5. Insurance Operations

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,
	2014			2013
DPAC, beginning of period	$	54,099		$	54,431
Capitalized Costs		26,782			28,692
Amortization of DPAC		(26,670	)		(27,732	)

DPAC, end of period	$	54,211		$	55,391

DRCC, beginning of period	$	38,200		$	37,149
Ceding Commissions Written		21,880			22,312
Earned Ceding Commissions		(21,762	)		(21,447	)

DRCC, end of period	$	38,318		$	38,014

DPAC (DRCC), net, beginning of period	$	15,899		$	17,282
Capitalized Costs, net		4,902			6,379
Amortization of DPAC (DRCC), net		(4,908	)		(6,284	)

DPAC (DRCC), net, end of period	$	15,893		$	17,377

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,
	2014			2013
Balance at beginning of period	$	159,222		$	193,241
Less reinsurance recoverable		(68,584	)		(81,415	)

Net balance at beginning of period		90,638			111,826

Incurred (recovered) related to:
Current year		26,855			26,654
Prior years		(30	)		(171	)

Total incurred		26,825			26,483

Paid related to:
Current year		3,867			1,172
Prior years		27,148			30,289

Total paid		31,015			31,461

Net balance at end of period		86,448			106,848
Plus reinsurance recoverable		64,109			75,680

Balance at end of period	$	150,557		$	182,528

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 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 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 2013 statutory net income and statutory capital and surplus levels, UPCIC has the capacity to pay ordinary dividends of $290 thousand during 2014. However, APPCIC does not have the capacity to pay ordinary dividends during 2014. For the three months ended March 31, 2014, no dividends were paid from UPCIC or APPCIC to UIHCF. Dividends paid to the shareholders of UIH are paid from the earnings of UIH and its non-insurance subsidiaries 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 dates presented (in thousands):


	As of March 31, 2014		As of December 31, 2013
Ten percent of total liabilities
UPCIC	$	39,971	$	39,179
APPCIC	$	630	$	625
Statutory capital and surplus
UPCIC	$	166,720	$	161,803
APPCIC	$	13,575	$	13,708

As of the 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 Insurance Entities are 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 dates presented (in thousands):


	As of March 31, 2014		As of December 31, 2013
Restricted cash and cash equivalents	$	2,635	$	2,600
Investments	$	3,683	$	3,707