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,
	2015			2014			2015			2014
DPAC, beginning of period	$	62,181		$	58,149		$	54,603		$	54,099
Capitalized Costs		30,846			27,579			91,135			84,354
Amortization of DPAC		(30,024	)		(27,769	)		(82,735	)		(80,494	)
DPAC, end of period	$	63,003		$	57,959		$	63,003		$	57,959
DRCC, beginning of period	$	—		$	30,072		$	28,943		$	38,200
Ceding Commissions Written		—			17,236			(5,276	)		49,555
Earned Ceding Commissions		—			(17,181	)		(23,667	)		(57,628	)
DRCC, end of period	$	—		$	30,127		$	—		$	30,127
DPAC (DRCC), net, beginning of period	$	62,181		$	28,077		$	25,660		$	15,899
Capitalized Costs, net		30,846			10,343			96,411			34,799
Amortization of DPAC (DRCC), net		(30,024	)		(10,588	)		(59,068	)		(22,866	)
DPAC (DRCC), net, end of period	$	63,003		$	27,832		$	63,003		$	27,832

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,
	2015			2014			2015			2014
Balance at beginning of period	$	112,117		$	144,625		$	134,353		$	159,222
Less: Reinsurance recoverable		(31,777	)		(58,705	)		(47,350	)		(68,584	)
Net balance at beginning of period		80,340			85,920			87,003			90,638
Incurred (recovered) related to:
Current year		54,014			32,637			127,211			87,825
Prior years		(160	)		1,544			(63	)		860
Total incurred		53,854			34,181			127,148			88,685
Paid related to:
Current year		41,818			24,365			72,438			44,432
Prior years		10,777			8,160			60,114			47,315
Total paid		52,595			32,525			132,552			91,747
Net balance at end of period		81,599			87,576			81,599			87,576
Plus: Reinsurance recoverable		19,460			49,339			19,460			49,339
Balance at end of period	$	101,059		$	136,915		$	101,059		$	136,915

Regulatory Requirements and Restrictions

The Insurance Entities are subject to regulations and standards of the Florida Office of Insurance Regulation (“OIR”). UPCIC also is subject to regulations and standards of regulatory authorities in other states where it is licensed, although as a Florida-domiciled insurer its principal regulatory authority is the 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 by the Insurance Entities 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 by the provisions of Florida Statutes. 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.

In accordance with Florida Statutes, and based on the calculations performed by the Company as of December 31, 2014, UPCIC has the capacity to pay ordinary dividends of $27.7 million during 2015. APPCIC does not have the capacity to pay ordinary dividends during 2015. For the nine months ended September 30, 2015, no dividends were paid from UPCIC or APPCIC to UIHCF. Dividends paid to the shareholders of UIH during the nine months ended September 30, 2015 were paid from the earnings of UIH and its non-insurance subsidiaries.

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,
	2015		2014
Ten percent of total liabilities
UPCIC	$	65,181	$	42,659
APPCIC	$	606	$	514
Statutory capital and surplus
UPCIC	$	233,634	$	200,173
APPCIC	$	14,258	$	14,036

As of the dates in the table above, both UPCIC and APPCIC met the Florida capitalization requirement. As of September 30, 2015 UPCIC also met the capitalization requirements of the other states in which it is licensed. UPCIC and APPCIC are also required to adhere to prescribed premium-to-capital surplus ratios and each 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,
	2015		2014
Restricted cash and cash equivalents	$	2,635	$	2,635
Investments	$	3,924	$	3,609