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Insurance Operations

3 Months Ended

Mar. 31, 2012

Reinsurance and Insurance Operations [Abstract]

Insurance Operations

5. Insurance Operations

The Company’s primary product is homeowners’ insurance currently offered by APPIC in one state (Florida) and by UPCIC in five states, including Florida, which represented 98% of the Insurance Entities’ policies-in-force as of March 31, 2012 and December 31, 2011. Approximately 98% of the Insurance Entities’ policies-in-force as of March 31, 2012 and December 31, 2011 included coverage for wind. As of March 31, 2012 and December 31, 2011, 30% and 32%, respectively, of the Insurance Entities’ policies-in-force with wind coverage were for insured properties located in Miami-Dade, Broward and Palm Beach counties.

Deferred Policy Acquisition Costs

The Company defers commissions and state premium taxes on policies written, called Deferred Policy Acquisition Costs (“DPAC”), net of corresponding amounts of ceded reinsurance commissions, called Deferred Reinsurance Ceding Commissions (“DRCC”). Net DPAC is amortized over the effective period of the related insurance policies. The following table presents the beginning and ending balances and the changes in DPAC, net of DRCC, for the periods presented (in thousands):


		Three Months Ended March 31,
		2012				2011
DPAC, beginning of year (1)		$	50,200			$	50,128
Capitalized costs			26,144				26,285
Amortization of DPAC			(24,472	)			(24,553	)

DPAC, end of period		$	51,872			$	51,860

DRCC, beginning of year (1)		$	38,845			$	40,682
Ceding commissions written			20,506				21,431
Earned ceding commissions			(19,277	)			(20,392	)

DRCC, end of period		$	40,074			$	41,721

DPAC (DRCC), net, beginning of year (1)		$	11,355			$	9,446
Capitalized costs, net			5,638				4,854
Amortization of DPAC (DRCC), net			(5,195	)			(4,161	)

DPAC (DRCC), net, end of period		$	11,798			$	10,139

(1)	The beginning balances for the three months ended March 31, 2012 have been adjusted in connection with the adoption of the FASB's updated guidance related to deferred acquisition costs as discussed below.

As discussed in Note 2 – Significant Accounting Policies, the Company prospectively adopted new accounting guidance effective January 1, 2012 related to accounting for costs associated with acquiring or renewing insurance contracts. This guidance resulted in a reduction of our net deferred policy acquisition costs as of December 31, 2011 by 13%, and a corresponding charge of $1.6 million, before taxes of $617 thousand, against earnings during the first quarter of 2012. This charge represents an acceleration of capitalized costs existing at December 31, 2011, which would have been amortized to earnings within a twelve-month period under the old guidance. Approximately $9 million of net costs would have been deferred during the three months ended March 31, 2012 under the old guidance compared to the $5.6 million under the new guidance. Future expenses will be higher with the adoption of this guidance, as the amounts being deferred have decreased, partially offset by less amortization. The effect of this change in future periods on income and per share amounts is not determinable as the historical methodology will have been discontinued after adoption.

Liability for Unpaid Losses and Loss Adjustment Expenses

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


		Three Months Ended March 31,
		2012				2011
Balance at beginning of period		$	187,215			$	158,929
Less reinsurance recoverable			88,002				79,114

Net balance at beginning of period			99,213				79,815

Incurred related to:
Current year			26,350				26,335
Prior years			(176	)			(150	)

Total incurred			26,174				26,185

Paid related to:
Current year			953				2,059
Prior years			31,419				24,302

Total paid			32,372				26,361

Net balance at end of period			93,015				79,639
Plus reinsurance recoverables			79,285				78,611

Balance at end of period		$	172,300			$	158,250

Regulatory Requirements

The Insurance Entities are subject to regulations and standards of the Florida Office of Insurance Regulation (“OIR”). UPCIC is also subject to the laws of other states in which it operates. The OIR standards require the Insurance Entities to maintain specified levels of statutory capital and restrict the timing and amount of dividends and other distributions that may be paid to the parent company. Except in the case of extraordinary dividends, these standards generally permit the Insurance Entities to pay dividends from statutory unassigned surplus. The dividends are limited based on the Insurance Entities’ level of statutory net income and statutory capital and surplus. 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.

Based on the 2011 statutory net income and statutory capital and surplus levels, UPCIC and APPCIC do not have the capacity to pay ordinary dividends during 2012. For the three months ended March 31, 2012, no dividends were paid from UPCIC or APPCIC to the parent company.

The Florida Insurance Code requires companies to maintain capitalization equivalent to the greater of ten percent of the insurer’s total liabilities or $5.0 million. The following table presents 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 March 31, 2012				As of December 31, 2011
Ten percent of total liabilities
UPCIC		$	39,039			$	37,063
APPCIC		$	141			$	97

At such dates, 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.