We conduct our operations primarily from our company-owned campus located at 1110 West Commercial Boulevard, Suite 100, Fort Lauderdale, Florida 33309, which contains approximately 67,000 square feet of office space. The facilities in our campus are suitable and adequate for our operations.
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand the results of operations and financial condition of UVE. MD&A is provided as a supplement to, and should be read in conjunction with, our financial statements and accompanying notes in Part II, Item 8 below.
We generate revenues primarily from the collection of premiums. The nature of our business tends to be seasonal, reflecting consumer behaviors in connection with the Florida residential real estate market and the hurricane season. The amount of direct written premium tends to increase just prior to the second quarter of our fiscal year and to decrease approaching the fourth quarter. Other sources of revenue include: commissions paid by our reinsurers to BARC, policy fees collected from policyholders by URA and financing fees charged to policyholders who choose to defer premium payments. We also generate income by investing our assets.
Our ability to achieve rate adequacy relative to the risks written improved our underwriting profit and together with our improved financial strength led to our decision to retain a greater share of our profitable business by reducing our quota share cession rate in our 2014-2015 reinsurance program and eliminating the use of quota share reinsurance in our 2015-2016 reinsurance program.
Net income and diluted earnings per common share grew by $33.5 million and $0.89, respectively compared to 2014
Net losses and LAE ratio of 37.2%, compared to 37.7% for 2014
We repurchased a total of 748,100 shares in 2015 at an aggregate cost of $18.7 million
We eliminated the use of quota share reinsurance effective June 1, 2015 for future periods
We believe that restructuring our reinsurance program and re-evaluating that structure on an ongoing basis has allowed us to take advantage of attractive reinsurance pricing, while still maintaining reinsurance coverage that we believe is sufficient to protect our policyholders and shareholders. While we believe the changes to the current reinsurance program are beneficial, there can be no assurance that our actual results of operations or financial condition will be positively affected. The Insurance Entities remain responsible for insured losses notwithstanding the failure of any reinsurer to make payments otherwise due to the Insurance Entities. Below is a description of our 2015-2016 reinsurance program for each of the Insurance Entities.
UPCIC’s reinsurance program, which generally runs from June 1 through May 31 of the following year, consists of various forms of catastrophe coverage. Under the 2015-2016 reinsurance program, UPCIC has a net retention of $35 million per catastrophe event for all losses incurred up to a first event loss of $2.24 billion. UPCIC purchases a separate underlying cover to further reduce its retention for all losses occurring in Hawaii. With this cover, UPCIC retains only $10 million under its program in Hawaii. These retention
APPCIC’s reinsurance program, which generally runs from June 1 through May 31 of the following year, consists of various forms of catastrophe and multiple line excess of loss coverage. Under the 2015-2016 reinsurance program, APPCIC has a net retention on its catastrophe program of $2 million for all losses per catastrophe event for losses incurred up to a first event loss of $41.2 million. The retention amount is gross of any potential tax benefit we would receive in paying such losses. APPCIC has mandatory catastrophe coverage through the FHCF plus voluntary catastrophe coverage with private reinsurers.
APPCIC’s multiple line excess of loss reinsurance program has a property retention of $0.5 million with coverage up to $9.0 million per individual property loss and a casualty retention of $0.3 million with coverage up to $1.3 million per individual casualty loss.
Separate from the Insurance Entities’ reinsurance programs, which provide protection for the Insurance Entities in the event we experience catastrophic losses, UVE also protects itself against diminution in value due to catastrophe events by purchasing a loss
warranty contract that would provide a payment to UVE of $80 million plus an amount equal to the forgiveness of related debt through a catastrophe risk-linked transaction contract, effective June 1, 2013 through May 31, 2016. This contract provides for recovery by UVE in the event of exhaustion of UPCIC’s catastrophe coverage. The total cost to UVE of this risk-linked transaction contract is $9.0 million per year for each of the three years.
Reserves are the difference between the estimated ultimate future cost of losses and LAE incurred and the amount of paid losses as of the reporting date. Reserves are estimated for both reported and unreported claims, and include estimates of all expenses associated with processing and settling all incurred claims. We update reserve estimates periodically as new information becomes available or as events emerge that may affect the resolution of unsettled claims. Changes in prior year reserve estimates (reserve re-estimates), which may be material, are determined by comparing updated estimates of ultimate losses to prior estimates, and the differences are recorded as losses and LAE in the Consolidated Statements of Income in the period such changes are determined. Estimating the ultimate cost of losses and LAE is an inherently uncertain and complex process involving a high degree of subjective judgment and is subject to the interpretation and usage of numerous uncertain variables.
Reserves for losses and LAE are determined in four primary sectors. These sectors are (1) the estimation of reserves for Florida non-catastrophe losses, (2) hurricane losses, (3) sinkhole losses, and (4) non-Florida non-catastrophe losses and any other losses. Evaluations are performed for loss and LAE separately, and on a net and direct basis for each sector. The analyses for non-catastrophe losses are further separated into data groupings of like exposure. These groups are property damage on homeowner policy forms HO-3 and HO-8 combined, property damage on homeowner policy forms HO-4 and HO-6 combined, property damage on dwelling fire policies, and all liability exposures combined.
Reserve estimates for both losses and LAE are derived using several different actuarial estimation methods in order to provide the actuary with multiple predictive viewpoints to consider for each of the sectors. Each of the methods has merit, because they each provide insight into emerging patterns. These methods are each variations on two primary actuarial techniques: “chain ladder development” techniques and “counts and average” techniques. The “chain ladder development” actuarial technique is an estimation process in which historical payment and reserving patterns are applied to actual paid and/or reported amounts (paid losses or LAE plus individual case reserves established by claim adjusters) for an accident period to create an estimate of how losses are likely to develop over time. The “counts and average” technique includes an evaluation of historical and projected costs per claim, and late-reported claim counts, for open claims by accident period. An accident period refers to classification of claims based on the date in which the
Two parameters are needed in each application of the B-F method: an initial assumption of expected losses and the expected reporting or payment pattern. Initial expected losses for each accident period other than the current year is determined using the estimated ultimate loss ratio from the prior analysis. Initial expected losses for the current year’s accident periods are determined based on trends in historical loss ratios, rate changes, and underlying loss trends. The expected reporting pattern is based on the reported or paid loss development method described above. This method is often used for long-tail lines and in situations where the reported loss experience is relatively immature or lacks sufficient credibility for the application of other methods.
Estimates of unpaid losses for hurricane experience, when required, are not developed using our specific development patterns, due to the relatively infrequent nature of storms and the high severity typically associated with them. Development patterns are based on industry data obtained by our consulting actuary are utilized, until enough time has passed that our historical patterns are relied upon. There is an inherent assumption that relying on industry development patterns, as opposed to company-specific patterns, produces more credible results for projecting hurricane losses during the first 36 months following an event.
Estimation methods described above each produce estimates of ultimate losses and LAE. Based on the results of these methods, a single estimate (commonly referred to as an actuarial point/central estimate) of the ultimate loss and LAE is selected accordingly for each accident-year claim grouping. Estimated IBNR reserves are determined by subtracting reported losses from the selected ultimate loss, and the paid LAE from the ultimate LAE. The estimated loss IBNR reserves are added to case reserves to determine total estimated unpaid losses. No case reserves are carried for LAE, therefore the estimated LAE IBNR reserves equal the total estimated unpaid LAE. For each sector, the reserving methods are carried out on both a net and direct basis in order to estimate liabilities accordingly. When selecting a single actuarial point/central estimate on a net basis, careful consideration is given for the reinsurance arrangements that were in place during each accident year, exposure period and segment being reviewed.
Reserve estimates are developed for both open claims and unreported claims. The actuarial methods described above are used to derive claim settlement patterns by determining development factors to be applied to specific data elements. Development factors are calculated for data elements such as claim counts reported and settled, paid losses and paid losses combined with case reserves. Historical development patterns for these data elements are used as the assumptions to calculate reserve estimates.
The estimation of claims and claims expense reserves for catastrophes also comprises estimates of losses from reported and unreported claims, primarily for damage to property. In general, estimates for catastrophe reserves are based on claim adjuster inspections and the application of historical loss development factors as described previously. However, depending on the nature of the catastrophe, as noted above, the estimation process can be further complicated. For example, for hurricanes, complications could include the inability of insureds to be able to promptly report losses, limitations placed on claims adjusting staff affecting their ability to inspect losses, determining whether losses are covered by our homeowners policy (generally for damage caused by wind or wind driven rain), or specifically excluded coverage caused by flood, estimating additional living expenses, and assessing the impact of demand surge and exposure to mold damage. The effects of numerous other considerations, include the timing of a catastrophe in relation to other events, such as at or near the end of a financial reporting period, which can affect the availability of information needed to estimate reserves for that reporting period. In these situations, practices are adapted to accommodate these circumstances in order to determine a best estimate of losses from a catastrophe.
In selecting development factors and averages described above in “The Actuarial Methods Used to Develop Reserve Estimates”, due consideration is given to how the historical experience patterns change from one year to the next over the course of several consecutive years of recent history. Predictions surrounding these patterns drive the estimates that are produced by each method, and are based on statistical techniques that follow standard actuarial practices.
The inherent uncertainty associated with our loss and LAE liability is magnified due to our concentration of property business in catastrophe-exposed coastal states, primarily Florida. The 2004 and 2005 hurricanes created great uncertainty in determining ultimate losses for these natural catastrophes due to issues related to applicability of deductibles, availability and cost of repair services and materials, and other factors. UPCIC experienced unanticipated unfavorable loss development on catastrophe losses from claims related to 2004 and 2005 being reopened and new claims being opened due to public adjusters encouraging policyholders to file new
claims, and from homeowners’ association assessments related to condominium policies. Due to the inherent uncertainty, the parameters of the loss estimation methodologies are updated on an annual basis as new information emerges.
We have created a proprietary claims analysis tool Peer-2-Peer (“P2P”) to analyze and calculate reserves to supplement analysis performed by our independent actuaries. P2P is a custom built application that aggregates, analyzes and forecasts reserves based on historical data that spans more than a decade. It identifies historical claims data using same like kind and quality variables that exist in present claims and sets forth appropriate, more accurate reserves on current claims. P2P is utilized by management in reviewing the topography of existing and incoming claims. P2P is analyzed at each quarters’ end and adjustments to reserves are made at an aggregate level when appropriate.
Due to the uncertainties involved, the ultimate cost of losses may vary materially from recorded amounts, which are based on our best estimates. The liability for unpaid losses and LAE at December 31, 2015 is $98.8 million.
We evaluate and recognize losses on insurance contracts when estimated future claims and maintenance costs under a group of existing policy contracts will exceed anticipated future premiums and investment income. The determination of the provision for premium deficiency requires estimation of the costs of losses, catastrophic reinsurance and policy maintenance to be incurred and investment income to be earned over the remaining policy period. Management has determined that a provision for premium deficiency was not warranted as of December 31, 2015.
year ended December 31, 2015 COMPARED TO YEAR ENDED DECEMBER 31, 2014
The increase in net income of $33.5 million, or 45.9%, for the year ended December 31, 2015 compared to the year ended December 31, 2014 reflects an increase in net earned premiums, net investment income, commissions and policy fees. These were partially offset by a decrease in realized gains from investments sold from our portfolio of investments available-for-sale and an increase in operating expenses. The elimination of our quota share reinsurance contracts is a significant factor behind our results. A more detailed discussion of these factors follows the table below.
The decrease in ceded earned premiums is attributable to the reduction and ultimate elimination of quota share reinsurance. Our reinsurance programs run from June 1 to May 31 of the following year. In June 2014, we reduced our quota share cession rate from
Losses and LAE were $187.7 million for the year ended December 31, 2015 compared to $123.3 million for the same period in 2014. The increase in net losses and LAE of $64.4 million primarily resulted from the elimination of the 30% quota share reinsurance agreement effective June 1, 2015 as discussed above and to a lesser extent to the growth in exposure. The net loss and LAE ratios, or net losses and LAE as a percentage of net earned premiums, were 37.2% and 37.7% during the years ended December 31, 2015 and 2014, respectively. The improvement in the net loss and LAE ratio from 2014 to 2015 was the result of lower reinsurance costs in 2015 relative to earned premiums. Losses and LAE were comprised of the following components (in thousands):
YEAR ended December 31, 2014 COMPARED TO YEAR ENDED DECEMBER 31, 2013
The increase in net income of $14.0 million, or 23.8%, for the year ended December 31, 2014 compared to the year ended December 31, 2013 reflects an increase in net earned premiums, the absence of trading losses generated in the first quarter of 2013, and an increase in realized gains from investments sold from our portfolio of investments available-for-sale. These were partially offset by a decrease in commissions and an increase in operating expenses. The reduction in the cession rate of our quota share reinsurance contracts is a significant factor behind our results. A more detailed discussion of these factors follows the table below.
The following table summarizes changes in each component of our Consolidated Statements of Income and Comprehensive Income for the year ended December 31, 2014 compared to the year ended December 31, 2013 (in thousands):
Net earned premiums were $326.9 million for the year ended December 31, 2014, compared to $267.7 million for the year ended December 31, 2013. The increase in net earned premiums of $59.2 million, or 22.1%, reflects a decrease in ceded earned premiums of $70.4 million, partially offset by a decrease in direct earned premiums of $11.2 million. Premium earned in the current period reflects premium written over the past 12 months and any changes in rates or policy count during that time. The decrease in ceded earned premiums is attributable to lower reinsurance costs with the 2013-2014 and 2014-2015 reinsurance programs reflected in the results for 2014 compared to the costs of the 2012-2013 and 2013-2014 reinsurance programs reflected in the results for 2013. In our 2014-2015 reinsurance program, we reduced the rate of quota share ceded premium from 45% in our 2012-2013 and 2013-2014 reinsurance programs to 30%. This reduction is reflected in the results beginning in the month of June 2014. The decrease in direct earned premiums is due primarily to a reduction in the number of policies in force in Florida through May 2014, and rate decreases for new business and renewals in Florida which went into effect in January and March 2014, respectively.
In the first quarter of 2013, we liquidated 100% of the equity securities that were held in our trading portfolio resulting in net losses of $8.2 million. Since April of 2014, we hold certain investments in a portfolio available for sale with changes in fair value reflected in stockholders’ equity with the exception of any other than temporary impairments which would be reflected in earnings. See “Item 8 - Note 3 (Investments)” for the composition of our portfolio as of December 31, 2014.
We sold investment securities available for sale during the year ended December 31, 2014, resulting in a net realized gain of $5.6 million. We took the opportunity throughout 2014 to realize gains ahead of potential volatility in the equity markets. These realized gains will be applied to capital loss carryforwards for state income taxes. For the year ended December 31, 2013, we realized net losses on investments of $14.7 million, reflecting the underlying market conditions as we liquidated one hundred percent of the equity securities held in our trading portfolio during March 2013.
The decrease of $7.9 million in the net change in unrealized gains for the year ended December 31, 2014 compared to the same period in 2013 reflects the absence of investment securities held in a trading portfolio during the year ended December 31, 2014. The investment securities held during the year ended December 31, 2014 were available for sale with changes in fair value recorded in equity. The majority of the net change in unrealized gains on investments for the year ended December 31, 2013 reflects the reversal of unrealized losses on investments held at December 31, 2012 and sold during the three months ended March 31, 2013 as we liquidated one hundred percent of the equity securities held in the trading portfolio through March 31, 2013.
Commission revenue is comprised principally of brokerage commissions we earn from reinsurers. For the year ended December 31, 2014, commission revenue was $14.2 million, compared to $18.6 million for the year ended December 31, 2013. The decrease in commission revenue of $4.4 million, or 23.7%, was the result of a decrease in the cost of certain reinsurance contracts upon which brokerage commissions are earned as well as overall changes in the structure of the reinsurance programs in effect during the year ended December 31, 2014 compared to the year ended December 31, 2013, including the reduction in the rate of quota share ceded premium from 45% to 30% as described above.
For the year ended December 31, 2014, general and administrative expenses were $118.4 million, compared to $92.0 million for the same period in 2013. The overall increase in general and administrative expenses of $26.4 million, or 28.7%, includes an increase of $11.8 million in the amortization of net deferred policy acquisition costs resulting mostly from changes with the 2014-2015 reinsurance program including a reduction in the rate of ceded premium from 45% to 30% in our quota share contracts. We also had an increase of $5.9 million in the amount of stock-based compensation, an increase in bonuses of $2.6 million, an increase of $2.0 million in advertising and promotional expenses and an increase of $2.8 million in other remaining expenses combined. Also, our recovery of FIGA assessments declined by $4.8 million as compared to prior year. FIGA assessments are initially charged to insurance companies, which then are allowed to recover the assessed amounts from their policyholders. UPCIC recovered the vast majority of its most recent FIGA assessment over a 12-month period ending in early February 2014. We therefore recovered more of the assessment in 2013 than in 2014 due to the timing of the initial assessment and the associated recovery period. These increases were partially offset by a reduction of $2.4 million related to insurance premiums paid for UVE-level coverage, most of which is related to catastrophe-linked insurance and a reduction of $1.1 million in regulatory fees.
Income taxes recoverable represent amounts due from taxing jurisdictions within one year and arise when tax payments exceed taxable income. Income taxes recoverable of $5.4 million and $5.7 million as of December 31, 2015 and 2014, respectively, represent amounts recoverable primarily for federal income taxes.
Advance premium represents premium payments made by policyholders ahead of the effective date of the policies. The increase of $6.9 million to $24.8 million as of December 31, 2015 is due to the organic growth of our business.
Reinsurance payable, net, represents our liability to reinsurers for ceded written premiums, net of ceding commissions receivable. The increase of $7.5 million to $73.6 million as of December 31, 2015 was primarily due to the increase in excess of loss catastrophe reinsurance coverage offset by the reduction in the premium we ceded to quota share reinsurers net of ceding commission.
See “Item 8 - Note 12 (Income Taxes)” for a schedule of deferred income taxes as of December 31, 2015 and 2014 which shows the components of deferred tax assets and liabilities as of both balance sheet dates.
See “-Liquidity and Capital Resources” for explanations of changes in contingently redeemable common stock, long-term debt and treasury shares.
Liquidity is a measure of a company’s ability to generate sufficient cash flows to meet its short and long-term obligations. Funds generated from operations have been sufficient to meet our liquidity requirements and we expect that in the future funds from operations will continue to meet such requirements.
The balance of cash and cash equivalents as of December 31, 2015 was $197.0 million compared to $115.4 million at December 31, 2014. See “Item 8 - Consolidated Statements of Cash Flows” for a reconciliation of the balance of cash and cash equivalents between December 31, 2015 and 2014. The increase in cash and cash equivalents was driven by cash flows generated from operations in excess of those used for investing and financing activities. Most of the balance of cash and cash equivalents maintained is available to pay claims in the event of a catastrophic event in addition to any amounts recovered under our reinsurance agreements.
As discussed in “Item 8 - Note 7 (Long-Term Debt),” UVE entered into the DB Loan with Deutsche Bank in March 2013, which was most recently amended in July 2015. The DB Loan makes available to UVE an unsecured line of credit in an aggregate amount not to exceed $15 million. Draws under the DB Loan have a maturity date of July 31, 2017 and carry an interest rate of LIBOR plus a margin of 5.50% or Deutsche Bank’s prime rate plus a margin of 3.50%, at the election of UVE. The DB Loan contains certain covenants and restrictions applicable while amounts are outstanding thereunder, including limitations with respect to our indebtedness, liens, distributions, mergers or dispositions of assets, organizational structure, transactions with affiliates and business activities. No amounts have been drawn under this unsecured line of credit.
In May 2013, UVE also entered into the Term Loan with RenRe Ventures, which is also discussed in “Item 8 - Note 7 (Long-Term Debt).” The Term Loan bears interest at the rate of 50 basis points per annum and matures on the earlier of May 23, 2016, or the date that all principal under the Term Loan is prepaid or deemed paid in full. The Term Loan is amortized over the three-year term and UVE may prepay the loan without penalty. The Term Loan contains certain covenants and restrictions applicable while amounts are outstanding thereunder, including limitations with respect to our indebtedness, liens, distributions, mergers or dispositions of assets, organizational structure, transactions with affiliates and business activities. UVE was in compliance with the covenants of the Term
Loan as of December 31, 2015. We made principal payments of $6.0 and $7.0 million on the Term Loan in May 2014 and May 2015, respectively. The Term Loan had a carrying amount of $6.9 million as of December 31, 2015.
Liquidity for UVE and its non-insurance subsidiaries is required to cover the payment of general operating expenses, dividends to shareholders (if and when authorized and declared by our Board of Directors), payment for the possible repurchase of our common stock (if and when authorized by our Board of Directors), payment of income taxes, and interest and principal payments on debt obligations. The declaration and payment of future dividends by UVE to its shareholders, and any future repurchases of UVE common stock, will be at the discretion of our Board of Directors and will depend upon many factors, including our operating results, financial condition, debt covenants and any regulatory constraints. Principal sources of liquidity for UVE and its non-insurance subsidiaries include revenues generated from fees paid by the Insurance Entities to affiliated companies for policy administration, inspections and claims adjusting services. Additional sources of liquidity include brokerage commissions earned on reinsurance contracts and any unused credit lines. UVE also maintains investments in equity securities which would generate funds upon sale. As discussed in “Item 8 - Note 5 (Insurance Operations),” there are limitations on the dividends the Insurance Entities may pay to their immediate parent company.
The Insurance Entities are responsible for losses related to catastrophic events in excess of coverage provided by the Insurance Entities’ reinsurance programs and for losses that otherwise are not covered by the reinsurance programs, which could have a material adverse effect on either the Insurance Entities’ or our business, financial condition, results of operations and liquidity.
During the year ended December 31, 2015, we also repurchased an aggregate of 548,100 shares of UVE’s common stock in the open market, in compliance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended, as discussed in “Item 8 - Note 8 (Stockholders’ Equity).” The repurchase cost was an aggregate of $13.6 million or an average cost of $24.76 per share and was funded using cash on hand.
The table below illustrates the change over time of the direct reserves established for unpaid losses and LAE for the Insurance Entities (Liability for Unpaid Losses and LAE “re-estimates”) at the end of the last ten calendar years through December 31, 2015 (in thousands):
The ratios are net of reinsurance, including catastrophe reinsurance premiums which comprise a significant cost, and inclusive of LAE. The expense ratios include management fees and commission paid to an affiliate of the Insurance Entities in the amount of $70.7 million and $65.5 million for UPCIC for the years ended December 31, 2015 and 2014, respectively and $0.8 million and $1.0 million for the years ended December 31, 2015 and 2014, respectively for APPCIC. The fees and commission paid to the affiliate are eliminated in consolidation.
In order to reduce losses and thereby reduce the loss ratio and the combined ratio, we have taken several steps. These steps include closely monitoring rate levels for new and renewal business, restructuring the homeowners’ insurance coverage offered and reducing the cost of catastrophic reinsurance coverage.
In November 2015, Demotech, Inc. affirmed the Financial Stability Rating® of “A” for the Insurance Entities. According to Demotech, Inc., the assigned rating represents a company’s continued positive surplus related to policyholders, liquidity of invested assets, an acceptable level of financial leverage, reasonable loss and loss adjustment expense reserves, and realistic pricing. The ratings of the Insurance Entities are subject to at least annual review by Demotech, Inc., and may be revised upward or downward or revoked at the sole discretion of Demotech, Inc. Financial Stability Ratings® are primarily directed towards policyholders, and are not evaluations directed toward the protection of investors in the company, including holders of the company’s common stock, and are not recommendations to buy, sell or hold securities. See “Item 1A - Risk Factors-A downgrade in our Financial Stability Rating® may have an adverse effect on our competitive position, the marketability of our product offerings, and our liquidity, operating results and financial condition.”
In April 2015, the FASB issued guidance on a customer’s accounting for fees paid in a cloud computing arrangement. Under the new standard, customers will apply the same criteria as vendors to determine whether a cloud computing arrangement contains a software license or is solely a service contract. If a cloud computing arrangement includes a software license, then the software license element of the arrangement should be accounted for consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The guidance is effective for reporting periods beginning after December 15, 2015, and may be applied either prospectively or retrospectively. Early adoption is permitted. The adoption of this guidance is not expected to have a material effect on our results of operations, financial position or liquidity.
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2015, 2014 and 2013
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2015, 2014 and 2013
We have audited the accompanying consolidated balance sheets of Universal Insurance Holdings, Inc. and Subsidiaries (the “Company”) as of December 31, 2015 and 2014, and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2015. We also have audited the Company’s internal control over financial reporting as of December 31, 2015, based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Management’s Report on Internal Control over Financial Reporting.” Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.
Represents change in fair value of available for sale investments, net of tax benefit of $1,369 thousand, $916 thousand and $236 thousand in years ended December 31, 2015, 2014 and 2013, respectively.
See “-Note 8 (Stockholders’ Equity)” for an explanation of events subsequent to December 31, 2014 giving rise to pro-forma stockholders’ equity of $218.9 million as of December 31, 2014.
The consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America (“U.S. GAAP”). The consolidated financial statements include the accounts of UVE and its wholly owned subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation.
The assessment of whether the impairment of a security’s fair value is other than temporary is performed using a portfolio review as well as a case-by-case review considering a wide range of factors. There are a number of assumptions and estimates inherent in evaluating impairments and determining if they are other than temporary, including: 1) the Company’s ability and intent to hold the
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. Investment real estate is evaluated for impairment when events or circumstances indicate the carrying value may not be recoverable
Derivatives. Derivatives were held in the Company’s trading portfolio and were reported at fair value with changes in their value reported as unrealized gains or losses until exercised, sold or upon expiration at which time the gain or loss was recognized as a realized gain or loss. The premium received for a written call option was recorded as a liability until the option was either exercised or expired. If the option was exercised by the holder, the Company recognizes the premium received by adjusting the amount of the realized gain or loss on the underlying security by the amount of the option premium received. If the option expired or otherwise terminated, the premium received was recognized as a component of realized gains or losses. All derivatives held in the Company’s trading portfolio were liquidated during the first quarter of 2013.
Recognition of Commission Revenue and Policy Fees. Commission revenue generated from agency operations and the Managing General Agent (MGA)’s policy fee on all new and renewal insurance policies are recognized as income upon policy inception. Brokerage commission revenue earned on ceded reinsurance is recognized over the term of the reinsurance agreements.
At December 31, 2015, we held fixed maturity, equity securities and short-term investments that were in an unrealized loss position as presented in the table above. For fixed maturity securities with significant declines in value, we perform quarterly fundamental credit analysis on a security-by-security basis, which includes consideration of credit quality and credit ratings, review of relevant industry analyst reports and other available market data. For fixed maturity, equity securities and short-term investments, the Company considers whether it has the intent and ability to hold the securities for a period of time sufficient to recover its cost basis. Where the
Company lacks the intent and ability to hold to recovery, or believes the recovery period is extended, the security’s decline in fair value is considered other than temporary and is recorded in earnings. Based upon management’s intent and ability to hold the securities until recovery and its credit analysis of the individual issuers of the securities, management has no reason to believe the unrealized losses for securities available for sale at December 31, 2015 are other than temporary.
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.
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):
Long-term debt consists of the following as of the dates presented (in thousands):
UPCIC is in compliance with each of the loan’s covenants as implemented by rules promulgated by the SBA. An event of default will occur under the surplus note, as amended, if UPCIC: (i) defaults in the payment of the surplus note; (ii) fails to submit quarterly filings to the FLOIR; (iii) fails to maintain at least $50 million of surplus during the term of the surplus note, except for certain situations; (iv) misuses proceeds of the surplus note; (v) makes any misrepresentations in the application for the program; (vi) pays any dividend when principal or interest payments are past due under the surplus note; or (vii) fails to maintain a level of surplus and reinsurance sufficient to cover in excess of UPCIC’s 1-in-100 year probable maximum loss as determined by a hurricane loss model accepted by the Florida Commission on Hurricane Loss Projection Methodology as certified by the FLOIR annually. To avoid a penalty rate, UPCIC must maintain either a ratio of net written premium to surplus of 2:1 or a ratio of gross written premiums to surplus of 6:1 according to a calculation method set forth in the surplus note. As of December 31, 2015, UPCIC’s net written premium to surplus ratio and gross written premium to surplus ratio were in excess of the required minimums and, therefore, UPCIC is not subject to increases in interest rates.
The following table provides the principal amount and unamortized original issue discount of the Term Loan as of the dates presented (in thousands):
Amortization of the original issue discount is included in interest expense, a component of general and administrative expenses, in the Consolidated Statements of Income and was $521 thousand and $840 thousand for the years ended December 31, 2015 and 2014, respectively.
The following table provides an estimate of principal payments to be made for the amounts due on the surplus note and the Term Loan as of December 31, 2015 (in thousands):
Differs from amount presented in the Balance Sheet as of December 31, 2015 due to unamortized discount as presented in the table above.
As of December 31, 2015 and 2014, the Company had shares outstanding of Series A Preferred Stock. As of December 31, 2014, the Company had shares outstanding of Series M Preferred Stock and the remaining outstanding shares were retired and cancelled during
The following table provides certain information for each series of convertible preferred stock as of the dates presented (in thousands, except conversion factor):
The Series A Preferred Stock pays a cumulative dividend of $0.25 per share per quarter. The Company declared and paid aggregate dividends to holders of record of the Company’s Series A Preferred Stock of $10 thousand and $13 thousand for the years ended December 31, 2015 and 2014, respectively.
The Series M Preferred Stock pays a cumulative dividend of $0.20 per share per year. The Company declared and paid aggregate dividends to holders of record of the Company’s Series M Preferred Stock of $0 and $400 for the years ended December 31, 2015 and 2014, respectively.
In June 2015, UVE repurchased 2,000 outstanding shares of Series M Preferred Stock at a total cost of $256 thousand. The repurchase constituted all of the outstanding shares of Series M Preferred Stock and such shares were retired and cancelled.
All shares acquired represent shares tendered to cover the strike price for options and tax withholdings on the intrinsic value of options exercised or restricted stock (as defined in “-Note 9 (Share-Based Compensation)”) vested. These shares have been cancelled by the Company.
In June 2015, UVE repurchased 200,000 shares of its common stock at market price from Ananke Catastrophe Investments Limited, an affiliate of Nephila Capital Ltd., in a privately negotiated transaction for a total cost of $5.1 million.
During the year ended December 31, 2015, UVE repurchased an aggregate of 548,100 shares of its common stock in the open market in compliance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended, at a total cost of $13.6 million.
UVE pays dividends to shareholders, which are funded by earnings on investments and distributions from the earnings of its consolidated subsidiaries. Generally, other than as disclosed above and in “-Note 7 (Long-Term Debt),” there are no restrictions for UVE limiting the payment of dividends. However, UVE’s ability to pay dividends to shareholders may be affected by restrictions on the ability of the Insurance Entities to pay dividends to UVE through UVECF. See “-Note 5 (Insurance Operations),” for a discussion of these restrictions. There are no such restrictions for UVE’s non-insurance consolidated subsidiaries. Notwithstanding the restriction on the net assets of the Insurance Entities, UVE received distributions from the earnings of its non-insurance consolidated subsidiaries of $58.2 million, $55.8 million and $26.9 million during the years ended December 31, 2015, 2014 and 2013, respectively. UVE did not make any capital contributions to the Insurance Entities during the years ended December 31, 2015, 2014 and 2013. The Company prepares and files a consolidated federal tax return for UVE and its consolidated subsidiaries with all U.S. GAAP tax related entries recorded on the books of UVE. Since the U.S. GAAP tax related entries are not recorded at the subsidiary level, the Company does not have the ability to produce the amount of net assets for each of its subsidiaries in accordance with U.S. GAAP.
The following table shows the effect of unaudited pro-forma adjustments to the consolidated balance sheet as of December 31, 2014 (in thousands, except per share amounts):
Under the Company’s 2009 Omnibus Incentive Plan, as amended (the “Incentive Plan”), 3,434,775 shares remained reserved for issuance and were available for new awards under the Incentive Plan as of December 31, 2015.
Awards under the Incentive Plan may include incentive stock options, non-qualified stock option awards (“Stock Option”), stock appreciation rights, non-vested shares of Common Stock (“Restricted Stock”), restricted stock units, performance share or unit awards, other share-based awards and cash-based incentive awards. Awards under the Incentive Plan may be granted to employees, directors, consultants or other persons providing services to the Company or its affiliates. The Incentive Plan also provides for awards that are intended to qualify as “performance-based compensation” in order to preserve the deductibility of such compensation by the Company under Section 162(m) of the Internal Revenue Code.
The following table provides certain information related to Stock Options and Restricted Stock during the year ended December 31, 2015 (in thousands, except per share data):
The Company accrued for aggregate contributions of approximately $682 thousand, $599 thousand and $709 thousand to the 401(k) Plan during the years ended December 31, 2015, 2014 and 2013, respectively.
There were no amounts due to SPC Global RE Advisors LLC as of December 31, 2015 and 2014, respectively. Payments due to Downes and Associates and SPC Global RE Advisors LLC were generally made in the month the services were provided.
RenRe currently is, and has been, a participant in the Company’s reinsurance programs. On May 23, 2013, the Company entered into a series of contracts with RenRe and its affiliate, RenRe Ventures. As discussed in “-Note 7 (Long-Term Debt),” UVE entered into an unsecured Term Loan with RenRe Ventures. The Term Loan is part of a series of agreements entered into by the Company, RenRe and RenRe Ventures pursuant to which, among other things, the Company has purchased a catastrophe risk-linked transaction contract from RenRe and entered into an agreement whereby RenRe will reserve reinsurance capacity for the Company’s reinsurance programs and receive a right of first refusal in respect of a portion thereof. As part of the series of agreements with RenRe and RenRe Ventures, on May 23, 2013, UVE, RenRe Ventures and Mr. Bradley Meier, the Company’s former Chairman, President and Chief Executive Officer, agreed to assign to RenRe Ventures a portion of UVE’s right of first refusal to repurchase shares of its common stock owned by Mr. Meier under the first repurchase agreement entered into on April 1, 2013. RenRe Ventures had a right of first refusal to repurchase one-third of the shares offered by Mr. Meier to any third party, up to the lesser of 2 million shares or 4.99% of UVE’s outstanding common stock, through December 31, 2014 which has expired.
At each balance sheet date, management assesses the need to establish a valuation allowance that reduces deferred tax assets when it is more likely than not that all, or some portion, of the deferred tax assets will not be realized. A valuation allowance would be based on all available information including the Company’s assessment of uncertain tax positions and projections of future taxable income from each tax-paying component in each jurisdiction, principally derived from business plans and available tax planning strategies. There are no valuation allowances as of December 31, 2015.
The Company has adopted ASC 740-10-05, Accounting for Uncertainty in Income Taxes, which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. ASC 740 provides a threshold for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company’s policy is to classify interest and penalties related to unrecognized tax positions in its provision for income taxes. As of December 31, 2015, 2014 and 2013, we have determined that no uncertain tax liabilities are required.
The Company filed a consolidated federal income tax return for the fiscal years ended December 31, 2014, 2013 and 2012 and intends to file the same for the year ended December 31, 2015. The tax allocation agreement between the Company and the Insurance Entities provide that they will incur income taxes based on a computation of taxes as if they were stand-alone taxpayers. The computations are made utilizing the financial statements of the Insurance Entities prepared on a statutory basis of accounting and prior to consolidating entries which include the conversion of certain balances and transactions of the statutory financial statements to a U.S. GAAP basis.
During 2015, the Company amended its 2010 federal tax return which resulted in a decrease to the 2013 Capital Loss carryforward of approximately $5.6 million. The Company had subsequently amended its 2009 federal tax return to carryback its 2012 Capital Loss carryforward resulting in a refund of approximately $5.7 million.
Basic earnings per share (“EPS”) is based on the weighted average number of common shares outstanding for the period, excluding any dilutive common share equivalents. Diluted EPS reflects the potential dilution resulting from exercises of stock options, vesting of restricted stock and conversion of preferred stock.
Represents the dilutive effect of unvested Restricted Stock and unexercised Stock Options.
The Company and its subsidiaries are lessees under various operating leases for real estate and equipment. The following table provides future minimum rental payments required under the non-cancelable operating leases as of the date presented (in thousands):
Total rental expense was $121 thousand, $753 thousand and $423 thousand in 2015, 2014 and 2013, respectively.
On December 2, 2014, UVE entered into a letter agreement with Ananke that calls for a minimum annual spend of $5 million towards covered loss index swaps during the period from June 1, 2016 through May 31, 2025.
Certain lawsuits have been filed against the Company. These lawsuits generally involve matters related to the claims aspect of the Company’s business. We contest liability and/or the amount of damages as appropriate in each pending matter. In accordance with applicable accounting guidance, we establish an accrued liability for legal matters when those matters present loss contingencies which are both probable and estimable.
Legal proceedings are subject to many uncertain factors that generally cannot be predicted with assurance, and we may be exposed to losses in excess of any amounts accrued. We currently estimate that the reasonably possible losses for legal proceedings, whether in excess of a related accrued liability or where there is no accrued liability, and for which we are able to estimate a possible loss, are immaterial. This represents management’s estimate of possible loss with respect to these matters and is based on currently available information. This estimate of possible loss does not represent our maximum loss exposure. The legal proceedings underlying the estimate will change from time to time and actual results may vary significantly from current estimates.
Common stock: Comprise actively traded, exchange-listed U.S. and international equity securities. Valuation is based on unadjusted quoted prices for identical assets in active markets that the Company can access.
Corporate Bonds: Comprise investment-grade fixed income securities. The primary inputs to the valuation include quoted prices for identical assets in inactive markets or similar assets in active or inactive markets, contractual cash flows, benchmark yields and credit spreads.
Other: Comprise investment securities subject to remeasurement with original maturities beyond one year. The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active.