We lease in total approximately 22,400 square feet of office space located in Florida, New York, Hawaii, and Minnesota. These leases are generally short-term to medium-term leases of commercial office space.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing in Part II, Item 8 of this Form 10-K. The following discussion provides an analysis of our results of operations and financial condition for 2020 as compared to 2019. Discussion regarding our results of operations and financial condition for 2019 as compared to 2018 is included in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2019. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Actual results may differ materially from those expressed or implied in these forward-looking statements as a result of certain known and unknown risks and uncertainties. See “Forward-Looking Statements.”
We have historically grown our business through strong organic growth complemented by strategic acquisitions and partnerships, including our acquisitions of AmCo Holding Company (AmCo) and its subsidiaries, including ACIC, in April 2017, IIC in April 2016, and Family Security Holdings, LLC (FSH), including its subsidiary FSIC in February 2015, and our strategic partnership with a subsidiary of Tokio Marine Kiln Group Limited (Kiln), which formed JIC in August 2018. During 2020, our policies in-force has remained constant, increasing by only 0.6% from 627,230 policies in-force at December 31, 2019 to 630,991 policies in-force at December 31, 2020.
(1) Loss ratio, net is calculated as losses and LAE net of losses ceded to reinsurers, relative to net premiums earned. Management uses this operating metric to analyze our loss trends and believes it is useful for investors to evaluate this component separately from our other operating expenses.
(2) Expense ratio is calculated as the sum of all operating expenses less interest expense relative to net premiums earned. Management uses this operating metric to analyze our expense trends and believes it is useful for investors to evaluate these components separately from our loss expenses.
(5) Included in both the expense ratio and the combined ratio is amortization expense predominately associated with the AmCo, IIC, and FSH acquisitions, which cause comparative differences among periods.
Combined ratio excluding the effects of current year catastrophe losses and prior year reserve development (underlying combined ratio) is a non-GAAP measure, that is computed by subtracting the effect of current year catastrophe losses and prior year development from the combined ratio. We believe that this ratio is useful to investors, and it is used by management to highlight the trends in our business that may be obscured by current year catastrophe losses and prior year development. Current year catastrophe losses cause our loss trends to vary significantly between periods as a result of their frequency of occurrence and magnitude, and can have a significant impact on the combined ratio. Prior year development is caused by unexpected loss development on historical reserves. We believe it is useful for investors to evaluate these components separately and in the aggregate when reviewing our performance. The most directly comparable GAAP measure is the combined ratio. The underlying combined ratio should not be considered as a substitute for the combined ratio and does not reflect the overall profitability of our business.
Net loss and LAE excluding the effects of current year catastrophe losses and prior year reserve development (underlying loss and LAE) is a non-GAAP measure that is computed by subtracting the effect of current year catastrophe losses and prior year reserve development from net loss and LAE. We use underlying loss and LAE figures to analyze our loss trends that may be impacted by current year catastrophe losses and prior year development on our reserves. As discussed previously, these two items can have a significant impact on our loss trends in a given period. We believe it is useful for investors to evaluate these components both separately and in the aggregate when reviewing our performance. The most directly comparable GAAP measure is net loss and LAE. The underlying loss and LAE measure should not be considered a substitute for net loss and LAE and does not reflect the overall profitability of our business.
(2) “Northeast” is comprised of Connecticut, Massachusetts, New Jersey, New York and Rhode Island; “Gulf” is comprised of Hawaii, Louisiana and Texas; and “Southeast” is comprised of Georgia, North Carolina and South Carolina.
Net investment income decreased by $6,020,000, or 20.0%, to $24,125,000 for the year ended December 31, 2020 from $30,145,000 for 2019. The decrease is driven by a $2,789,000 decrease in income from our cash and cash equivalents as a result of lower yields in 2020 from volatility in the interest market as a result of the COVID-19 pandemic. Our alternative investments have produced lower returns during the year ended December 31, 2020 causing a $1,215,000 decrease in net investment income. In addition, the net investment yield of our fixed maturities portfolio decreased from 2.1% at December 31, 2019 to 1.0% at December 31, 2020, resulting in a decrease of $1,478,000 in investment income generated from our fixed maturity portfolio.
Expenses for the year ended December 31, 2020 increased $120,992,000, or 14.1%, to $978,833,000 for the year ended December 31, 2020, from $857,841,000 for 2019. The increase in expenses was primarily due to an increase in loss and LAE as a result of the higher frequency of catastrophe activity during 2020. The calculations of our combined loss ratios and underlying loss ratios are shown below.
During the year ended December 31, 2020 there was a higher frequency of catastrophe events when compared to prior years. Excluding catastrophe losses and reserve development, our gross underlying loss and LAE ratio for the year ended
December 31, 2020 would have been 22.8%, an decrease of 4.9 points from 27.7% during the year ended December 31, 2019, representing an improvement in current year non-catastrophe loss and LAE expense.
General and administrative expenses increased by $6,068,000, or 9.2%, to $72,057,000 for the year ended December 31, 2020, from $65,989,000 for the year ended December 31, 2019, primarily due to increased salary and benefit related costs of $3,210,000 from an increase in employee headcount and an increase in professional services expenses of $2,763,000, from costs incurred to plan construction of a new headquarters building, which was subsequently discontinued.
(1) Underlying net loss and LAE Ratio is a non-GAAP measure and is reconciled above to the Consolidated net loss and LAE Ratio, the most directly comparable GAAP measure. Additional information regarding non-GAAP financial measures presented in this Form 10-K can be found in the “Definitions of Non-GAAP Measures” section, above.
The primary goals of our investment strategy are to preserve capital, maximize after-tax investment income, maintain liquidity and minimize risk. To accomplish our goals, we purchase debt securities in sectors that represent the most attractive relative value, and we maintain a moderate equity exposure. Limiting equity exposure manages risks and helps to preserve capital for two reasons: first, bond market returns are less volatile than stock market returns, and second, should the bond issuer enter bankruptcy liquidation, bondholders generally have a higher priority than equity holders in a bankruptcy proceeding.
Two outside asset management companies, which have authority and discretion to buy and sell securities for us, manage our investments subject to (i) the guidelines established by our Board of Directors and (ii) the direction of management. The Investment Committee of our Board of Directors reviews and approves our investment policy on a regular basis.
reflected a similar diversification. At December 31, 2020, approximately 87.6% of our fixed maturities were U.S. Treasuries, or corporate bonds rated “A” or better, and 12.4% were corporate bonds rated “BBB” or “BB”.
The most significant impact of COVID-19 on our business during the year ended December 31, 2020 was the fluctuations in our investment portfolios due to volatility in the equity securities markets that we were unable to predict. During the second half of the year ended December 31, 2020, we decreased our equity portfolio from 9.1% of our total invested assets (including cash, restricted cash and cash equivalents) at June 30, 2020 to 0.6% of our total invested assets (including cash, restricted cash and cash equivalents) at December 31, 2020. As a result of this decrease, we experienced a decreased impact from fluctuations in the equity securities markets on our financial statements for the second half of the year ended December 31, 2020. We may continue seeing volatile swings in the markets through 2021 if economic stresses persist. Management is working closely with our investment asset managers to monitor the fluctuations in the markets and the corresponding impact to our portfolios. Future declines in the markets due to COVID-19 may have a negative impact on our investment returns; however, we have taken a conservative approach and have limited our exposure to the volatility in the equity markets to less than 10% of our invested assets.
We follow industry practice of reinsuring a portion of our risks. Reinsurance involves transferring, or “ceding”, all or a portion of the risk exposure on policies we write to another insurer, known as a reinsurer. To the extent that our reinsurers are unable to meet the obligations they assume under our reinsurance agreements, we remain primarily liable for the entire insured loss under the policies we write.
Effective January 1, 2020, we renewed our all other perils catastrophe excess of loss agreement (AOP) agreement. The agreement provides protection from catastrophe loss events other than named windstorms and earthquakes up to $110,000,000, an increase of $10,000,000 from 2019. Additionally, we increased our aggregate protection provided under this agreement by adding a prepaid reinstatement to the $30,000,000 of limit provided by second layer of the program.
(1) We began writing cyber security and inland flood policies in 2020.
Current year catastrophe losses disaggregated between named and numbered storms and all other catastrophe loss events are shown in the following table.
See Note 8 in our Notes to Consolidated Financial Statements for additional information regarding our reinsurance program.
We generally use the term “loss(es)” to collectively refer to both loss and LAE. We establish reserves for both reported and unreported unpaid losses that have occurred at or before the balance sheet date for amounts we estimate we will be required to pay in the future, including provisions for claims that have been reported but are unpaid at the balance sheet date and for obligations on claims that have been incurred but not reported at the balance sheet date. Our policy is to establish these loss reserves after considering all information known to us at each reporting period. At any given point in time, our loss reserve represents our best estimate of the ultimate settlement and administration costs of our insured claims incurred and unpaid.
Since the process of estimating loss reserves requires significant judgment due to a number of variables, such as fluctuations in inflation, judicial decisions, legislative changes and changes in claims handling procedures, our ultimate liability will likely differ from these estimates. We revise our reserve for unpaid losses as additional information becomes available, and reflect adjustments, if any, in our earnings in the periods in which we determine the adjustments as necessary.
See Note 9 in our Notes to Unaudited Consolidated Financial Statements for additional information regarding our losses and LAE.
We generate cash through premium collections, reinsurance recoveries, investment income, the sale or maturity of invested assets, the issuance of debt and the issuance of additional shares of our stock. We use our cash to pay reinsurance premiums, claims and related costs, policy acquisition costs, salaries and employee benefits, other expenses and stockholder dividends, acquire subsidiaries and pay associated costs, as well as to repay debts and purchase investments.
During the year ended December 31, 2020, we contributed $12,000,000 and $3,000,000 to our insurance subsidiary, UPC, and reinsurance subsidiary, UPC Re, respectively. During the year ended December 31, 2019, we contributed $4,000,000 and $13,000,000 to our insurance subsidiaries UPC and FSIC, respectively. We may make future contributions of capital to our insurance subsidiaries as circumstances require.
On December 13, 2017, we issued $150,000,000 of senior notes (Senior Notes) that will mature on December 15, 2027 and bear interest at a rate equal to 6.25% per annum payable semi-annually on each June 15 and December 15, commencing June 15, 2018. The Senior Notes are senior unsecured obligations of the Company. We may redeem the Senior Notes at our option, at any time and from time to time in whole or in part, at a redemption price equal to the greater of (i) 100% of the principal amount of the Senior Notes to be redeemed and (ii) the sum of the present values of the remaining scheduled payments of principal and interest thereon from the date of redemption to the date that is three months prior to maturity. On and after that date, we may redeem the Senior Notes at par.
In addition to our unpaid loss and loss adjustment expenses, as of December 31, 2020 we have outstanding debt obligations related to our notes payable totaling $160,376,000. This is exclusive of interest costs, which we estimate will total $65,629,000 over the life of the debt, based on the current fixed and variable interest rates of these notes. Our short-term obligation related to these notes payable total $1,523,000 in principal payments and $9,479,000 in estimated interest payments. For more information regarding these outstanding notes, please see Note 10.
During the year ended December 31, 2020, several changes in operating assets and liabilities were impacted by current year catastrophe losses. Unpaid losses and LAE increased during the period and, as a result, we expect an increase in cash outflows related to the payment of catastrophe claims in the near future. In addition, reinsurance recoverable on paid and unpaid losses increased during the period. In 2020, we saw losses above our reinsurance retention thresholds and subsequent reinsurance
recoverables as a result of 13 named storms making landfall within our geographic footprint. In 2019, while we did have losses related to catastrophes, these catastrophes were less severe. As a result, fewer losses were incurred that were eligible for ceding under our reinsurance treaty.
The principal cash inflows from our investing activities come from repayments of principal, proceeds from maturities and sales of investments. We closely monitor and manage these risks through our comprehensive investment risk management process. The principal cash outflows relate to purchases of investments and cost of property, equipment and capitalized software acquired. Additional cash outflows relate to the purchase of fixed assets. The primary liquidity concerns with respect to these cash flows are the risk of default by debtors and market disruption. During the year ended December 31, 2020, cash provided by (used in) investing activities increased $70,545,000 as the result of net sales of investments totaling $47,414,000 in 2020, compared to net purchases of investments of $12,083,000 in 2019.
The principal cash inflows from our financing activities come from issuances of debt and other securities. The principal cash outflows come from repayments of debt and payments of dividends. The primary liquidity concern with respect to these cash flows is market disruption in the cost and availability of credit. We believe our current capital resources, together with cash provided from our operations, are sufficient to meet currently anticipated working capital requirements. During the year ended December 31, 2020, cash provided by (used in) financing activities decreased by $445,000 due to a $294,000 decrease year over year in cash outflows related to our repayment of our outstanding debt, as well as a $184,000 decrease year over year in our tax withholding payments related to the net settlement of equity awards.
For investments classified as available for sale, the difference between fair value and cost or amortized cost for fixed income securities is reported as a component of accumulated other comprehensive income (loss) on our Consolidated Balance Sheet and is not reflected in our net income (loss) of any period until reclassified to net income (loss) upon the consummation of a transaction with an unrelated third party. We have a portfolio monitoring process to identify and evaluate each fixed income security whose carrying value may be impaired as the result of a credit loss.
If our management decides not to sell the fixed-income security and it is more likely than not that we will not be required
to sell the fixed-income security before recovery of its amortized cost basis, we evaluate whether the decline in fair value has
If the estimated recovery value is less than the amortized cost of the security, a credit loss exists and an allowance for the difference between the estimated recovery value and amortized cost is recorded in earnings. The portion of the unrealized loss related to factors other than credit remains classified in accumulated other comprehensive income (loss). If we determine that the fixed income security does not have sufficient cash flow or other information to estimate a recovery value for the security, we may conclude that the entire decline in fair value is deemed to be credit related and the loss is recorded in earnings.
See Note 2(b) in our Notes to Consolidated Financial Statements for further information regarding our credit loss testing.
Goodwill is the excess of cost over the estimated fair value of net assets acquired. Goodwill is not amortized but is tested
indicate that there may be justification for conducting an interim test. We test goodwill for impairment by performing a
quantitative assessment and goodwill is impaired when it is determined that the carrying value of a reporting unit is in excess of the fair value of that reporting unit. The valuation methodologies utilized are subject to key judgments and assumptions that are sensitive to change. Estimates of fair value are inherently uncertain and represent only management’s reasonable expectation regarding future developments.
We have audited the accompanying consolidated balance sheet of United Insurance Holdings Corp. and subsidiaries (the "Company") as of December 31, 2020 and 2019, the related consolidated statements of comprehensive income (loss), stockholders' equity, and cash flows, for each of the three years in the period ended December 31, 2020, and the related notes and the schedules listed in the Index at Item 15 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
LIABILITY FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSE (LAE)- Refer to Notes 2 and 9 to the Financial Statements
Given the subjectivity of estimating the projected losses to be incurred by the Company as it relates to both reported and unreported claims, performing audit procedures to evaluate whether the Company’s loss reserves were appropriately recorded as of December 31, 2020, required a high degree of auditor judgment and an increased extent of effort, including the need to involve our actuarial specialists.
◦Testing the underlying data that served as the basis for the actuarial analysis, including historical claims, to test that the inputs to the actuarial estimate were reasonable.
◦Holding discussions with management to discuss the Company’s ultimate recorded reserve actions and understand any trends that have been observed in the Company’s claims data.
◦Comparing management’s prior-year assumptions of expected development and ultimate loss to actuals incurred during the current year to identify potential bias in the determination of the loss reserves.
See accompanying notes to consolidated financial statements. Statements include related party transactions as detailed in Note 14.
LLC, which provides claims adjusting services to UPC, FSIC, ACIC and IIC; AmCo Holding Company, LLC (AmCo) and
Family Security Holdings, LLC (FSH), which are holding company subsidiaries that consolidate their respective insurance
companies; BlueLine Cayman Holdings (BlueLine), which reinsures portfolios of excess and surplus policies; UPC Re, which
provides a portion of the reinsurance protection purchased by our insurance subsidiaries when needed; Skyway Reinsurance
Services, LLC, which provides reinsurance brokerage services for our insurance companies; Skyway Legal Services, LLC,
Our primary products are homeowners' and commercial residential property insurance, which we currently offer in 12 states, under authorization from the insurance regulatory authorities in each state. In addition, we write commercial residential insurance in three states: Florida, South Carolina, and Texas. We are also licensed to write property and casualty insurance in an additional six states; however, we have not commenced writing in these states.
We conduct our operations under one reportable segment, property and casualty insurance policies. Our chief operating decision maker is our President, who makes decisions to allocate resources and assesses performance at the corporate level.
The COVID-19 pandemic has resulted in governments worldwide enacting emergency measures to combat the spread of the virus. These measures, which include the implementation of travel bans and restrictions, self-imposed quarantine periods, state and local shelter-in-place orders, business and government shutdowns and social distancing, have caused and continue to cause material disruption to businesses and economies globally. In addition, global equity markets have experienced and continue to experience significant volatility and weakness.
We are committed to maintaining a stable and secure business for our employees, agents, customers and stockholders. During the second half of 2020, we were able to resume hiring activities, despite the limits on in-person interviews and on-
Quarterly, we perform an assessment of our investments to determine if any are impaired as the result of a credit loss. An investment is impaired when the fair value of the investment declines to an amount less than the cost or amortized cost of that investment. For each fixed-income security in an unrealized loss position, if we determine that we intend to sell the security or that it is more likely than not that we will be required to sell the security before recovery of the cost or amortized cost basis for reasons such as liquidity needs, contractual or regulatory requirements, the security’s entire decline in fair value is recorded in earnings.
the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized
We are exposed to credit losses primarily through three different pools of assets based on similar risk characteristics: premiums receivable for direct written business; reinsurance recoverables from ceded losses to our reinsurers; and our note receivable. We estimate the expected credit losses based on historical trends, credit ratings assigned to reinsurers by rating agencies, average default rates, current economic conditions, and reasonable and supportable forecasts of future economic conditions that affect the collectability of the reported amounts over its expected life. Changes in the relevant information may significantly affect the estimates of expected credit losses.
At each reporting date, we determine whether we have a premium deficiency. A premium deficiency would result if the sum of our expected losses, deferred policy acquisition costs, reinsurance costs, and policy maintenance costs (such as costs to store records and costs incurred to collect premiums and pay commissions) exceeded our related unearned premiums plus investment income. Should we determine that a premium deficiency exists, we would write off the unrecoverable portion of deferred policy acquisition costs and record a liability to the extent the deficiency exceeded the deferred policy acquisition costs. We did not have a premium deficiency at December 31, 2020 or 2019.
See Note 6 in our Notes to Consolidated Financial Statements for a discussion of our property, equipment and capitalized software that were held during 2020 and 2019.
Non-amortizing intangible assets generally represent the cost of insurance licenses acquired. Non-amortizing intangible assets are tested for impairment in the fourth quarter of each fiscal year by comparing the fair value of the licenses acquired to their carrying values. We established fair value for purposes of impairment testing using the income approach. If the carrying value of a license acquired exceeds its fair value, an impairment loss is recognized equal to that excess. For 2020, 2019 and 2018, we determined that the fair values of the intangible assets were not impaired.
We evaluate if a leasing arrangement exists upon inception of a contract. A contract contains a lease if the contract conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. Identified property, plant or equipment for all of our leases are physically distinct and explicitly identified. In addition, we assess whether a contract implicitly contains the right to control the use of a tangible asset that is not already owned.
On March 27, 2020, former President Trump signed into law the Coronavirus Aid, Relief, and Economic Security (CARES) Act to mitigate the economic impacts of the COVID-19 crisis. Among other things, the CARES Act included technical corrections to the effective date language in the Tax Cuts and Jobs Act (TCJA) enacted on December 22, 2017. We assessed all provisions of the CARES Act and determined that two provisions needed further analysis to determine the impact to our business.
First, the TCJA simplified the definition of "qualified improvement property" and removed the 15-year life for cost
Second, the TCJA eliminated the two-year carryback period and provided for indefinite carryforward of net operating
operating loss deduction. The CARES Act amended the law for net operating losses generated in taxable years beginning after
We expense all advertising costs as an operating expense when we incur those costs. For the years ended December 31, 2020, 2019 and 2018, we incurred advertising costs of $1,212,000, $1,426,000, and $1,674,000, respectively.
We report both basic earnings per share and diluted earnings per share. To calculate basic earnings per share, we divide net loss attributable to UIHC common stockholders (net loss less the net income attributable to NCI) by the weighted-average number of shares of common stock outstanding during the period. We calculate diluted earnings per share using the Treasury method by dividing net loss attributable to UIHC common stockholders by the weighted-average number of shares of common stock, common stock equivalents, and restricted shares outstanding during the period. Common share equivalents are only included when they are dilutive.
•a concentration of credit risk with regard to our cash, because we choose to deposit all of our cash at five financial institutions.
We estimate uncollectible amounts receivable from reinsurers based on an assessment of factors including the creditworthiness of the reinsurers and the adequacy of collateral obtained, where applicable. With the adoption of ASU 2016-13, we recorded a $256,000 opening credit loss allowance adjustment on January 1, 2020. As of December 31, 2020, our ending credit loss allowance related to reinsurance recoverables was $386,000.
Where permitted by law or regulatory authority, we collect assessments imposed upon policyholders as a policy surcharge and we record the amounts collected as a liability until we remit the amounts to the regulatory agency that imposed the assessment. During 2020 and 2019, we did not receive any significant assessments from regulatory authorities in the states in which our insurance subsidiaries operate.
In August 2018, the Financial Accounting Standards Board (FASB) issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (ASU 2018-13). This update modifies the existing disclosure requirements on fair value measurements in Topic 820 by changing requirements regarding Level 1, Level 2 and Level 3 investments. ASU 2018-13 is effective for annual reporting periods beginning after December 15, 2019, including interim periods within those annual periods. Entities are permitted to early adopt any removed or modified disclosures of ASU 2018-13 immediately and delay the adoption of the additional disclosures until their effective date. We have early adopted the guidance on removed and modified disclosures and adopted the remainder of the guidance on January 1, 2020, which has not impacted the accompanying consolidated financial statements.
requirements. We adopted this guidance in the course of performing our annual assessment of goodwill during the fourth quarter of 2020 using data as of September 30, 2020. As of December 31, 2020, there was no impact on our consolidated financial statements as the result of the adoption of this standard. We have updated our related disclosures accordingly.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments- Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13). This update is intended to replace the incurred loss impairment methodology in current GAAP with a method that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 will provide users with more useful information regarding the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. In addition, credit losses on available-for-sale debt securities will now have to be presented as an allowance rather than as a write-down. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. We adopted this guidance as of January 1, 2020 using a modified cumulative effect adjustment to the opening balance of retained earning for 2020, with no adjustment to prior periods presented. The cumulative effect to the opening balance of retained earnings for 2020 was a decrease of $262,000, net of reversals from allowances recorded under prior guidance.
We have a quarterly portfolio monitoring process to identify and evaluate each fixed-income security whose carrying value
may be impaired as the result of a credit loss. For each fixed-income security in an unrealized loss position, if we determine that
we intend to sell the security or that it is more likely than not that we will be required to sell the security before recovery of the
(1) This amount represents the actual number of discrete securities, not the number of shares or units of those securities. The numbers are not presented in thousands.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The hierarchy for inputs used in determining fair value maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Assets and liabilities recorded on our Consolidated Balance Sheets at fair value are categorized in the fair value hierarchy based on the observability of inputs to the valuation techniques as follows:
The fair value of our fixed maturities is initially calculated by a third-party pricing service. Valuation service providers typically obtain data about market transactions and other key valuation model inputs from multiple sources and, through the use of proprietary models, produce valuation information in the form of a single fair value for individual fixed income and other securities for which a fair value has been requested. The inputs used by the valuation service providers include, but are not limited to, market prices from recently completed transactions and transactions of comparable securities, interest rate yield curves, credit spreads, liquidity spreads, currency rates and other information, as applicable. Credit and liquidity spreads are typically implied from completed transactions and transactions of comparable securities. Valuation service providers also use proprietary discounted cash flow models that are widely accepted in the financial services industry and similar to those used by other market participants to value the same financial information. The valuation models take into account, among other things, market observable information as of the measurement date, as described above, as well as the specific attributes of the security being valued, including its term, interest rate, credit rating, industry sector and, where applicable, collateral quality and other issue or issuer specific information. Executing valuation models effectively requires seasoned professional judgment and experience.
The following table presents the fair value of our financial instruments measured on a recurring basis by level at December 31, 2020 and 2019:
Florida State Board of Administration, Truist Financial Corporation (Truist) (formerly known as Branch Banking & Trust Corporation or BB&T), and our senior notes approximate fair value as the interest rates and terms are variable.
For our investments in U.S. government securities that do not have prices in active markets, agency securities, state and municipal governments, and corporate bonds, we obtain the fair values from our investment custodians, which use a third-party valuation service. The valuation service calculates prices for our investments in the aforementioned security types on a month-end basis by using several matrix-pricing methodologies that incorporate inputs from various sources. The model the valuation service uses to price U.S. government securities and securities of states and municipalities incorporates inputs from active market makers and inter-dealer brokers. To price corporate bonds and agency securities, the valuation service calculates non-call yield spreads on all issuers, uses option-adjusted yield spreads to account for any early redemption features, and adds final spreads to the U.S. Treasury curve at 3 p.m. (ET) as of quarter end. Since the inputs the valuation service uses in its calculations are not quoted prices in active markets, but are observable inputs, they represent Level 2 inputs.
The information presented in the table below is as of December 31, 2020 and 2019:
In addition to the cash held on deposit described above, we also have securities on deposit with regulators, which are presented within our Fixed Maturities or Other Investments lines on the Consolidated Balance Sheets, dependent upon if they are short-term or long-term in nature. The table below shows the carrying value of those securities held on deposit with regulators.
See Note 18 for additional information on the stock grants related to dilutive securities.
(1) Includes vehicles under capital leases. See Note 11 of these Notes to Consolidated Financial Statements for further information on leases.
Depreciation and amortization expense under property and equipment was $6,441,000, $6,305,000 and $4,222,000 for the years ended December 31, 2020, 2019 and 2018, respectively. During the years ended December 31, 2019 and 2018, we incurred non-cash capitalized software write-off charges as a result of our decision to discontinue the use or development of several software projects that were previously capitalized. During the year ended December 31, 2020, we incurred non-cash construction in progress write-off charges of $2,763,000 as a result of our decision to discontinue construction of a new 150,000 square-foot headquarters and associated permit applications and architectural drawings.
We completed our most recent goodwill impairment testing during the fourth quarter of 2020 and determined that there was no impairment in the value of the asset as of December 31, 2020. The future potential impacts of COVID-19 on the operating
results of our reporting units are uncertain, as we continue to monitor the global economic volatility. However, we remain
No impairment loss in the value of goodwill was recognized during the years ended December 31, 2020, 2019 and 2018. Additionally, there was no accumulated impairment related to goodwill at December 31, 2020 or 2019.
(1) Indefinite-lived intangible assets are comprised of state insurance and agent licenses, as well as perpetual software licenses.
Amortization expense of our intangible assets was $4,267,000, $5,355,000 and $13,920,000 for the years ended December 31, 2020, 2019 and 2018, respectively.
Our program includes excess of loss, aggregate excess of loss and quota share treaties. Our excess of loss treaty, in effect from June 1, 2020 through May 31, 2021, provides coverage for catastrophe losses from named or numbered windstorms and earthquakes up to an exhaustion point of approximately $3,300,000,000. In addition to this treaty, we had an aggregate excess of loss treaty, effective January 1, 2020, which provided coverage for all catastrophe perils other than hurricanes, tropical storms, tropical depressions and earthquakes. We ceded $30,000,000 of catastrophe losses under this treaty for the year ended December 31, 2020. In addition, we had an all other perils excess of loss treaty, effective January 1, 2020, which provided coverage for all catastrophe perils other than hurricanes, tropical storms, tropical depressions, and earthquakes up to an exhaustion point of approximately $110,000,000. The quota share agreements effective June 1, 2020 through May 31, 2021, provide coverage for all catastrophe perils and attritional losses incurred by our insurance subsidiaries UPC and FSIC, and were extended to cover ACIC effective December 31, 2020 through May 31, 2022 with an additional 8% coverage for UPC and FSIC. For all catastrophe perils, the quota share agreement provides ground-up protection effectively reducing our retention for catastrophe losses. Finally, effective December 31, 2020, we entered into a quota share reinsurance agreement with Homeowners Choice Property and Casualty Insurance Company, Inc (HCP). Under the terms of this agreement, HCP will provide 69.5% quota share reinsurance on in-force, new and renewal policies in Connecticut, Massachusetts, New Jersey, and Rhode Island effective December 31, 2020, until June 1, 2021.
•Case reserves - When a claim is reported, we establish an automatic minimum case reserve for that claim type that represents our initial estimate of the losses that will ultimately be paid on the reported claim. Our initial estimate for each claim is based upon averages of loss payments for our prior closed claims made for that claim type. Then, our claims personnel perform an evaluation of the type of claim involved, the circumstances surrounding each claim and the policy provisions relating to the loss and adjust the reserve as necessary. As claims mature, we increase or decrease the reserve estimates as deemed necessary by our claims department based upon additional information we receive regarding the loss, the results of on-site reviews and any other information we gather while reviewing the claims.
•Reserves for losses incurred but not reported (IBNR reserves) - Our IBNR reserves include true IBNR reserves plus “bulk” reserves. Bulk reserves represent additional amounts that cannot be allocated to particular claims, but which are necessary to estimate ultimate losses on reported and unreported claims. We estimate our IBNR reserves by projecting the ultimate losses using the methods discussed below and then deducting actual loss payments and case reserves from the projected ultimate losses. We review and adjust our IBNR reserves on a quarterly basis based on information available to us at the balance sheet date.
When we establish our reserves, we analyze various factors such as our historical loss experience and that of the insurance industry, claims frequency and severity, our business mix, our claims processing procedures, legislative enactments, judicial decisions and legal developments in imposition of damages, and general economic conditions, including inflation. A change in any of these factors from the assumptions implicit in our estimates will cause our ultimate loss experience to be better or worse than indicated by our reserves, and the difference could be material. Due to the interaction of the aforementioned factors, there
is no precise method for evaluating the impact of any one specific factor in isolation, and an element of judgment is ultimately required. Due to the uncertain nature of any projection of the future, the ultimate amount we will pay for losses will be different from the reserves we record. However, in our judgment, we employ techniques and assumptions that are appropriate, and the resulting reserve estimates are reasonable, given the information available at the balance sheet date.
To determine our ultimate losses, we first use multiple actuarial techniques to establish a range of reasonable estimates. These techniques are in line with actuarial standards of practice and actuarial literature. A brief overview of each of these techniques is provided below. We then make additional qualitative considerations for many of the previously mentioned factors and select a point within this range. These ultimate loss estimates include reserves for both reported and unreported claims.
•Development Method - The development method is based upon the assumption that the relative change in a given year’s loss estimates from one evaluation point to the next is similar to the relative change in prior years’ reported loss estimates at similar evaluation points. In utilizing this method, actual annual historical loss data is evaluated. Loss development factors (LDFs) are calculated to measure the change in cumulative losses from one evaluation point to the next. These historical LDFs and comparable industry benchmark factors form the basis for selecting the LDFs used in projecting the current valuation of losses to an ultimate basis. When applied to incurred loss data, the implicit assumption is that the relative adequacy of case reserves has been consistent over time, and that there have been no material changes in the rate at which claims have been reported. Applying this method to paid losses avoids potential distortions in the data due to changes in case reserving methodology, but also loses any potentially useful information contained in the current case reserves. The paid development method’s implicit assumption is that the rate of payment of claims has been relatively consistent over time.
•Bornhuetter-Ferguson Method - The Bornhuetter-Ferguson (B-F) method is a credibility weighting procedure that blends the responsiveness of the Development Method with the stability of the Expected Loss Method by setting ultimate losses equal to actual losses plus the expected unreported losses which are based on the Expected Loss Method. As an experience year matures, actual losses gradually move closer to their ultimate levels so reliance on the Expected Loss Method can be reduced.
•Paid-to-Paid Development Method - In addition to the aforementioned methods, we also rely upon the Paid-to-Paid Development Method to project ultimate unallocated loss adjustment expense (ULAE). Ratios of paid ULAE to paid loss and allocated loss adjustment expense are compiled by calendar year and a paid-to-paid ratio selection is made. The selected ratio is applied to the estimated IBNR amounts and one half of this ratio is applied to case reserves. This method is derived from rule of thumb that half of ULAE is incurred when a claim is opened and the other half is incurred over the remaining life of the claim.
On an annual basis, our consulting actuary issues a statement of actuarial opinion that documents the actuary’s evaluation of the adequacy of our unpaid loss obligations under the terms of our policies. We review the analysis underlying the consulting actuary’s opinion and compare the projected ultimate losses to our own estimates to ensure that the reserve for unpaid losses recorded at each annual balance sheet date is based upon all internal and external factors related to known and unknown claims against us and to ensure our reserve is within guidelines promulgated by the National Association of Insurance Commissioners (NAIC).
As reflected by our losses incurred related to prior years, favorable development experienced in 2020 was primarily the result of better than expected non-catastrophe losses experienced. The favorable development also came as a result of strengthening of our case reserves throughout 2019 based on a review of historical loss trends and uncertainty surrounding late
On December 13, 2017, we issued $150,000,000 of 10-year senior notes (the Senior Notes) that will mature on December 15, 2027 and bear interest at a rate equal to 6.25% per annum payable semi-annually on each June 15 and December 15, commencing June 15, 2018. The Senior Notes are senior unsecured obligations of the Company. We may redeem the Senior Notes at our option, at any time and from time to time in whole or in part, prior to September 15, 2027, at a redemption price equal to the greater of (i) 100% of the principal amount of the notes to be redeemed and (ii) the sum of the present values of the remaining scheduled payments of principal and interest thereon from the date of redemption to the date that is three months prior to maturity. On or after that date, we may redeem the Senior Notes at par.
Senior Notes - Our Senior Notes provide that the Company and its subsidiaries shall not incur any indebtedness unless no default exists and the Company’s leverage ratio as of the last day of any annual or quarterly period (the balance sheet date) immediately preceding the date on which such additional indebtedness is incurred would have been no greater than 0.3:1, determined on a pro forma basis as if the additional indebtedness and all other indebtedness incurred since the immediately preceding balance sheet date had been incurred and the proceeds therefrom applied as of such day. The Company and its subsidiaries also may not create, assume, incur or permit to exist any indebtedness for borrowed money that is secured by a lien on the voting stock of any significant subsidiary without securing the Senior Notes equally. The Company may not issue, sell, assign, transfer or otherwise dispose of, directly or indirectly, any of the capital stock of the Company’s significant subsidiaries as of the issue date of the Senior Notes (except to the Company or to one or more of the Company’s other subsidiaries, or for the purpose of qualifying directors or as may be required by law or regulation), subject to certain exceptions. At December 31, 2020, we were in compliance with the covenants in the Senior Notes.
SBA Note - Our SBA Note requires that UPC maintain either a 2:1 ratio of net written premium to surplus, or net writing ratio, or a 6:1 ratio of gross written premium to surplus, or gross writing ratio, to avoid additional interest penalties. The SBA Note agreement defines surplus for the purpose of calculating the required ratios as the $20,000,000 of capital contributed to UPC under the agreement plus the outstanding balance of the note. Should UPC fail to exceed either a net writing ratio of 1.5:1 or a gross writing ratio of 4.5:1, UPC's interest rate will increase by 450 basis points above the 10-year Constant Maturity Treasury rate, which was 0.66% at the end of December 2020. Any other writing ratio deficiencies result in an interest rate penalty of 25 basis points above the stated rate of the note. Our SBA Note further provides that the Florida State Board of Administration may, among other things, declare its loan immediately due and payable upon any default existing under the SBA Note; however, any payment is subject to approval by the insurance regulatory authority. At December 31, 2020, we were in compliance with the covenants in the SBA Note.
Truist Note - Our Truist Note requires that, at all times while there has been no losses from our insurance subsidiaries' operations (non-recurring losses), we will maintain a minimum cash flow coverage ratio of 1.2:1. The cash flow coverage ratio is defined as the ratio of our cash flow to debt service charges. This ratio will be tested annually, based on our audited financial statements. For the one-year period following a non-recurring loss, we are required to maintain a minimum cash flow coverage ratio of 1.0:1. This covenant will only be effective if the pre non-recurring losses test is failed, and is only available and effective for one annual test period. Thereafter, the non-recurring loss cash flow coverage ratio of 1.2:1 will immediately apply. At the time of the most recent annual test period, December 31, 2020, we were not in compliance with the minimum cash flow coverage ratio covenant in the Truist Note. As a result, the Company has obtained a waiver for the period ending December 31, 2020.
In addition, the Truist Note requires that we establish and maintain with Truist at all times during the term of the loan a non-interest bearing demand deposit account with a minimum balance of $500,000, and an interest-bearing account with a minimum balance of $1,500,000. In the event of default, Truist may, among other things, declare its loan immediately due and payable, require us to pledge additional collateral to the bank, and take possession of and foreclose upon our corporate headquarters, which has been pledged to the bank as security for the loan. At December 31, 2020, we were in compliance with the covenants in the Truist Note other than the minimum cash flow coverage ratio covenant.
We have fully funded three limited partnership investments and have committed to fund our remaining four limited partnership investments. The amount of unfunded commitments was $2,056,000 and $2,201,000 at December 31, 2020 and 2019, respectively.
We, as lessee, have entered into leases of commercial office space of various term lengths. In addition to office space, we lease office equipment and a parking lot under operating leases and vehicles under finance leases.
At December 31, 2020, future minimum gross lease payments relating to these non-cancellable operating and finance lease agreements were as follows:
Weighted average remaining lease term and discount rate related to operating and finance leases were as follows:
As of December 31, 2020, we had net operating loss (NOL) carryforwards. The amount and timing of realizing the benefits of NOL carryforwards depend on future taxable income and limitation imposed by tax laws. There is no expiration for $1,168,000 of our federal NOL and $90,963,000 of our state NOL. The remaining $17,143,000 of our federal NOL expires in 2040. The unused business tax credits of $1,686,000 will also expire in 2040.
The statute of limitations related to our consolidated Federal income tax returns and our Florida income tax returns expired for all tax years up to and including 2016; therefore, only the 2017 through 2020 tax years remain subject to examination by taxing authorities. During the year ended December 31, 2020, we were examined by the Internal Revenue Service (IRS) regarding our 2016 income tax return. This examination was closed by the IRS prior to December 31, 2020 with no material adjustment needed.
The following is a reconciliation of the beginning and ending amount of unrecognized tax benefits for the year ended December 31, 2020:
Included in the balance at December 31, 2020 was $683,000 of unrecognized tax benefits that, if recognized, would affect the annual effective tax rate. We do not anticipate a material change in the unrecognized tax benefits over the next 12 months.
Governmental agencies or certain quasi-governmental entities can levy assessments upon us in the states in which we write policies. See Note 2(r) for a description of how we recover assessments imposed upon us. We expense an assessment when the particular governmental agency or quasi-governmental entity levies it upon us; therefore, expected recoveries are not assets and we will record the amounts as income when collected from policyholders.
The amount of restricted net assets of our insurance subsidiaries are:
•Statutory accounting requires us to expense policy acquisition costs when incurred, while GAAP allows us to defer to the extent realizable, and amortize policy acquisition costs over the estimated life of the policies.
•Statutory accounting requires that surplus notes, also known as surplus debentures, be recorded in statutory surplus, while GAAP requires us to record surplus notes as a liability.
•Statutory accounting allows ceding commission income to be recognized when written if the cost of acquiring and renewing the associated business exceeds the ceding commissions, but under GAAP such income is deferred and recognized over the coverage period.
•Statutory accounting requires that unearned premiums and loss reserves are presented net of related reinsurance rather than on a gross basis under GAAP.
•Statutory accounting requires an additional admissibility test and the change in deferred income tax is reported directly in capital and surplus, rather than being reported as a component of income tax expense under GAAP.
Our insurance subsidiaries must file with the various insurance regulatory authorities an “Annual Statement” which reports, among other items, statutory net income (loss) and surplus as regards policyholders, which is called stockholders’ equity under GAAP. For the years ended December 31, 2020, 2019 and 2018, our combined recorded statutory net loss was $28,326,000, $38,507,000, and $5,199,000, respectively.
AmRisc, a managing general agent, handles the underwriting, claims processing, premium collection and reinsurance review for AmCo. R. Daniel Peed, Chief Executive Officer and Chairman of our Board of Directors, became Non-Executive Vice Chairman of AmRisc. Effective December 31, 2019, Mr. Peed resigned from his position with AmRisc, terminating the related party relationship.
In accordance with the managing general agency contract with AmRisc, we recorded $406,914,000, and $361,904,000 of gross written premiums for the years ended December 31, 2019, and 2018, respectively, resulting in gross fees and commission (including a profit commission) of $107,577,000, and $95,920,000, respectively, due to AmRisc. Receivables are stated net of the fees and commission due under the contract.
We provide a 401(k) plan for substantially all of our employees. We match 100% of the first 5% of employees’ contributions to the plan. For the years ended December 31, 2020, 2019, and 2018, our contributions to the plan on behalf of the participating employees were $1,381,000, $787,000, and $861,000, respectively.
Under the Company’s 2013 Omnibus Incentive Plan, 1,000,000 shares were authorized for issuance at December 31, 2020. In 2020, the Board of Directors adopted the 2020 Omnibus Incentive Plan, which was approved by shareholders during our 2020 Annual Shareholder meeting. As of December 31, 2020, an additional 2,000,000 shares were authorized for issuance.
(1) This table does not include withholding of vested shares for tax liabilities, which totaled $112,000, $296,000, and $418,000 in 2020, 2019, and 2018, respectively.
We had approximately $1,798,000 of unrecognized stock compensation expense at December 31, 2020 related to non-vested stock-based compensation granted, which we expect to recognize over a weighted-average period of approximately 2 years. We had approximately $135,000 of unrecognized director stock-based compensation expense at December 31, 2020 related to non-vested director stock-based compensation granted, which we expect to recognize over a weighted-average period of approximately 0.3 years.
Stock-based compensation cost for restricted stock awards, restricted stock units and performance stock units is measured based on the closing fair market value of our common stock on the date of grant, which vest in equal installments over the requisite service period of typically three years. Restricted stock awards granted to non-employee directors vest over a one-year period. Each restricted stock unit and performance stock unit represents our obligation to deliver to the holder one share of common stock upon vesting.
We granted 386,101, 134,231, and 174,602 shares of restricted common stock, which had a weighted-average grant date fair value of $9.33, $16.24, and $20.07 per share during the years ended December 31, 2020, 2019, and 2018, respectively. Additionally, during the year ended December 31, 2019, the Company granted 45,000 shares of restricted common stock, with a fair value of $15.70 per share, which were contingent upon stockholder approval of the 2020 Omnibus Incentive Plan. The contingent shares were issued and fully vested during the year ended December, 31 2020.
On January 6, 2021, our insurance subsidiary, UPC, contributed $5,000,000 to fund an initial investment in a limited partnership investment fund.
On January 18, 2021, the Company, together with our wholly-owned subsidiaries UPC and UIM, entered into a Renewal Rights Agreement, dated as of January 18, 2021 with HCP and HCI Group, Inc. (HCI), pursuant to which the Company, UPC and UIM agreed to sell, and HPC agreed to purchase, the renewal rights to UPC’s personal lines homeowners business in Connecticut, Massachusetts, New Jersey and Rhode Island. The transfer of policies is subject to regulatory approval. The sale was also consummated on January 18, 2021.
The Company announced that its Board of Directors declared a $0.06 per share quarterly cash dividend that will be paid on
On February 19, 2021, our insurance subsidiary, IIC, paid a dividend of $3,500,000 to the Company.
On February 24, 2021, the Company made a capital contribution of $3,500,000 to our insurance subsidiary, FSIC.