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Insurance Operations

9 Months Ended

Sep. 30, 2012

Reinsurance/Insurance Operations [Abstract]

Insurance Operations

5.	Insurance Operations

The Company’s primary product is homeowners insurance currently offered by APPCIC in one state (Florida) and by UPCIC in seven states, including Florida.

The following table provides the percentage of concentrations with respect to the Insurance Entities’ nationwide policies-in-force as of the periods presented:


		September 30, 2012				December 31, 2011
Percentage of Policies-In-Force:
In Florida			96	%			98	%
With wind coverage			98	%			98	%
With wind coverage in South Florida (1)			29	%			32	%

(1)	South Florida is comprised of Miami-Dade, Broward and Palm Beach counties.

Deferred Policy Acquisition Costs

The Company defers certain costs in connection with 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 September 30,								Nine Months Ended September 30,
		2012				2011				2012				2011
DPAC, beginning of period (1)		$	56,922			$	59,129			$	50,200			$	50,128
Capitalized costs			26,849				30,759				82,529				87,551
Amortization of DPAC			(26,606	)			(30,332	)			(75,564	)			(78,123	)

DPAC, end of period		$	57,165			$	59,556			$	57,165			$	59,556

DRCC, beginning of period (1)		$	39,178			$	47,103			$	38,845			$	40,682
Ceding commissions written			21,082				21,220				65,857				69,109
Earned ceding commissions			(21,114	)			(21,780	)			(65,556	)			(63,248	)

DRCC, end of period		$	39,146			$	46,543			$	39,146			$	46,543

DPAC (DRCC), net, beginning of period (1)		$	17,744			$	12,026			$	11,355			$	9,446
Capitalized costs, net			5,767				9,539				16,672				18,442
Amortization of DPAC (DRCC), net			(5,492	)			(8,552	)			(10,008	)			(14,875	)

DPAC (DRCC), net, end of period		$	18,019			$	13,013			$	18,019			$	13,013

(1)	The beginning balances for the nine months ended September 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 September 30,								Nine Months Ended September 30,
		2012				2011				2012				2011
Balance at beginning of period		$	164,625			$	155,375			$	187,215			$	158,929
Less reinsurance recoverable			73,169				76,307				88,002				79,114

Net balance at beginning of period			91,456				79,068				99,213				79,815

Incurred related to:
Current year			27,409				24,975				83,120				76,897
Prior years			8,891				4,368				8,791				4,483

Total incurred			36,300				29,343				91,911				81,380

Paid related to:
Current year			18,808				15,244				34,143				30,119
Prior years			10,434				9,587				58,467				47,496

Total paid			29,242				24,831				92,610				77,615

Net balance at end of period			98,514				83,580				98,514				83,580
Plus reinsurance recoverables			74,160				79,374				74,160				79,374

Balance at end of period		$	172,674			$	162,954			$	172,674			$	162,954

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 to the parent company. 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 nine months ended September 30, 2012, no dividends were paid from UPCIC or APPCIC to the parent company. Dividends paid to the shareholders of UIH are paid from the surplus of UIH and not that of the Insurance Entities.

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 September 30, 2012				As of December 31, 2011
Ten percent of total liabilities
UPCIC		$	45,312			$	37,063
APPCIC		$	688			$	97
Statutory capital and surplus
UPCIC		$	125,676			$	122,956
APPCIC		$	9,053			$	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.

The Company is required by various state laws and regulations to maintain certain assets in depository accounts. The following table represents assets held by insurance regulators as of the periods presented (in thousands):


		As of September 30, 2012				As of December 31, 2011
Restricted cash and cash equivalents		$	54,295			$	48,092
Investments		$	4,008			$	3,801