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						Nine Months Ended
	September 30,						September 30,
	2014			2013			2014			2013
DPAC, beginning of period	$	58,149		$	59,033		$	54,099		$	54,431
Capitalized Costs		27,579			26,382			84,354			85,315
Amortization of DPAC		(27,769	)		(27,888	)		(80,494	)		(82,219	)
DPAC, end of period	$	57,959		$	57,527		$	57,959		$	57,527
DRCC, beginning of period	$	30,072		$	41,792		$	38,200		$	37,149
Ceding Commissions Written		17,236			21,319			49,555			69,853
Earned Ceding Commissions		(17,181	)		(22,537	)		(57,628	)		(66,428	)
DRCC, end of period	$	30,127		$	40,574		$	30,127		$	40,574
DPAC (DRCC), net, beginning of period	$	28,077		$	17,241		$	15,899		$	17,282
Capitalized Costs, net		10,343			5,063			34,799			15,462
Amortization of DPAC (DRCC), net		(10,588	)		(5,351	)		(22,866	)		(15,791	)
DPAC (DRCC), net, end of period	$	27,832		$	16,953		$	27,832		$	16,953

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						Nine Months Ended
	September 30,						September 30,
	2014			2013			2014			2013
Balance at beginning of period	$	144,625		$	166,260		$	159,222		$	193,241
Less: Reinsurance recoverable		(58,705	)		(67,820	)		(68,584	)		(81,415	)
Net balance at beginning of period		85,920			98,440			90,638			111,826
Incurred (recovered) related to:
Current year		32,637			28,665			87,825			81,995
Prior years		1,544			(330	)		860			(1,977	)
Total incurred		34,181			28,335			88,685			80,018
Paid related to:
Current year		24,365			21,813			44,432			39,288
Prior years		8,160			10,789			47,315			58,383
Total paid		32,525			32,602			91,747			97,671
Net balance at end of period		87,576			94,173			87,576			94,173
Plus: Reinsurance recoverable		49,339			63,201			49,339			63,201
Balance at end of period	$	136,915		$	157,374		$	136,915		$	157,374

The company has adjusted prior year reserves to reflect both positive and negative development trends. The company continues to see an increase in claim settlement rates as a result of ongoing claims department initiatives which were introduced in 2013. This has resulted in favorable development for the majority of claim segments, particularly for the most recent accident years, but is offset by unfavorable development in bringing closure to claims previously in a litigious environment.

Regulatory Requirements and Restrictions

The Insurance Entities are subject to regulations and standards of the Florida Office of Insurance Regulation. 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 regulatory 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.” However, if the dividend, together with other dividends paid within the preceding twelve months, exceeds this 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. APPCIC does not have the capacity to pay ordinary dividends during 2014. For the nine months ended September 30, 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 insurance 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 capital and surplus calculated in accordance with statutory accounting principles, which differ from GAAP, and an amount representing ten percent of total liabilities for both UPCIC and APPCIC as of the dates presented (in thousands):

	September 30,		December 31,
	2014		2013
Ten percent of total liabilities
UPCIC	$	47,451	$	39,179
APPCIC	$	678	$	625
Statutory capital and surplus
UPCIC	$	183,064	$	161,803
APPCIC	$	13,528	$	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):

	September 30,		December 31,
	2014		2013
Restricted cash and cash equivalents	$	2,635	$	2,600
Investments	$	3,678	$	3,707