Significant counties are defined as greater than 2.5% of total premium in force as of December 31, 2019.
Private market reinsurance coverage continues to be structured into layers. This structure utilizes a cascading feature such that any layers above a $111 million attachment point are excess of loss over the immediately preceding layer. If the aggregate limit of the preceding layer is exhausted, the next layer cascades down in its place for future events.
For the FHCF Reimbursement Contracts effective June 1, 2019, UPCIC has continued the election of the 90% coverage level. The total mandatory FHCF layer is estimated to provide approximately $2.038 billion of coverage for UPCIC, which inures to the benefit of the open market coverage secured from private reinsurers.
A detailed discussion of our results of operations follows the table below (in thousands, except per share data).
Policy fees for the year ended December 31, 2019 were $21.6 million compared to $20.3 million for the same period in 2018. The increase of $1.3 million, or 6.3%, was the result of an increase in the number of new and renewed policies written during the year ended December 31, 2019 compared to the same period in 2018.
Prior year adverse development was the result of the following factors:
Direct and ceded losses include prior year reserve development on major hurricanes where the settlement of claims and the re-estimation of expected costs for losses and LAE remaining to be settled exceed previously carried reserves. In 2019, for Hurricanes Irma, Florence, Michael and Matthew, we recorded adverse development of $469.9 million of gross losses and $465.4 million of ceded losses resulting in $4.5 million net impact. This compares to only one hurricane having adverse development in 2018 of $513 million of gross losses and $513 million of ceded losses, resulting in zero net losses in 2018 from Hurricane Irma. In addition, we recorded $2.6 million in 2019, compared to $20.7 million in 2018, of contractually based costs for reinstatement premiums as a result of adverse development of ceded losses for Hurricane Irma recorded during 2019 and 2018.
Net income was $117.1 million for the year ended December 31, 2018, an increase of $10.1 million, or 9.5%, compared to $106.9 million for the year ended December 31, 2017. The year ended December 31, 2018 is comparatively better due to continued growth of premiums, investment income and other sources revenue. Results in 2018 also include the impact of two hurricanes, Florence and Michael, and an increase in losses and LAE for the strengthening of loss reserves of prior accident years. Reserve strengthening was driven by higher than expected claim costs from prior years relating to litigation, reopened claims and increases in loss settlement trends above carried values. Net unrealized losses on equity securities was $17.2 million in 2018, reducing net income. Also impacting 2018 was a lower effective tax rate. Diluted earnings per common share increased by $0.28 to $3.27 for the year ended December 31, 2018 compared to $2.99 per share for the year ended December 31, 2017, reflecting the increase in net income and a slight decrease in our weighted average diluted shares outstanding. A more detailed discussion of our results of operations follows the table below (in thousands, except per share data).
Reinsurance recoverable represents the estimated amount of paid and unpaid losses, LAE and other expenses that are expected to be recoverable from reinsurers. The decrease of $225.4 million to $193.2 million as of December 31, 2019 was primarily due to the collection of amounts from reinsurers relating to settled claims from hurricanes and other events.
In total, during the year ended December 31, 2019, we repurchased an aggregate of 2,337,825 shares of our common stock in the open market at an aggregate purchase price of $66.2 million. Also see “Part II, Item 5 - Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities-Registrant Purchases of Equity Securities” for share repurchase activity during 2019 and the three months ended December 31, 2019.
We utilize independent actuaries to help establish liabilities for unpaid losses, anticipated loss recoveries and LAE. We do not discount the liability for unpaid losses and LAE for financial statement purposes. In establishing the liability for unpaid losses and LAE, actuarial judgment is relied upon in order to make appropriate assumptions to estimate a best estimate of ultimate losses. There are inherent uncertainties associated with this estimation process, especially when a company is undergoing changes in its claims settlement practices, when a company has limited experience in a certain area or when behaviors of policyholders are influenced by external factors and/or market dynamics. As an example, a dramatic change occurred during calendar year 2015 when we realigned our adjusting teams as well as launched our Fast Track initiative, reducing settlement costs and strengthening case reserve adequacy for claims reported during the year. These changes have had a meaningful influence on development pattern selections applied to 2013 through 2017 accident year claims in the reserving estimates for each of the methods described in “Item 8 - Note 17 (Liability for Unpaid Losses and Loss Adjustment Expenses).” More recently, since 2016 there has been a significant increase in efforts to pursue subrogation against third parties responsible for property damage losses to our insureds. As a result, anticipated subrogation recoveries are reviewed and estimated on a stand-alone basis in the Company’s reserve analysis. Market dynamics in Florida include the use of assignments of benefits (“AOB”) and the resulting increase in litigation against the Company. As a result of the use of AOBs, as well as the continued overall increase in represented claims and claims-related abuses in Florida, we have increased our estimates of ultimate losses for the most recent and prior accident years.
Consolidated Statements of Income for the Years Ended December 31, 2019, 2018 and 2017
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. The Company’s primary use of estimates are in the recognition of liabilities for unpaid losses, loss adjustment expenses and subrogation recoveries, and reinsurance recoveries. Actual results could differ from those estimates.
Investment Real Estate. Investment real estate is recorded at cost less accumulated depreciation. Depreciation is calculated on a straight-line basis over the estimated useful life of the assets. Real estate taxes, interest and other costs incurred during development and construction of properties are capitalized. Income and expenses from income producing real estate are reported under net investment income. Investment real estate is evaluated for impairment when events or circumstances indicate the carrying value may not be recoverable.
Provision for Premium Deficiency. It is the Company’s policy to evaluate and recognize losses on insurance contracts when estimated future claims, deferred policy acquisition costs and maintenance costs under a group of existing contracts will exceed anticipated future premiums. No accruals for premium deficiency were considered necessary as of December 31, 2019 and 2018.
Reinsurance. Ceded written premium is recorded upon the effective date of the reinsurance contracts and earned over the contract period. Amounts recoverable from reinsurers are estimated in a manner consistent with the provisions of the reinsurance agreements and consistent with the establishment of the gross insurance liability to the Company. Allowances are established for amounts deemed uncollectible, if any.
On November 9, 2006, UPCIC entered into a $25.0 million surplus note with the State Board of Administration of Florida (the “SBA”) under Florida’s Insurance Capital Build-Up Incentive Program (the “ICBUI”). The surplus note has a twenty-year term and accrues interest, adjusted quarterly based on the 10-year Constant Maturity Treasury Index. The carrying amount of the surplus note is included in the statutory capital and surplus of UPCIC of approximately $9.9 million as of December 31, 2019.