 2022 results of operations comparisons are
to first quarter of fiscal 2021 (unless otherwise specified).
Results of Operations - Three Months Ended
Months Ended
Net income for the three months endedMarch 31, 2022 , was$17.5 million compared to$26.4 million for the same period in 2021. Weighted average diluted common shares outstanding for the three months endedMarch 31, 2022 were lower by 0.2% to 31.2 million shares from 31.3 million shares for the same period of the prior year. Diluted EPS for the three months endedMarch 31, 2022 was$0.56 compared to$0.84 for the same period in 2021. Benefiting the quarter were increases in premiums earned, net, an increase in commission revenue, and an increase in net investment income, partially offset by an increase in operating costs and expenses, a decrease in realized gains and an increase in unrealized losses on equity securities. Direct premium earned and premiums earned, net were up 10.4% and 10.6%, respectively, due to premium growth in 15 of the 19 states in which we are licensed and writing during the past 12 months as a result of rate increases implemented during 2021 and 2022. The net loss and LAE ratio was 68.8% for the three months endedMarch 31, 2022 , compared to 59.2% for the same period in 2021 reflecting higher core losses, an increase in excess weather events beyond those expected, and higher prior years' reserve development. As a result of the above and further explained below, the combined ratio for the three months endedMarch 31, 2022 was 97.9% compared to 93.1% for the three months endedMarch 31, 2021 . Also see the discussion above under "Overview-Trends."
A detailed discussion of our results of operations follows the table below (in
thousands, except per share data).
Three Months Ended
March 31, Change
2022 2021 $ %
PREMIUMS EARNED AND OTHER REVENUES
Direct premiums written $ 396,481 $ 365,314 $ 31,167 8.5 %
Change in unearned premium 18,122 10,292 7,830 76.1 %
Direct premium earned 414,603 375,606 38,997 10.4 %
Ceded premium earned (145,539) (132,301) (13,238) 10.0 %
Premiums earned, net 269,064 243,305 25,759 10.6 %
Net investment income 4,042 2,986 1,056 35.4 %
Net realized gains (losses) on investments 58 542 (484) (89.3) %
Net change in unrealized gains (losses) of equity
securities (3,396) (494) (2,902) 587.4 %
Commission revenue 11,161 9,126 2,035 22.3 %
Policy fees 4,779 5,387 (608) (11.3) %
Other revenue 1,774 1,905 (131) (6.9) %
Total premiums earned and other revenues 287,482 262,757 24,725 9.4 %
OPERATING COSTS AND EXPENSES
Losses and loss adjustment expenses 185,106 143,963 41,143 28.6 %
General and administrative expenses 78,297 82,423 (4,126) (5.0) %
Total operating costs and expenses 263,403 226,386 37,017 16.4 %
Interest and amortization of debt issuance costs 1,608 20 1,588 7,940.0 %
INCOME (LOSS) BEFORE INCOME TAXES 22,471 36,351 (13,880) (38.2) %
Income tax expense (benefit) 4,934 9,943 (5,009) (50.4) %
NET INCOME (LOSS) $ 17,537 $ 26,408 $ (8,871) (33.6) %
Other comprehensive income (loss), net of taxes (42,910) (16,910)
(26,000) 153.8 % COMPREHENSIVE INCOME (LOSS)$ (25,373) $ 9,498 $ (34,871) NM DILUTED EARNINGS (LOSS) PER SHARE DATA: Diluted earnings (loss) per common share$ 0.56 $ 0.84 $ (0.28) (33.3) % Weighted average diluted common shares outstanding 31,227 31,277 (50) (0.2) % NM - Not Meaningful Direct premiums written increased by$31.2 million , or 8.5%, for the quarter endedMarch 31, 2022 , driven by premium growth within ourFlorida business of$27.4 million , or 8.9%, and premium growth in our other states business of$3.7 million , or 6.4%, as compared to the same period of the prior year. Rate increases approved in 2020 and 2021 forFlorida and for certain other states, as discussed below, were the principal driver of higher written premiums. In total policies in force declined 26,848, or 40
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Table of Contents 2.8%, from 943,593 atDecember 31, 2021 to 916,745 atMarch 31, 2022 . A summary of the recent rate increases which are driving increases in written premium are as follows: •InDecember 2020 , the FLOIR approved an overall 7.0% rate increase for UPCIC onFlorida personal residential homeowners' line of business, effectiveDecember 2020 for new business andMarch 2021 for renewals.
•In
on
•InDecember 2021 , the FLOIR approved an overall 3.9% rate increase for UPCIC onFlorida personal residential homeowners' line of business, effectiveJanuary 2022 for new business andMarch 2022 for renewals.
•In addition, during the past year, rate increases for UPCIC were approved in
These rate increases are applied on new business submissions and renewals from the effective date of their renewal and then are earned subsequently over the policy period. The recent rate increases inFlorida are in response to rising claim costs driven by higher costs of material and labor associated with claims, the cost of weather events, the rising cost of catastrophe and other reinsurance protecting policyholders and, more importantly, the impact of "social inflation" on claims as claim settlements increasingly have involved inflated demands, representation and litigation. In addition, the Insurance Entities' policies provide for coverage limits to be adjusted at renewal based on third-party data sources that monitor factors such as changes in costs for residential building materials and labor. During 2022, management continued efforts to prudently manage policy counts and exposures intended to slow the growth of written premiums relating to new business compared to prior years while the above rate increases are taking effect. Reduced new business writings, declines in renewal retentions during 2022 and the impact of selected policy non-renewals, has resulted in a decrease in policies in force of 26,848, or 2.8%, from 943,593 atDecember 31, 2021 to 916,745 atMarch 31, 2022 . Direct premiums written continue to increase across the majority of 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 a majority of states for the past three years. In total, we wrote policies in 19 states during each of the first quarters of 2022 and 2021. In addition, we are authorized to do business inTennessee andWisconsin and are proceeding with product filings in those states. AtMarch 31, 2022 , policies in force decreased 59,505 policies, or 6.1%, premium in force increased$154.5 million , or 10.0%, and total insured value increased$13.8 billion , or 4.5%, compared toMarch 31, 2021 . The following table provides direct premiums written forFlorida and Other States for the three months endedMarch 31, 2022 and 2021 (dollars in thousands): For the Three Months Ended Growth March 31, 2022 March 31, 2021 year over year Direct Direct Premiums State Premiums Written % Written % $ % Florida$ 334,437 84.4 %$ 307,011 84.0 %$ 27,426 8.9 % Other states 62,044 15.6 % 58,303 16.0 % 3,741 6.4 % Total$ 396,481 100.0 %$ 365,314 100.0 %$ 31,167 8.5 % We seek to prudently grow and generate long-term rate adequate premium in each state where we offer policies. Our diversification strategy seeks to increase business outside ofFlorida and to improve geographical distribution withinFlorida . Premium growth outsideFlorida is a measure monitored by management in its efforts to meet that objective.
Direct premium earned increased by
ended
12 months including the benefit of rate changes.
Reinsurance enables our Insurance Entities to limit potential exposures to catastrophic events and other covered events. Ceded premium represents premiums paid to reinsurers for this protection and is a cost which reduces net written and net earned premiums. Ceded premium earned increased$13.2 million , or 10.0%, for the quarter endedMarch 31, 2022 , as compared to the same period of the prior year. The increase in reinsurance costs reflects an increase in the value of exposures we insure; increased pricing when compared to the expired reinsurance program and differences in the structure and design of the respective programs. Reinsurance costs, as a percentage of direct premium earned, decreased from 35.2% for the three months endedMarch 31, 2021 to 35.1% for the three months endedMarch 31, 2022 , primarily due to$2.6 million of reinstatement premiums related to Hurricane Sally recorded in the prior year quarter. Reinsurance costs associated with each year's reinsurance program are earned over the annual policy period which typically runs fromJune 1st to May 31s.. See the discussion above for the Insurance Entities' 2021-2022 reinsurance programs and "Item 1-Note 4 (Reinsurance)." 41
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Premiums earned, net of ceded premium earned, grew by 10.6%, or
to
increase in direct premium earned offset by increased costs for reinsurance.
Net investment income was$4.0 million for the three months endedMarch 31, 2022 , compared to$3.0 million for the same period in 2021, an increase of$1.1 million , or 35.4%. In the fourth quarter of 2021, we saw increases in investment yields as theFederal Reserve took action to address the market concerns of inflation and employment. As a result, liquidity generated by our portfolio from interest payments, principal repayments and new investments are being invested at higher rates, resulting in overall increased investment returns on our portfolio. Total invested assets were$1,085.6 million as ofMarch 31, 2022 compared to$1,093.7 million as ofDecember 31, 2021 . The decrease is attributable to unrealized losses, which increased during the three months endedMarch 31, 2022 and lower cash balances. Cash and cash equivalents were$165.4 million atMarch 31, 2022 compared to$250.5 million atDecember 31, 2021 , a decrease of 34.0%. This decrease is largely attributable to changes in operational cash flows since year end. Cash and cash equivalents are invested short term until needed to settle loss and LAE payments, reinsurance premium payments and operating cash needs or until they are deployed by our investment advisors. Yields from cash and cash equivalents, short-term investments and the available-for-sale debt portfolio are dependent on the composition of the portfolio, future market forces, monetary policy and interest rate policy from theFederal Reserve . During most of 2021, theFederal Reserve broadly maintained lower interest rates, which impacted the effective yields on newly purchased available-for-sale debt securities and overnight cash purchases and short-term investments. This overall trend changed in late 2021 and into 2022 as inflation worries began to impact the financial markets, including the markets' concern over futureFederal Reserve actions of rate hikes and other actions to address inflation concerns. As a result, we saw increased yields on securities purchased in late 2021 and 2022 and increased unrealized losses on our portfolio, reflected after-tax in the equity section of our balance sheet as increased market yields negatively impacted the fair value of much of our available-for-sale debt securities. We sell investments, including securities, from our investment portfolio from time to time to meet our investment objectives or take advantage of market opportunities. During the three months endedMarch 31, 2022 , sales of available-for-sale debt securities resulted in net realized losses of$0.2 million and sales of equity securities resulted in net realized gains of$0.3 million , generating total net realized gains of$0.1 million during the first quarter of 2022. During the three months endedMarch 31, 2021 , sales of available-for-sale debt securities resulted in net realized losses of$0.2 million , sales of equity securities resulted in net realized gains of$0.3 million and the sale of an investment real estate property resulted in a realized gain of$0.4 million , in total generating net realized gains of$0.5 million . See "Item 1-Note 3 (Investments)." There was a$3.4 million net unrealized loss in equity securities during the three months endedMarch 31, 2022 compared to a$0.5 million net unrealized loss in equity securities during the three months endedMarch 31, 2021 . Net change in unrealized gains or losses reflected on the income statement are the result of changes in the fair market value of our equity securities during the period for securities still held at the end of the reported period and the reversal of unrealized gains or losses for securities sold during the period. See "Item 1-Note 3 (Investments)." Commission revenue is comprised principally of brokerage commissions we earn from third-party reinsurers (excluding the FHCF) on reinsurance placed for the Insurance Entities. Commission revenue is earned pro-rata over the reinsurance policy period which runs fromJune 1st to May 31st of the following year. For the three months endedMarch 31, 2022 , commission revenue was$11.2 million , compared to$9.1 million for the three months endedMarch 31, 2021 . The increase in commission revenue of$2.0 million , or 22.3%, for the three months endedMarch 31, 2022 was primarily due to increased commissions from third-party reinsurers earned on increased reinsurance premiums which is attributable due to growth in our insured values for this year's reinsurance program as well as the difference in pricing and structure associated with our reinsurance program when compared to the prior year. Policy fees were$4.8 million for the three months endedMarch 31, 2022 compared to$5.4 million for the same period in 2021. The decrease of$0.6 million , or 11.3%, was the result of a decrease in the combined total number of new and renewal policies written during the three months endedMarch 31, 2022 compared to the same period in 2021 in states where we are permitted to charge this fee.
Other revenue, representing revenue from policy installment fees, premium
financing and other miscellaneous income, was
ended
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The following table presents losses and LAE incurred on a direct, ceded and net
basis expressed in dollars and as a percent of the respective amounts of
premiums earned. These amounts are further categorized as i) core losses, ii)
weather events for the current accident year and iii) prior years' reserve
development (dollars in thousands):
Three Months Ended March 31, 2022
Direct Loss Ratio Ceded Loss Ratio Net Loss Ratio
Premiums earned $ 414,603 $ 145,539 $ 269,064
Loss and loss adjustment expenses:
Core losses $ 179,950 43.4 % $ 44 - % $ 179,906 66.9 %
Weather events* 4,545 1.1 % - - % 4,545 1.7 %
Prior years' reserve development 10,660 2.6 % 10,005 6.9 % 655 0.2 %
Total losses and loss adjustment
expenses $ 195,155 47.1 % $ 10,049 6.9 % $ 185,106
68.8 %
*Includes only current year weather events beyond those expected.
Three Months Ended March 31, 2021
Direct Loss Ratio Ceded Loss Ratio Net Loss Ratio
Premiums earned $ 375,606 $ 132,301 $ 243,305
Loss and loss adjustment expenses:
Core losses $ 145,228 38.7 % $ 28 - % $ 145,200 59.7 %
Weather events* - - - - - -
Prior years' reserve development 92,070 24.5 % 93,307 70.5 % (1,237) (0.5) %
Total losses and loss adjustment
expenses $ 237,298 63.2 % $ 93,335 70.5 % $ 143,963
59.2 %
*Includes only current year weather events beyond those expected.
See "Item 1-Note 6 (Liability for Unpaid Losses and Loss Adjustment Expenses)"
for change in liability for unpaid losses and LAE.
Management looks at losses and LAE in three areas, as described below and represented in the tables above, each of which has different drivers that impact reported results. As a result, these components of losses and LAE are described separately. Overall losses and LAE, net of reinsurance recoveries, were$185.1 million resulting in a 68.8% net loss and LAE ratio for the quarter endedMarch 31, 2022 . This compares to$144.0 million resulting in a 59.2% net loss and LAE ratio for the quarter endedMarch 31, 2021 .
The factors impacting losses and LAE are as follows:
•Core losses
•Our core losses consist of all losses and LAE for the current year excluding both weather events for the current year beyond those anticipated in our regular accrual process and prior years' reserve development. Core losses were 43.4% of direct premium earned for the quarter endedMarch 31, 2022 compared to 38.7% for the same period in 2021. These losses and loss ratios benefit from the potential profits generated through the management of claims by our claims adjusting affiliate, including claim fees ceded to reinsurers, which are described below, reducing core losses. The core loss ratio for 2021 and 2022 reflects actions taken by management to increase its loss pick to accrue for current accident year reserves. The trend in core losses and LAE is increasing year over year as the claims environment inFlorida continues to deteriorate. Also see the discussion above under "Overview-Trends." Core losses also increase as premium volume increases year over year.
•Weather events beyond those expected
•There were
the core losses during the quarter ended
•There were no weather events beyond those expected during the quarter ended
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•Prior years' reserve development
•Two drivers influence the amounts recorded as prior years' reserve development,
namely: (i) changes to prior estimates of direct and net ultimate losses on
prior accident years excluding major hurricanes and (ii) changes to prior
estimates of direct and net ultimate losses on hurricanes.
?During the quarter ended
totaled
development after the benefit of reinsurance.
•For hurricanes, prior years' reserve development for the quarter endedMarch 31, 2022 was the result of a direct increase in the ultimate losses of$10.7 million offset by ceded hurricane losses of$10.0 million resulting in net unfavorable development of$0.7 million . Direct and net losses increased for Hurricanes Irma and Matthew. Hurricane Irma direct losses increased$10.6 million and net losses increased$0.6 million . Hurricane Matthew direct and net losses increased$0.1 million .
•Excluding hurricanes, there was no prior years' reserve development for the
quarter ended
?For the quarter ended
of
development.
•Prior years' reserve development for the quarter endedMarch 31, 2021 was the result of a gross increase in the ultimate losses for Hurricane Sally of$92 million . Changes to ceded reserves on prior years' hurricanes exceeded gross development by$1.2 million , resulting in net favorable development on prior years' reserve development. There was an increase in ceded reserves on Hurricane Sally as a result of recoveries on losses outside ofFlorida , which have a lower attachment point, offset by a reduction in Hurricane Irma recoveries representing previously ceded losses not subject to recovery. As a result, net prior years' reserve development was favorable.
•Excluding hurricanes, there was no prior years' reserve development for the
quarter ended
The financial benefit generated by our claims adjusting affiliate from the management of claims, including claim fees ceded by our Insurance Entities to reinsurers, was$2.1 million for the three months endedMarch 31, 2022 , compared to$8.1 million during the three months endedMarch 31, 2021 , driven by the recoveries from reinsurers and internal claim services. The benefit was recorded in the condensed consolidated financial statements as a reduction to losses and LAE. For the three months endedMarch 31, 2022 , general and administrative expenses were$78.3 million compared to$82.4 million during the same period in 2021, as follows (dollars in thousands): Three Months Ended March 31, Change 2022 2021 $ % $ Ratio $ Ratio Premiums earned, net$ 269,064 $ 243,305 $ 25,759 10.6 % General and administrative expenses: Policy acquisition costs 54,723 20.3 % 56,458 23.2 % (1,735) (3.1) % Other operating costs 23,574 8.8 % 25,965 10.7 % (2,391) (9.2) % Total general and administrative expenses$ 78,297 29.1 %$ 82,423 33.9 %$ (4,126) (5.0) % General and administrative expenses decreased by$4.1 million , which was the result of a decrease in policy acquisition costs of$1.7 million and other operating costs of$2.4 million . The total general and administrative expense ratio was 29.1% for the three months endedMarch 31, 2022 compared to 33.9% for the same period in 2021. •The decrease in policy acquisition costs of$1.7 million reflects a reduction in the commission rate paid to agents on the renewal ofFlorida policies which was reduced by 2 percentage points to 10% effectiveApril 1, 2021 . The commission rate paid to agents on the renewal ofFlorida polices will be reduced by an additional 2 percentage points to 8% effectiveMay 1, 2022 , which will benefit future periods as the new rate structure applies prospectively. The decrease in policy acquisition costs as a percentage of premiums earned, net during the quarter is primarily due to the reduction in commissions paid to agents. •The decrease in other operating costs of$2.4 million primarily reflects lower employee benefits and performance bonus accruals. The other operating cost ratio was 8.8% for the three months endedMarch 31, 2022 , compared to 10.7% for the same period in 2021. This reduction reflects several factors including economies of scale as we continue to grow premium, and efficiencies gained from leveraging technology and spending discipline. 44
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Table of Contents As a result of the above, the combined ratio for the first quarter endedMarch 31, 2022 was 97.9% compared to 93.1% for the same period in 2021. The increase was the result of a decrease in the general and administrative expense ratio offset by an increase in the loss and LAE ratio as described above. Interest and amortization of debt issuance costs increased$1.6 million for the three months endedMarch 31, 2022 . The increase in interest and amortization of debt issuance costs is the result of an increase in the outstanding debt as a result of our fourth quarter of 2021 borrowing. See "Item 1-Note 7 (Long-term debt)" for additional details. Income tax expense was$4.9 million for the quarter endedMarch 31, 2022 compared to an income tax expense of$9.9 million for the quarter endedMarch 31, 2021 . Our effective tax rate ("ETR") decreased to 22.0% for the three months endedMarch 31, 2022 , as compared to 27.4% for the three months endedMarch 31, 2021 . The ETR decreased as a result of a lower ratio of permanent items relative to the amount of income before taxes, principally non-deductible compensation, and a higher level of discrete tax benefits primarily due an increase in theFlorida corporate income tax rate enacted onJanuary 1, 2022 .
Other comprehensive loss, net of taxes for the three months ended
2022
for the same period in 2021, reflecting after-tax changes in fair value of
available-for-sale debt securities held in our investment portfolio and
reclassifications out of accumulated other comprehensive income for
available-for-sale debt securities sold. See "Item 1-Note 11 (Other
Comprehensive Income (Loss))" for additional information about the amounts
comprising other comprehensive income (loss), net of taxes for these periods.
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Analysis of Financial Condition-As of
2021
We believe that cash flows generated from operations will be sufficient to meet our working capital requirements for at least the next twelve months. We invest amounts considered to be in excess of current working capital requirements.
The following table summarizes, by type, the carrying values of investments as
of the dates presented (in thousands):
As of
March 31, December 31,
Type of Investment 2022 2021
Available-for-sale debt securities
Equity securities 65,126 47,334 Investment real estate, net 5,845 5,891 Total$ 1,085,648 $ 1,093,680
See "Item 1-Condensed Consolidated Statements of Cash Flows" and "Item 1-Note 3
(Investments)" for explanations on changes in investments.
Prepaid reinsurance premiums represent the portion of unearned ceded written premium that will be earned pro-rata over the coverage period of our reinsurance program, which runs fromJune 1st to May 31st of the following year. The decrease of$131.6 million to$109.4 million as ofMarch 31, 2022 was due to the amortization of ceded written premium for the reinsurance costs relating to our 2021-2022 catastrophe reinsurance program earned during the period.
Reinsurance recoverable represents the estimated amount of paid and unpaid
losses, LAE and other expenses that are expected to be recovered from
reinsurers. The decrease of
was primarily due to the collections of amounts recoverable from reinsurers
relating to settled claims from hurricanes and covered by our reinsurance
contracts.
Premiums receivable, net, represents amounts receivable from policyholders. The decrease in premiums receivable, net of$3.3 million to$61.7 million as ofMarch 31, 2022 relates to consumer payment behavior of our business. The amount of direct premiums written during a calendar year tends to increase just prior to the second quarter and tends to decrease approaching the fourth quarter. Deferred policy acquisition costs ("DPAC") decreased by$5.2 million to$103.6 million as ofMarch 31, 2022 , which is consistent with the seasonal premium trends of written premium. In addition DPAC was impacted by the reduction toFlorida renewal commissions implemented during 2021 and other changes to the Company's commission structure. See "Item 1-Note 5 (Insurance Operations)" for a roll-forward in the balance of our DPAC. Income taxes recoverable represents the difference between estimated tax obligations and tax payments made to taxing authorities. As ofMarch 31, 2022 , the balance recoverable was$2.3 million , representing amounts due from taxing authorities at that date, compared to a balance recoverable of$16.9 million as ofDecember 31, 2021 . Income taxes recoverable as ofMarch 31, 2022 will either be refunded or applied to future periods to offset future federal and state income tax obligations. Deferred income taxes represent the estimated tax asset or tax liability caused by temporary differences between the tax return basis of certain assets and liabilities and amounts recorded in the financial statements. During the three months endedMarch 31, 2022 , deferred tax assets increased by$23.7 million to$40.1 million primarily due to an increase in unrealized losses on investments and a decrease in unearned premiums net of prepaid reinsurance premiums. Deferred income taxes reverse in future years as the temporary differences between book and tax reverse. See "Item 1-Note 6 (Liability for Unpaid Losses and Loss Adjustment Expenses)" for a roll-forward in the balance of our unpaid losses and LAE. Unpaid losses and LAE decreased by$101.7 million to$244.5 million as ofMarch 31, 2022 . The majority of the decrease is from the settlement of losses from prior hurricanes and prior large weather events. Overall, unpaid losses and LAE decreased, as claim settlements exceeded new emerging claims. Unpaid losses and LAE are net of estimated subrogation recoveries. Unearned premiums represent the portion of direct premiums written that will be earned pro-rata in the future. The decrease of$18.1 million fromDecember 31, 2021 to$839.6 million as ofMarch 31, 2022 reflects the seasonality of our business, which varies from month to month. Advance premium represents premium payments made by policyholders ahead of the effective date of the policies. The increase of$31.4 million to$85.1 million as ofMarch 31, 2022 reflects customer payment behavior and the payment behavior of mortgage escrow service providers. 46
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Table of Contents We maintain a short-term cash investment strategy sweep to maximize investment returns on cash balances. There were no book overdrafts as ofMarch 31, 2022 compared to book overdrafts totaling$26.8 million as ofDecember 31, 2021 . The decrease of$26.8 million is the result of higher cash balances available for offset as ofMarch 31, 2022 compared toDecember 31, 2021 . See "-Liquidity and Capital Resources" for more information. Reinsurance payable, net, represents the unpaid reinsurance premium installments owed to reinsurers, unpaid reinstatement premiums due to reinsurers and cash advances received from reinsurers, if any. OnJune 1st of each year, we renew our core catastrophe reinsurance program and record the estimated annual cost of our reinsurance program. These estimated annual costs are increased or decreased during the year based on premium adjustments or as a result of new placements during the year. The annual cost initially increases reinsurance payable, which is then reduced as installment payments are made over the policy period of the reinsurance, which typically runs fromJune 1st to May 31st . The balance decreased by$175.9 million to$12.7 million as ofMarch 31, 2022 as a result of the timing of the above items.
Other liabilities and accrued expenses increased by
million
revenue and other liabilities due to the timing of payments.
Capital resources, net, decreased by$33.7 million for the three months endedMarch 31, 2022 , reflecting a net decrease in total stockholders' equity and long-term debt. The change in stockholders' equity was principally the result of increases coming from our 2022 net income and share-based compensation, offset by declines in the after-tax changes in the fair value of our available-for-sale debt securities, treasury share purchases and dividends to shareholders. Available-for-sale debt securities decline in fair value of$56.9 million (before tax) in the first quarter of 2022, caused the net unrealized loss position of$20.2 million atDecember 31, 2021 to increase to$77.2 million atMarch 31, 2022 . Current market outlooks are signaling furtherFederal Reserve tightening which could continue to have a negative impact on the valuation of available-for-sale debt securities. See "Item 1-Condensed Consolidated Statements of Stockholders' Equity" and "Item 1-Note 8 (Stockholders' Equity)" for explanation of changes in treasury stock.
The reduction in debt of
debt during 2022. See "-Liquidity and Capital Resources" for more information.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Liquidity is a measure of a company's ability to generate sufficient cash flows to meet its short and long-term obligations. Funds generated from operations have been sufficient and we expect them to be sufficient to meet our current and long term liquidity requirements. The balance of cash and cash equivalents, excluding restricted cash, as ofMarch 31, 2022 was$165.4 million , compared to$250.5 million atDecember 31, 2021 . See "Item 1-Condensed Consolidated Statements of Cash Flows" for a reconciliation of the balance of cash and cash equivalents betweenMarch 31, 2022 andDecember 31, 2021 . The decrease in cash and cash equivalents was driven by cash flows used in operating activities, investing and financing activities. Our cash investment strategy at times includes cash investments where the right of offset against other bank accounts does not exist. A book overdraft occurs when aggregating the book balance of all accounts at a financial institution, for accounts which have the right of offset, and if the aggregation results in a net negative book balance, that balance is reclassified from cash and cash equivalents in our Condensed Consolidated Balance Sheet to book overdraft. Cash and cash equivalents balances are available to settle book overdrafts, and to pay reinsurance premiums, expenses and claims. Reinsurance premiums are paid in installments during the reinsurance policy period, which runs fromJune 1st to May 31st of the following year. The FHCF reimbursement premiums are paid in three installments onAugust 1st ,October 1st , andDecember 1st , and third-party reinsurance premiums are generally paid in four installments onJuly 1st ,October 1st ,January 1st andApril 1st , resulting in significant payments at those times. See "Item 1-Note 12 (Commitments and Contingencies)" and additional discussion below under the caption "-Material Cash Requirements" for more information. The balance of restricted cash and cash equivalents as ofMarch 31, 2022 andDecember 31, 2021 represents cash equivalents on deposit with certain regulatory agencies in the various states in which our Insurance Entities do business. Liquidity is required at the holding company for us to cover the payment of holding company general operating expenses and contingencies, dividends to shareholders (if and when authorized and declared by our Board of Directors), payment for the possible repurchase of our common stock (if and when authorized by our Board of Directors), payment of our tax obligations to taxing authorities, settlement of taxes between subsidiaries in accordance with our tax sharing agreement, capital contributions to subsidiaries, if needed, and interest and principal payments on outstanding debt obligations of the holding company. See "Item 1-Note 5 (Insurance Operations)." The declaration and payment of future dividends to our shareholders, and any future repurchases of our common stock, will be at the discretion of our Board of Directors and will depend upon many factors, including our operating results, financial condition, debt covenants and any regulatory constraints. New regulations or changes to existing regulations imposed on the Company and its affiliates may also impact the amount and timing of future dividend payments to the parent. Principal sources of liquidity for the holding company include dividends paid by our service entities generated from income earned on fees paid by the Insurance Entities to affiliated companies for general agency, inspections and claims adjusting services. Dividends are also paid from income earned from brokerage commissions earned on reinsurance contracts placed by our wholly-owned subsidiary,Blue Atlantic Reinsurance Corporation , and policy fees. We also maintain high quality investments in our portfolio as a source of liquidity along with ongoing interest and dividend income from those 47
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Table of Contents investments. As discussed in "Item 1-Note 5 (Insurance Operations)," there are limitations on the dividends the Insurance Entities may pay to their immediate parent company,Protection Solutions, Inc. ("PSI", formerly known asUniversal Insurance Holding Company of Florida ). The maximum amount of dividends that can be paid byFlorida insurance companies without prior approval of the FLOIR is subject to restrictions as referenced below and in "Item 1-Note 5 (Insurance Operations)." Dividends from the Insurance Entities can only be paid from accumulated unassigned funds derived from net operating profits and net realized capital gains. Subject to such accumulated unassigned funds, the maximum dividend that may be paid by the Insurance Entities to PSI without prior approval (an "ordinary dividend") is further limited to the lesser of statutory net income from operations of the preceding calendar year or statutory unassigned surplus as of the preceding year end. During the three months endedMarch 31, 2022 and the year endedDecember 31, 2021 , the Insurance Entities did not pay dividends to PSI. As ofMarch 31, 2022 , the Insurance Entities did not have the capacity to pay ordinary dividends. OnNovember 23, 2021 , we entered into Note Purchase Agreements with certain institutional accredited investors and qualified institutional buyers pursuant to which we issued$100 million of 5.625% Senior Unsecured Notes due 2026. We intend to use the net proceeds to support the Insurance Entities' statutory capital requirements and for general corporate purposes. If necessary, the Company also has amounts available under our unsecured revolving loan as discussed in "Item 1-Note 7 (Long-term debt)." Liquidity for the Insurance Entities is primarily required to cover payments for reinsurance premiums, claims payments including potential payments of catastrophe losses (offset by recovery of any reimbursement amounts under our reinsurance agreements), fees paid to affiliates for managing general agency services, inspections and claims adjusting services, agent commissions, premium and income taxes, regulatory assessments, general operating expenses, and interest and principal payments on debt obligations. The principal source of liquidity for the Insurance Entities consists of the revenue generated from the collection of premiums earned, net, interest and dividend income from the investment portfolio, the collection of reinsurance recoverable and financing fees. Our insurance operations provide liquidity as premiums are generally received months or even years before potential losses are paid under the policies written. In the event of catastrophic events, many of our reinsurance agreements provide for "cash advance" whereby reinsurers advance or prepay amounts to us, thereby providing liquidity, which we utilize in the claim settlement process. In addition, the Insurance Entities maintain substantial investments in highly liquid, marketable securities, which would generate funds upon sale. The average credit rating on our available-for-sale securities was A+ as ofMarch 31, 2022 andDecember 31, 2021 . Credit ratings are a measure of collection risk on invested assets. Credit ratings are provided by third party nationally recognized rating agencies and are periodically updated. Management establishes guidelines for minimum credit rating and overall credit rating for all investments. The duration of our available-for-sale securities was 4.5 years atMarch 31, 2022 compared to 4.4 years atDecember 31, 2021 . Duration is a measure of a bond's sensitivity to interest rate changes and is used by management to limit the potential impact of longer-term investments. The Insurance Entities are responsible for losses related to catastrophic events in excess of coverage provided by the Insurance Entities' reinsurance programs and retentions before our reinsurance protection commences. Also, the Insurance Entities are responsible for all other losses that otherwise may not be covered by the reinsurance programs and any amounts arising in the event of a reinsurer default. Losses or a default by reinsurers may have a material adverse effect on either of the Insurance Entities, on our business, financial condition, results of operations and liquidity. Capital Resources Capital resources provide protection for policyholders, furnish the financial strength to support the business of underwriting insurance risks and facilitate continued business growth. The following table provides our stockholders' equity, total long-term debt, total capital resources, debt-to-total capital ratio and debt-to-equity ratio for the periods presented (dollars in thousands): As of March 31, December 31, 2022 2021 Stockholders' equity$ 396,341 $ 429,702 Total long-term debt 103,384 103,676 Total capital resources$ 499,725 $ 533,378 Debt-to-total capital ratio 20.7 % 19.4 % Debt-to-equity ratio 26.1 % 24.1 % The debt-to-total capital ratio is total long-term debt divided by total capital resources, whereas the debt-to-equity ratio is total long-term debt divided by stockholders' equity. These ratios help management measure the amount of financing leverage in place in relation to equity and future leverage capacity. 48
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Table of Contents As described in our Annual Report on Form 10-K for the year endedDecember 31, 2021 , UPCIC entered into a surplus note with theState Board of Administration of Florida underFlorida's Insurance Capital Build-Up Incentive Program onNovember 9, 2006 . The surplus note has a twenty-year term, with quarterly payments of principal and interest that accrue per the terms of the note agreement. AtMarch 31, 2022 , UPCIC was in compliance with the terms of the surplus note. Total adjusted capital and surplus, which includes the surplus note, was in excess of regulatory requirements for both UPCIC and APPCIC. As discussed in "Item 1-Note 7 (Long-term Debt)," we entered into a credit agreement and related revolving loan withJPMorgan Chase Bank, N.A . inAugust 2021 which makes available an unsecured revolving credit facility with an aggregate commitment not to exceed$35.0 million . Borrowings under the Revolving Loan mature 364 days after the date of the loan. The Revolving Loan contains customary financial covenants. As ofMarch 31, 2022 , the Company was in compliance with all applicable covenants, including financial covenants. We had not drawn any amounts under the Revolving Loan as ofMarch 31, 2022 . InNovember 2021 , we completed a private placement offering through which we issued and sold$100 million of 5.625% Senior Unsecured Notes due 2026 (the "Notes") to certain institutional accredited investors and qualified institutional buyers. The Notes mature onNovember 26, 2026 , at which time the entire$100 million of principal is due and payable. At any time on or afterNovember 23, 2023 , the Company may redeem all or part of the Notes. See "Item 1-Note 7 (Long-term debt)" for additional details. As ofMarch 31, 2022 , we were in compliance with all applicable covenants, including financial covenants of this note agreement. We will also continue to evaluate opportunities to access the debt capital markets to raise additional capital. We anticipate any proceeds would be used for general corporate purposes, including investing in the capital and surplus of the Insurance Entities. In addition to the liquidity generally provided from operations, we maintain a conservative, well-diversified investment portfolio, predominantly comprised of fixed income securities with an average credit rating of A+, that focuses on capital preservation and providing an adequate source of liquidity for potential claim payments and other cash needs. The portfolio's secondary investment objective is to provide a total rate of return with emphasis on investment income. Historically, we have consistently generated funds from operations, allowing our cash and invested assets to grow. We have not had to liquidate investment holdings to fund either operations or financing activities.
Impact of the COVID-19 Pandemic
The impact of the COVID-19 pandemic on the credit markets remains a key risk as the world continues to navigate its consequences and the efforts taken by governments to accelerate and stimulate a financial recovery. We remain in regular contact with our advisors to monitor the credit quality of the issuers of the securities in our portfolio and discuss appropriate responses to credit downgrades or changes in companies' credit outlook. We believe these measures, when combined with the inherent liquidity generated by our business model and in our investment portfolio, will allow us to continue to meet our short- and long-term obligations.
Looking Forward
We continue to monitor a range of financial metrics related to our business. Although we have not yet experienced material adverse impacts on our business or liquidity, conditions are subject to change depending on the extent of the economic downturn and the pace and extent of an economic recovery. Significant uncertainties exist with the potential long-term impact of the COVID-19 pandemic, including unforeseen newly emerging risks that could affect us and future economic changes as theFederal Reserve addresses the emerging economic concerns of inflation, employment and recession. We will continue to monitor the broader economic impacts of the COVID-19 pandemic and its impact on our operations and financial condition including liquidity and capital resources.
Common Stock Repurchases
OnNovember 3, 2020 , we announced that our Board of Directors authorized a share repurchase program under which we may repurchase in the open market up to$20 million of outstanding shares of our common stock throughNovember 3, 2022 . We may repurchase shares from time to time at our discretion, based on ongoing assessments of our capital needs, the market price of our common stock and general market conditions. We will fund the share repurchase program with cash from operations. During the three months endedMarch 31, 2022 , we repurchased an aggregate of 320,528 shares of our common stock in the open market at an aggregate purchase price of$3.9 million . Also, see "Part II, Item 2-Unregistered Sales ofEquity Securities and Use of Proceeds" for share repurchase activity during the three months endedMarch 31, 2022 .
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements that are reasonably
likely to have a material effect on the financial condition, results of
operations, liquidity, or capital resources of the Company, except for
multi-year reinsurance contract commitments for future years that will be
recorded at the commencement of the coverage period. See "Item 1-Note 12
(Commitments and Contingencies)" for more information.
49
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Table of Contents
Cash Dividends
The following table summarizes the dividends declared by the Company in 2022:
Cash Dividend
Dividend Shareholders Dividend Per Common Share
2022 Declared Date Record Date Payable Date Amount
First Quarter February 10, 2022 March 10, 2022 March 17, 2022 $ 0.16
MATERIAL CASH REQUIREMENTS
The following table represents our material cash requirements for which cash
flows are fixed or determinable as of
Total Next 12 Months Beyond 12 Months
Reinsurance payable and multi-year
commitments (1) $ 303,658 $ 92,893 $ 210,765
Unpaid losses and LAE, direct (2) 244,482 137,888 106,594
Long-term debt (3) 134,981 7,188 127,793
Total material cash requirements $ 683,121 $
237,969 $ 445,152
(1)Amount represents the payment of reinsurance premiums payable under
multi-year commitments. See "Item 1-Note 12 (Commitments and Contingencies)."
(2)There are generally no notional or stated amounts related to unpaid losses and LAE. Both the amounts and timing of future loss and LAE payments are estimates and subject to the inherent variability of legal and market conditions affecting the obligations and make the timing of cash outflows uncertain. The ultimate amount and timing of unpaid losses and LAE could differ materially from the amounts in the table above. Further, the unpaid losses and LAE do not represent all the obligations that will arise under the contracts, but rather only the estimated liability incurred throughMarch 31, 2022 . Unpaid losses and LAE are net of estimated subrogation recoveries. In addition, these balances exclude amounts recoverable from the Company's reinsurance program. See "Item 1-Note 4 (Reinsurance)."
(3)Long-term debt consists of a Surplus note and 5.625% Senior unsecured notes.
See "Item 1-Note 7 (Long-term debt)."
Impact of Inflation and Changing Prices
The financial statements and related data presented herein have been prepared in accordance withU.S. GAAP, which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. Our primary assets are monetary in nature. As a result, interest rates have a more significant impact on our performance than the effects of the general levels of inflation. Interest rates do not necessarily move in the same direction or with the same magnitude as the cost of paying losses and LAE. Insurance premiums are established before we know the amount of loss and LAE and the extent to which inflation may affect such expenses. Consequently, we attempt to anticipate the future impact of inflation when establishing rate levels. While we attempt to charge adequate rates, we may be limited in raising premium levels for competitive and regulatory reasons. Inflation also affects the market value of our investment portfolio and the investment rate of return. Any future economic changes which result in prolonged and increasing levels of inflation could cause increases in the dollar amount of incurred loss and LAE and thereby materially adversely affect future liability requirements.
Arrangements with Variable Interest Entities
We entered into a reinsurance captive arrangement with a VIE in the normal
course of business, and consolidated the VIE since we are the primary
beneficiary.
For a further discussion of our involvement with the VIE, see "Item 1-Note 14
(Variable Interest Entities)."
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
There have been no material changes during the period covered by this Quarterly Report on Form 10-Q to Critical Accounting Policies and Estimates previously disclosed in "Part II, Item 7-Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K for the year endedDecember 31, 2021 .
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