XML 42 R12.htm IDEA: XBRL DOCUMENT

Insurance Operations

12 Months Ended

Dec. 31, 2011

Reinsurance and Insurance Operations [Abstract]

INSURANCE OPERATIONS

NOTE 5 – INSURANCE OPERATIONS

The Company’s primary product is homeowners’ insurance currently offered by its insurance subsidiaries in five states, including Florida, which represented 98% of policies-in-force as of December 31, 2011 and 2010. Approximately 98% of policies in force as of December 31, 2011 and 2010 included coverage for wind. As of December 31, 2011 and 2010, 32% of the wind coverage policies-in-force are in Miami-Dade, Broward and Palm Beach counties.

Deferred Policy Acquisition Costs and Ceding Commissions

The following table provides the beginning, ending and changes in deferred policy acquisition costs (“DPAC”), net of deferred ceding commission (“DCC”) for the periods presented (in thousands):


		For the years ended December 31,
		2011				2010				2009
DPAC, beginning of year		$	50,127			$	43,971			$	40,155
Capitalized Costs			114,358				100,615				88,333
Amortization of DPAC			107,003				94,459				84,517

DPAC, end of year		$	57,482			$	50,127			$	43,971

DCC, beginning of year		$	40,682			$	34,507			$	39,747
Ceding Commissions Written			89,330				82,568				68,567
Earned Ceding Commissions			85,526				76,393				73,807

DCC, end of year		$	44,486			$	40,682			$	34,507

DPAC (DCC), net, beginning of year		$	9,445			$	9,464			$	408
Capitalized Costs, net			25,028				18,047				19,766
Amortization of DPAC (DCC), net			21,477				18,066				10,710

DPAC (DCC), net, end of year		$	12,996			$	9,445			$	9,464

Liability for Unpaid Losses and Loss Adjustment Expenses

As described in Note 2, the insurance subsidiaries establish liabilities for unpaid losses and loss adjustment expenses on reported and unreported claims of insured losses. These liability estimates are based on known facts and interpretation of factors such as claim payment patterns, loss payments, pending levels of unpaid claims, product mix and industry experience. The establishment of appropriate liabilities, including liabilities for catastrophes, is an inherently uncertain process. Management regularly updates its estimates as new facts become known and further events occur which may impact the resolution of unsettled claims.

The level of catastrophe loss experienced in any year cannot be predicted and could be material to results of operations and financial position. The Company’s policyholders are concentrated in South Florida, which is periodically subject to adverse weather conditions, such as hurricanes and tropical storms. During the twelve-month periods ended December 31, 2011, 2010 and 2009, the Company did not experience any catastrophic events. The Company’s in-force policyholder coverage for windstorm exposures as of December 31, 2011 was approximately $129.2 billion. Management continuously evaluates alternative business strategies to more effectively manage the Company’s exposure to catastrophe losses, including the maintenance of catastrophic reinsurance coverage as discussed in Note 4.

Management believes that the liabilities for claims and claims expense as of December 31, 2011 are appropriately established in the aggregate and adequate to cover the ultimate cost of reported and unreported claims arising from losses which had occurred by that date. However, if losses exceeded direct loss reserve estimates there could be a material adverse effect on the Company’s financial statements. Also, if there are regulatory initiatives, legislative enactments or case law precedents which change the basis for policy coverage, in any of these events, there could be an effect on direct loss reserve estimates having a material adverse effect on the Company’s financial statements.

Activity in the liability for unpaid losses and loss adjustment expenses is summarized as follows (in thousands):


		Year Ended December 31,
		2011				2010
Balance at beginning of year		$	158,929			$	127,198
Less reinsurance recoverable			(79,115	)			(62,901	)

Net balance at beginning of year			79,814				64,297

Incurred related to:
Current year			112,838				107,424
Prior years			11,471				5,931

Total incurred			124,309				113,355

Paid related to:
Current year			50,850				54,216
Prior years			54,060				43,622

Total paid			104,910				97,838

Net balance at end of year			99,213				79,814
Plus reinsurance recoverable			88,002				79,115

Balance at end of year		$	187,215			$	158,929

As a result of management’s analysis of loss reserves and trends, the provision for losses and LAE, net of related reinsurance recoverables, increased by $11.5 million and $5.9 million in 2011 and 2010, respectively, These increases were recorded in response to reserve development in prior accident years. Some of the increase in reserves is attributable to development on the small number of hurricane claims that remain open. Adjustments relating to older accident years also reflect increases in certain types of activities in UPCIC’s non-catastrophe claims that are more typically associated with catastrophe claims. Examples include insureds re-opening claims, seeking payments without corresponding repairs, and using public adjusters. These activities were prevalent in the catastrophe claims arising from 2004 and 2005 hurricane seasons but subsequently increased in non-catastrophe claims as the number of remaining hurricane claims subsided. In addition, certain changes to Florida law in recent years have adversely affected claims payout patterns. Florida laws relating to sinkhole claims also have generated claims in older accident years as insureds seek to establish that sinkhole activity occurred in policy periods pre-dating legislative changes.

Regulatory Requirements and Restrictions

The Company’s regulated subsidiaries, UPCIC and APPCIC, are subject to regulations and standards of the Florida Office of Insurance Regulation (“OIR”). These standards require the subsidiaries to maintain specified levels of statutory capital and restrict the timing and amount of dividends and other distributions that may be paid to the parent company. Except in the case of extraordinary dividends, these standards generally permit dividends to be paid from statutory unassigned surplus of the regulated subsidiary and are limited based on the regulated subsidiary’s level of statutory net income and statutory capital and surplus. The maximum dividend that may be paid by UPCIC and APPCIC to the Company without prior approval is limited to the lesser of statutory net income from operations of the preceding calendar year or 10.0% of statutory unassigned capital surplus as of the preceding year end. These dividends are referred to as “ordinary dividends” and generally can be paid without prior regulatory approval. If the dividend, together with other dividends paid within the preceding twelve months, exceeds a specified statutory limit or is paid from sources other than earned surplus, the entire dividend is generally considered an “extraordinary dividend” and must receive prior regulatory approval.

In 2011, based on the 2010 statutory net income and statutory capital and surplus levels, the maximum amount of ordinary dividends which could be paid is $2.5 million from UPCIC and $1.2 million from APPCIC. No dividends were paid from UPCIC or APPCIC to their parent company during the years ended December 31, 2011, 2010 and 2009.

The Florida Insurance Code requires companies to maintain capitalization equivalent to the greater of 10% of the insurer’s total liabilities or $5.0 million. The following table provides the amount of statutory capital and surplus, and an amount representing ten percent of total liabilities for both UPCIC and APPCIC as of the periods presented (in thousands):


		As of December 31,
		2011				2010
Ten percent of total liabilities
UPCIC		$	37,063			$	32,864
APPCIC		$	97			$	83

Statutory capital and surplus
UPCIC		$	122,956			$	115,926
APPCIC		$	9,378			$	11,252

At such dates in the table above, both UPCIC and APPCIC met the Florida capitalization requirement. UPCIC and APPCIC are also required to adhere to prescribed premium-to-capital surplus ratios and have met those requirements at such dates.

Through Universal Insurance Holding Company of Florida, UPCIC’s parent company, UIH recorded capital contributions of $5.0 million, $12.0 million and $32.0 million to UPCIC in June 2011, September 2011 and December 2011, respectively.

UPCIC and APPCIC are required annually to comply with the NAIC RBC requirements. RBC requirements prescribe a method of measuring the amount of capital appropriate for an insurance company to support its overall business operations in light of its size and risk profile. NAIC’s RBC requirements are used by regulators to determine appropriate regulatory actions relating to insurers who show signs of weak or deteriorating condition. As of December 31, 2011, based on calculations using the appropriate NAIC RBC formula, UPCIC’s and APPCIC’s reported total adjusted capital was in excess of the requirements.