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Insurance Operations

3 Months Ended

Mar. 31, 2013

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:


		As of March 31, 2013				As of December 31, 2012

Percentage of Policies-In-Force:
In Florida			95	%			96	%
With wind coverage			98	%			98	%
With wind coverage in South Florida (1)			28	%			28	%

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

Deferred Policy Acquisition Costs, net

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 March 31,
		2013				2012
DPAC, beginning of period (1)		$	54,431			$	50,200
Capitalized Costs			28,692				26,144
Amortization of DPAC			(27,732	)			(24,472	)

DPAC, end of period		$	55,391			$	51,872


DRCC, beginning of period (1)		$	37,149			$	38,845
Ceding Commissions Written			22,312				20,506
Earned Ceding Commissions			(21,447	)			(19,277	)

DRCC, end of period		$	38,014			$	40,074


DPAC (DRCC), net, beginning of period (1)		$	17,282			$	11,355
Capitalized Costs, net			6,379				5,638
Amortization of DPAC (DRCC), net			(6,284	)			(5,195	)

DPAC (DRCC), net, end of period		$	17,377			$	11,798

(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 policy 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. 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 was 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,
		2013				2012

Balance at beginning of period		$	193,241			$	187,215
Less reinsurance recoverable			(81,415	)			(88,002	)

Net balance at beginning of period			111,826				99,213

Incurred related to:
Current year			26,654				26,350
Prior years			(171	)			(176	)

Total incurred			26,483				26,174

Paid related to:
Current year			1,172				953
Prior years			30,289				31,419

Total paid			31,461				32,372

Net balance at end of period			106,848				93,015
Plus reinsurance recoverable			75,680				79,285

Balance at end of period		$	182,528			$	172,300

Regulatory Requirements and Restrictions

The Insurance Entities 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 their immediate parent company, Universal Insurance Holding Company of Florida (“UIHCF”), 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 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.

Based on the 2012 statutory net income and statutory capital and surplus levels, UPCIC and APPCIC do not have the capacity to pay ordinary dividends during 2013. For the three months ended March 31, 2013, no dividends were paid from UPCIC or APPCIC to UIHCF. Dividends paid to the shareholders of UIH are paid from the equity of UIH and not from the capital and surplus 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 March 31, 2013				As of December 31, 2012
Ten percent of total liabilities
UPCIC		$	42,736			$	39,260
APPCIC		$	827			$	694

Statutory capital and surplus
UPCIC		$	135,696			$	134,034
APPCIC		$	14,505			$	14,330

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.

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				As of
		March 31,				December 31,
		2013				2012
Restricted cash and cash equivalents		$	2,600			$	33,009
Investments		$	4,013			$	4,009