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Insurance Operations

6 Months Ended

Jun. 30, 2012

Reinsurance/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 97% and 98% of the Insurance Entities’ policies-in-force as of June 30, 2012 and December 31, 2011, respectively. Approximately 98% of the Insurance Entities’ policies-in-force as of June 30, 2012 and December 31, 2011 included coverage for wind. As of June 30, 2012 and December 31, 2011, 29% 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 certain costs in connection with the written policies, 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 June 30,								Six Months Ended June 30,
		2012				2011				2012				2011
DPAC, beginning of period (1)		$	51,872			$	51,860			$	50,200			$	50,128
Capitalized costs			29,536				30,507				55,680				56,792
Amortization of DPAC			(24,486	)			(23,238	)			(48,958	)			(47,791	)

DPAC, end of period		$	56,922			$	59,129			$	56,922			$	59,129


DRCC, beginning of period (1)		$	40,074			$	41,721			$	38,845			$	40,682
Ceding commissions written			21,286				26,457				44,775				47,888
Earned ceding commissions			(22,182	)			(21,075	)			(44,442	)			(41,467	)

DRCC, end of period		$	39,178			$	47,103			$	39,178			$	47,103


DPAC (DRCC), net, beginning of period (1)		$	11,798			$	10,139			$	11,355			$	9,446
Capitalized costs, net			8,250				4,050				10,905				8,904
Amortization of DPAC (DRCC), net			(2,304	)			(2,163	)			(4,516	)			(6,324	)

DPAC (DRCC), net, end of period		$	17,744			$	12,026			$	17,744			$	12,026

(1)	The beginning balances for the six months ended June 30, 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 13% reduction of our net deferred policy acquisition costs as of December 31, 2011, and a corresponding pre-tax charge of $1.6 million against earnings during the first quarter of 2012. This charge represents a charge-off of capitalized costs existing at December 31, 2011, which would have been amortized to earnings within a twelve-month period under the old guidance. In the period of adoption (three months ended March 31, 2012), approximately $9 million of net costs would have been deferred 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 periods subsequent to March 31, 2012, 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 June 30,								Six Months Ended June 30,
		2012				2011				2012				2011
Balance at beginning of period		$	172,300			$	158,249			$	187,215			$	158,928
Less reinsurance recoverable			79,285				78,611				88,002				79,114

Net balance at beginning of period			93,015				79,638				99,213				79,814

Incurred related to:
Current year			29,362				25,587				55,711				51,923
Prior years			75				265				(100	)			114

Total incurred			29,437				25,852				55,611				52,037

Paid related to:
Current year			14,382				12,817				15,335				14,875
Prior years			16,614				13,606				48,033				37,909

Total paid			30,996				26,423				63,368				52,784

Net balance at end of period			91,456				79,068				91,456				79,068
Plus reinsurance recoverables			73,169				76,307				73,169				76,307

Balance at end of period		$	164,625			$	155,375			$	164,625			$	155,375

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 six months ended June 30, 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				As of
		June 30,				December 31,
		2012				2011
Ten percent of total liabilities
UPCIC		$	60,300			$	37,063
APPCIC		$	461			$	97

Statutory capital and surplus
UPCIC		$	135,337			$	122,956
APPCIC		$	9,331			$	9,378

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 as well.