NOTE 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):

	For the years ended December 31,
	2015			2014			2013
DPAC, beginning of year	$	54,603		$	54,099		$	54,431
Capitalized Costs		116,954			108,072			109,981
Amortization of DPAC		(111,538	)		(107,568	)		(110,313	)
DPAC, end of year	$	60,019		$	54,603		$	54,099
DRCC, beginning of year	$	28,943		$	38,200		$	37,149
Ceding Commissions Written		(5,276	)		64,810			89,679
Earned Ceding Commissions		(23,667	)		(74,067	)		(88,628	)
DRCC, end of year	$	—		$	28,943		$	38,200
DPAC (DRCC), net, beginning of year	$	25,660		$	15,899		$	17,282
Capitalized Costs, net		122,230			43,262			20,302
Amortization of DPAC (DRCC), net		(87,871	)		(33,501	)		(21,685	)
DPAC (DRCC), net, end of year	$	60,019		$	25,660		$	15,899

Liability for Unpaid Losses and Loss Adjustment Expenses

The Insurance Entities establish liabilities for unpaid losses and loss adjustment expenses on reported and unreported claims of insured losses. These liability estimates are based on known facts and interpretation of factors such as claim payment patterns, loss payments, pending levels of unpaid claims, product mix and industry experience. The establishment of appropriate liabilities, including liabilities for catastrophes, is an inherently uncertain process. Management regularly updates its estimates as new facts become known and further events occur which may impact the resolution of unsettled claims.

The level of catastrophe loss experienced in any year cannot be predicted and could be material to results of operations and financial position. The Company’s policyholders are concentrated in South Florida, which is periodically subject to adverse weather conditions, such as hurricanes and tropical storms. During the twelve-month periods ended December 31, 2015, 2014 and 2013, the Company did not experience any significant effects from catastrophic events. Management continuously evaluates alternative business strategies to effectively manage the Company’s exposure to catastrophe losses, including the maintenance of catastrophic reinsurance coverage as discussed in “—Note 4 (Reinsurance).”

Management believes that the liabilities for claims and claims expense as of December 31, 2015 are appropriately established in the aggregate and adequate to cover the ultimate cost of reported and unreported claims arising from losses which had occurred by that date. However, if losses exceeded direct loss reserve estimates there could be a material adverse effect on the Company’s financial statements. Also, if there are regulatory initiatives, legislative enactments or case law precedents which change the basis for policy coverage, in any of these events, there could be an effect on direct loss reserve estimates having a material adverse effect on the Company’s financial statements.

Set forth in the following table is the change in liability for unpaid losses and LAE for the periods presented (in thousands):

	Year Ended December 31,
	2015			2014			2013
Balance at beginning of year	$	134,353		$	159,222		$	193,241
Less: Reinsurance recoverable		(47,350	)		(68,584	)		(81,415	)
Net balance at beginning of period		87,003			90,638			111,826
Incurred (recovered) related to:
Current year		188,040			124,011			111,560
Prior years		(301	)		(736	)		(2,945	)
Total incurred		187,739			123,275			108,615
Paid related to:
Current year		123,952			73,981			62,529
Prior years		65,490			52,929			67,274
Total paid		189,442			126,910			129,803
Net balance at end of period		85,300			87,003			90,638
Plus: Reinsurance recoverable		13,540			47,350			68,584
Balance at end of year	$	98,840		$	134,353		$	159,222

The Company has adjusted prior year reserves to reflect both positive and negative development trends. The Company continues to see an improvement in claim settlement rates as a result of ongoing claims department initiatives which were originally introduced in 2013. This has resulted in an accelerated claims settlement process for the majority of claim segments, particularly for the 2015 accident year.

Regulatory Requirements and Restrictions

The Insurance Entities are subject to regulations and standards of the FLOIR. 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 FLOIR. 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 (“UVECF”), 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 had the capacity to pay ordinary dividends of $27.7 million during 2015. APPCIC did not have the capacity to pay ordinary dividends during 2015. For the year ended December 31, 2015, no dividends were paid from UPCIC or APPCIC to UVECF. Dividends paid to the shareholders of UVE were paid from the earnings of UVE 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 U.S. GAAP, and an amount representing ten percent of total liabilities for both UPCIC and APPCIC as of the dates presented (in thousands):

	As of December 31,
	2015		2014
Ten percent of total liabilities
UPCIC	$	55,928	$	42,659
APPCIC	$	463	$	514
Statutory capital and surplus
UPCIC	$	256,987	$	200,173
APPCIC	$	14,777	$	14,036

As of the dates in the table above, both UPCIC and APPCIC met the capitalization requirement. UPCIC also met the capitalization requirements of the other states in which it is licensed as of December 31, 2015. UPCIC and APPCIC are also required to adhere to prescribed premium-to-capital surplus ratios and have met those requirements at such dates.

Through UVECF, the Insurance Entities’ parent company, UVE recorded capital contributions for the periods presented (in thousands):

	For the Years Ended December 31,
	2015		2014		2013
Capital Contributions	$	—	$	—	$	—

UPCIC and APPCIC are required annually to comply with the NAIC risk-based capital (“RBC”) requirements. RBC requirements prescribe a method of measuring the amount of capital appropriate for an insurance company to support its overall business operations in light of its size and risk profile. NAIC RBC requirements are used by regulators to determine appropriate regulatory actions relating to insurers who show signs of weak or deteriorating condition. As of December 31, 2015, based on calculations using the appropriate NAIC RBC formula, UPCIC’s and APPCIC’s reported total adjusted capital was in excess of the requirements.

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 December 31,
	2015		2014
Restricted cash and cash equivalents	$	2,635	$	2,635
Investments	$	3,876	$	3,609