There are no mortgages or lease arrangements for the buildings on our campus and all are adequately covered by insurance.
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 consolidated financial statements and accompanying notes in Part II, Item 8 below.
UVE is the largest private personal residential insurance company in Florida by direct written premium in-force, with approximately 10.1% market share as of September 30, 2017, according to the most recent data reported by the FLOIR. We perform substantially all aspects of insurance underwriting, policy issuance, general administration and claims processing and settlement internally through our vertically integrated operations. Our wholly-owned licensed insurance subsidiaries, UPCIC and APPCIC, currently write personal residential insurance policies predominantly in Florida with $924.0 million in direct written premium for the year ended December 31, 2017. UPCIC also writes residential homeowners insurance policies in Alabama, Delaware, Georgia, Hawaii, Indiana, Maryland, Massachusetts, Michigan, Minnesota, New Jersey, New York, North Carolina, Pennsylvania, South Carolina, and Virginia with $131.9 million in direct written premium for the year ended December 31, 2017, and is licensed to issue policies in Iowa, New Hampshire, and West Virginia. We believe that our longevity in the Florida market and our resulting depth of experience will enable us to continue to successfully grow our business in both hard and soft markets.
Over the past several years, we have grown our business both within Florida and elsewhere in the United States through our distribution network of approximately 8,800 licensed independent agents. Our goals are to profitably grow our business, invest in our vertically integrated structure, expand our independent agent network, and return value to shareholders. Some of our key strategies include increasing our policies in force in Florida through continued profitable and organic growth; expanding into other states to diversify our revenue and risk; optimizing our reinsurance program; and continuing to provide high quality service to our policyholders. We believe each of these strategies has contributed towards an increase in earnings and earnings per share as well as an improvement in our overall financial condition. See “-Results of Operations” below for a discussion of our annual results for 2017 compared to the same period in 2016.
Our overall organic growth strategy emphasizes taking prudent measures to increase our footprint, policy count and improve the quality of our business rather than merely increasing our market share. Our focus on long-term capital strength and organic growth allows us to be selective in the risks we accept. Our goal is to write risks that are priced adequately and meet our underwriting standards. We believe that our strategy of organically expanding our premium growth through our independent agent distribution network and through Universal DirectSM, streamlining claims management and balancing appropriate pricing with disciplined underwriting standards will maximize our profitable growth. We also intend to continue our expansion outside of Florida in markets that allow us to write profitable business and to diversify our revenue and risk. Upon entering new markets, we leverage our existing independent agent network to generate new local relationships and business and we take the time to learn about each new market and any of its unique risks in order to carefully develop our own policy forms, rates and informed underwriting standards. Our expansion efforts differ from many of our competitors that have grown in recent years primarily through assumption of policies from Citizens, Florida’s statutory residual property insurance market.
Hurricane Irma made initial landfall in the Florida Keys on September 10, 2017 as a Category 4 storm on the Saffir-Simpson Hurricane Scale. Hurricane Irma was an extremely destructive event that caused a wide swath of damage across the entire Florida peninsula and throughout the Southeastern United States. Although Hurricane Irma was a devastating catastrophic event, the ultimate net financial impact to UVE was substantially limited by both our comprehensive reinsurance program and benefits received as a result of our vertically integrated structure as discussed below.
The discussion below provides additional commentary surrounding the various effects of Hurricane Irma on the Company’s financial results.
During the quarter ended December 31, 2017, the Company revised its estimated gross losses and loss adjustment expenses to $446.7 million, reflecting gross losses and LAE of $444.7 million at UPCIC and $2.0 million at APPCIC. This revision to gross losses at UPCIC was to account for claims experience during the fourth quarter, and we note that as of February 9, 2018, the Company has received 68,634 claims relating to Hurricane Irma, of which 57,799, or approximately 84%, have already been closed. As discussed above, the Company’s reinsurance program limited net losses and loss adjustment expenses from Hurricane Irma to $37 million. Because gross losses and LAE in states outside of Florida are projected to be $12.8 million (which is above our $5.0 million Non-Florida retention) additional recoveries from our Other States Reinsurance Program during the fourth quarter served to reduce UPCIC’s aggregate retention from $35.0 million to $27.2 million. After adding in APPCIC’s net retention of $2.0 million, this resulted in a total net retention of losses and loss adjustment expenses of $29.2 million related to Hurricane Irma for the year ended December 31, 2017.
Additionally, the Company experienced approximately $2.4 million of gross losses and loss adjustment expenses related to hailstorms in Minnesota that occurred in June 2017. As a result of Hurricane Irma satisfying an otherwise recoverable provision within our Other States Reinsurance Program, the Company’s retention in states outside of Florida was reduced to $1.0 million from $5.0 million. This resulted in an effective savings of $1.4 million recorded in the fourth quarter of 2017 on the Minnesota hailstorm events, as the Company retained only the first $1.0 million of losses on the event. Through May 31, 2018, our Other States Reinsurance Program will continue to have a net retention of $1.0 million as a result of the otherwise recoverable provision having been satisfied.
See “-2017/2018 Reinsurance Program” below for a more detailed discussion of the Company’s reinsurance program.
As previously described, due to our vertically integrated structure, the Company retains certain revenues and/or fees that are paid to our subsidiary service companies for various services provided, including reinsurance brokerage, claims adjusting and other services. This benefit is particularly notable during large catastrophic events such as Hurricane Irma, which result in a substantial number of claims by our policyholders, leading to increased activity at our service company subsidiaries. This higher activity led to an increase in service income that helped to reduce the effect that Hurricane Irma had on our consolidated financial statements.
In addition to the items discussed above, Hurricane Irma resulted in various other effects on our ongoing business, in particular with respect to premium writings and policy fee income. We experienced an increased level of premium volume, including an increase in both new and renewal business, as well as a corresponding increase in policy fee income, during both the quarter ending September 30, 2017 and the quarter ending December 31, 2017.
In addition, the emergency order extended the time periods applicable to certain actions, including reviews of rate filings. This resulted in an extension of the review period for our previously submitted Florida rate filing (which was for an average statewide increase of 3.4%). We initially anticipated that the FLOIR’s review of our rate filing would be completed in September 2017, but as a result of Hurricane Irma and the corresponding emergency order, the rates were approved in early December 2017. We began using the newly approved rates on December 7, 2017 for new business and on January 26, 2018 for renewal business.
Although Hurricane Irma caused substantial losses, our vertically integrated structure and comprehensive reinsurance program substantially limited the overall financial impact from this damaging storm.
Diluted EPS increased by $0.20 to $2.99 per common share, compared year-over-year to 2016.
Declared and paid dividends per common share of $0.69, including a $0.13 special dividend in December 2017.
Repurchased approximately 771,000 shares in 2017 at an aggregate cost of $18.1 million.
Offered Universal DirectSM in all 16 states in which the Company writes policies as of December 31, 2017.
UPCIC commenced writing homeowners policies in New Jersey and New York.
UPCIC received regulatory approval for and implemented an overall 3.4% rate increase in Florida.
We use reinsurance to reduce our exposure to catastrophic losses primarily through excess of loss reinsurance. We believe that the overall terms of the 2017-2018 reinsurance program are more favorable than the 2016-2017 and 2015-2016 reinsurance program. We eliminated our quota share reinsurance arrangements effective June 1, 2015; purchased additional excess of loss catastrophe cover; converted the exposure of all UPCIC states from a two-tower reinsurance program to a single tower reinsurance program; purchased a stand-alone non-Florida supplemental catastrophe reinsurance program; realized cost reductions in part due to market conditions and our preparation and efforts to manage risk exposure; and further enhanced our reinsurance coverage terms and conditions.
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 2017-2018 reinsurance program for each of the Insurance Entities.
UPCIC’s reinsurance program, which runs from June 1 through May 31 of the following year, consists of various forms of catastrophe coverage. Under the 2017-2018 reinsurance program, UPCIC has a net retention of $35 million per catastrophe event for all losses incurred up to a first event loss of $2.778 billion. UPCIC also purchases a separate supplemental underlying cover to further reduce its retention for all losses occurring in states outside of Florida. With this cover, UPCIC retains only $5 million under its program in its non-Florida states. In certain circumstances involving a catastrophic event affecting both Florida and other states, UPCIC’s retention could result in pre-tax net liability as low as $5 million - the $35 million net retention under the all states reinsurance program could be offset by as much as $30 million in coverage under the Other States (non-Florida) Reinsurance Program. These retention amounts are gross of any potential tax benefit we would receive in paying such losses. UPCIC has mandatory catastrophe coverage through the FHCF plus voluntary catastrophe coverage with private reinsurers.
UPCIC structures its reinsurance coverage into layers and utilizes a cascading feature such that the second, third, fourth, fifth and sixth reinsurance layers all attach at $90 million. Any layers above the $90 million attachment point are excess of loss over the immediately preceding layer. If the aggregate limit of the preceding layer is exhausted, the next layer cascades down in its place for future events. Further, UPCIC buys four dedicated limits of $55 million in excess of $35 million for the first four catastrophe events. This means
The estimated total net cost of UPCIC’s FHCF and catastrophe related coverage, including reinstatement premium protection coverage, is $315.9 million. The largest private participants in UPCIC’s program include Allianz Risk Transfer, Axis Specialty Limited, Everest Reinsurance, Renaissance Reinsurance, Chubb Tempest Reinsurance various Lloyd’s of London syndicates, and FHCF. The table below provides the A.M. Best and S&P financial strength ratings for each of the largest third-party reinsurers in UPCIC’s 2017-2018 reinsurance program.
APPCIC’s reinsurance program, which 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 2017-2018 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 $28.1 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 structures its catastrophe reinsurance coverage into layers and utilizes a cascading feature such that the second and third reinsurance layers all attach at $2 million. Any layers above the $2 million attachment point are excess of loss over the immediately preceding layer. If the aggregate limit of the preceding layer is exhausted, the next layer cascades down in its place for future events. This means that, unless losses exhaust the top layer of our coverage, we are only exposed to $2 million in losses, pre-tax, per catastrophe for each of the first two events.
The estimated total net cost of APPCIC’s FHCF, per risk and catastrophe related coverage, including reinstatement premium protection coverage is $2.8 million. The largest private participants in APPCIC’s program include Everest Reinsurance Company, Chubb Tempest Reinsurance Ltd., Hiscox Insurance Co (Bermuda) Ltd, Hannover Ruck SE and various Lloyd’s of London syndicates. The table below provides the A.M. Best and S&P financial strength ratings for each of the largest third-party reinsurers in APPCIC’s 2017-2018 reinsurance program.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Our primary use of estimates include, use
Reconciliation of tables to the consolidated financial statements- Reconciliation of net incurred and paid claims development table to the liability for claims and claim adjustment expenses in the Consolidated Balance Sheet.
Duration- a table of the average historical claims duration for the past five years
In establishing the liability for unpaid losses and LAE, actuarial judgment is relied upon in order to make appropriate assumptions to estimate a best estimate of ultimate losses. There are inherent uncertainties associated with this estimation process, especially when a company is undergoing changes in its claims settlement practices, when a company has limited experience in a certain area, or when behaviors of policyholders are influenced by external factors and/or market dynamics. Claims reported in 2013 and 2014, for example, benefited from several initiatives designed to expedite claim closure rates and reduce settlement costs on claims introduced in our claims department during those 24 months. A more dramatic change occurred during calendar year 2015 when we realigned our adjusting teams as well as launched our Fast Track initiative, reducing settlement costs and strengthening case reserve adequacy for claims reported during the year. These changes have had a meaningful influence on development pattern selections applied to 2013 through 2017 accident year claims in the reserving estimates for each of the methods described in “Item 8 - Note 17 (Liability for Unpaid Losses and Loss Adjustment Expenses)”. More recently, since 2016 there has been a significant increase in efforts to pursue subrogation against third parties responsible for property damage losses to our insureds. As a result, anticipated subrogation recoveries are reviewed and estimated on a stand-alone basis in the Company’s reserve analysis. Market dynamics in Florida include the continuing expansion of assignment of benefits (“AOB”) and the resulting increase in litigation against the Company. As a result of the continuing and growing use of AOB’s in this manner, we have increased our estimates of ultimate losses for the most recent and prior accident years.
consolidated financial statements. Another example would be when a change in economic conditions is expected to affect the cost of repairs to property; actuarial judgment is applied to determine appropriate development factors to use in the reserve estimate that will most accurately reflect the expected impacts on severity development.
Plaintiffs targeting property and casualty insurers, in purported class action litigation related to claims-handling and other practices.
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 and in “Item 8 -Note 17 (Liability for Unpaid Losses and Loss Adjustment Expenses)” to the consolidated financial statements. 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, or 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 compliance with annual statutory reporting requirements, our appointed independent actuary provides a Statement of Actuarial Opinion (“SAO”) indicating that carried loss and LAE reserves recorded at each annual balance sheet date make a reasonable provision for all of the Insurance Entities’ unpaid loss and LAE obligations under the terms of contracts and agreements with our policyholders. Recorded reserves are compared to the indicated range provided in the actuary’s report accompanying the SAO. At December 31, 2017, the recorded amount for net loss and LAE falls within the range determined by the appointed independent actuaries and approximates their best estimate.
In the normal course of business, we seek to reduce the risk of loss that may arise from catastrophes or other events that cause unfavorable underwriting results by reinsuring certain levels of risk in various areas of exposure with other insurance enterprises or reinsurers. While ceding premiums to reinsurers reduces our risk of exposure in the event of catastrophic losses, it also reduces our potential for greater profits in the event that such catastrophic events do not occur. We believe that the extent of our reinsurance level of protection is typical of, or exceeds, that of other insurers actively writing in the Florida personal residential insurance market. Amounts recoverable from reinsurers are estimated in a manner consistent with the provisions of the reinsurance agreement and consistent with the establishment of our gross liability. The Insurance Entities’ reinsurance policies do not relieve them from their obligations to policyholders. Failure of reinsurers to honor their obligations could result in losses; consequently, allowances are established for amounts deemed uncollectible from reinsurers. No such allowance was deemed necessary as of December 31, 2017.
year ended December 31, 2017 COMPARED TO YEAR ENDED December 31, 2016
Net income increased by $7.5 million, or 7.6%, to $106.9 million for the year ended December 31, 2017 compared to $99.4 million for the year ended December 31, 2016. Net income for the year ended December 31, 2017 included growth within each revenue category, continued underwriting profitability despite the impact from Hurricane Irma during the year, and a reduction in our effective tax rate. Diluted earnings per common share increased by $0.20 to $2.99 for the year ended December 31, 2017 compared to $2.79 per share for the year ended December 31, 2016, primarily as a result of an increase in net income and offset by modest increase in weighted average diluted shares outstanding. A more detailed discussion of this and other factors follows the table below.
Direct premiums earned increased by 8.5% to $999.2 million for the year ended December 31, 2017, from $921.2 million in the prior year. The increase in direct earned premium reflects the growth within both our Florida and Other States books, as discussed above, which has occurred over the past 12 months.
We periodically sell investment securities from our portfolio of securities available for sale when opportunities arise or when circumstances could result in greater losses if such securities continue to be held. We sold investment securities available for sale during the year ended December 31, 2017 resulting in a net realized gain of $2.6 million compared to a net realized gain of $2.3 million during the year ended December 31, 2016.
Other revenue represents revenue from policy installment fees, premium financing and other miscellaneous income. Other revenue for the year ended December 31, 2017 grew by $576,000, or 9.0%, to $7.0 million compared to $6.4 million for the year ended December 31, 2016. The increase reflects growth in the number of policies written during the year ended December 31, 2017 compared to the same period in 2016, as well as consumer behavior underlying the composition of our insurance portfolio.
During the year ended December 31, 2017, the Company recorded gross losses and LAE of $446.7 million resulting from Hurricane Irma. The Company’s reinsurance program limited losses from Hurricane Irma to $29.2 million, which added 4.2 percentage points to the net losses and LAE ratio for the year ended December 31, 2017. For additional details surrounding Hurricane Irma losses, see
In the fourth quarter of 2017, the Company recorded reserve of $44.7 million for the reserve strengthening comprised of 1) $26.4 million for unfavorable prior year reserve development related to accident years 2013, 2015 and 2016 and 2) $18.3 million for unfavorable development for the 2017 accident year. Each year reserve re-estimates, as described in “Item 8 - Note 17 (Liability for Unpaid Losses and Loss Adjustment Expenses)”, are conducted and the difference between indicated reserves based on new reserve estimates and the previously recorded estimate is recorded and included in “Losses and loss adjustment expenses” in the Consolidated Statements of Income. An AOB is a document signed by a policyholder that allows a third party to be paid for services performed for an insured homeowner who would normally be reimbursed by the insurance company directly after making a claim. The Company has generally seen an increase in the use of AOB’s by Florida policyholders. Claims paid under an AOB often involve unnecessary litigation and as a result cost the Company significantly more than claims settled when an AOB is not involved. Reserve re-estimates in 2017 resulted in unfavorable prior year reserve development of $27.7 million, compared to favorable prior year reserve development of $4.7 million in 2016. Unfavorable prior year loss reserve development in 2017 related to accident years 2013, 2015, and 2016, primarily as a result of increased litigation frequency surrounding the AOB issue within our Florida policies.
Income tax expense for the year ended December 31, 2017 increased by $0.1 million, or 0.1%, to $63.5 million as compared to $63.5 million for the year ended December 31, 2016. See “Item 8 - Note 12 (Income Taxes)” for a reconciliation from the statutory income tax rates to our effective tax rates for these periods.
Comprehensive income includes net income and other comprehensive income or loss. Other comprehensive income, net of taxes for the year ended December 31, 2017 was $0.1 million compared to a loss of $2.4 million for the same period in 2016. Other comprehensive income (loss) represents after tax changes to equity which are not recognized in net income, including changes in the fair value of securities available for sale held in our investment portfolio and any reclassifications out of cumulative other comprehensive income for securities sold. See “Item 8 - Note 14 (Other Comprehensive Income (Loss)).”
Net income decreased by $7.1 million, or 6.6%, to $99.4 million for the year ended December 31, 2016 compared to the year ended December 31, 2015. Net income was impacted by $51.4 million in gross losses and LAE associated with weather events occurring in 2016. Weather events in 2016 were comprised of a series of severe storms in the first quarter of 2016 and then the impact of two hurricanes in 2016, Hermine in the third quarter and Matthew in the fourth quarter. Premium growth and the elimination of our quota share reinsurance contracts effective June 1, 2015, and a lower expense ratio are significant factors behind our 2016 results and comparison to prior years periods. Diluted earnings per common share decreased by $0.18, or 6.0%, to $2.79 for the year ended December 31, 2016 compared to $2.97 per share the year ended December 31, 2015, as a result of a decrease in net income and a slight decrease in weighted average shares outstanding (diluted). A more detailed discussion of this and other factors follows the table below.
Our reinsurance programs run from June 1 to May 31 of the following year. In June 2015, we eliminated quota share reinsurance on a cut off basis. Ceded earned quota share premiums in 2015 were $97.5 million and none in 2016 as a result of the termination of the quota share. Ceded earned premiums relating to our catastrophe reinsurance program were $235.3 million in 2015 compared to $288.8 million in 2016. The increase in the ceded earned premiums relating to our catastrophe reinsurance program relate to coverage and limit improvements over 2015.
Net investment income was $9.5 million for the year ended December 31, 2016, an increase of 85.1%, compared to $5.2 million for the year ended December 31, 2015. The increase in net investment income of $4.4 million is principally the result of increases in our fixed income investment portfolio fueled by cash flows generated from operations and actions taken to increase yield by investing these new funds along with maturities in higher yield securities while maintaining high credit quality. Total average investments were $592.6 million during the year ended December 31, 2016 compared to $470.4 million in the same period in 2015.
See “Item 8 - Note 17 (Liability for Unpaid Losses and Loss Adjustment Expenses)” for change in liability for unpaid losses and LAE.
For the year ended December 31, 2016, general and administrative expenses were $221.2 million, compared to $183.8 million for the same period in 2015 as follows (dollars in thousands):
Comprehensive income includes net income and other comprehensive income or loss. The other comprehensive loss for the years ended December 31, 2016 and 2015, reflect after tax changes in fair value of securities held in our portfolio of securities available for sale and reclassification out of cumulative other comprehensive income for securities sold. See “Item 8 - Note 14 (Other Comprehensive Income (Loss)).”
ANALYSIS OF FINANCIAL CONDITION AS OF DECEMBER 31, 2017 COMPARED TO DECEMBER 31, 2016
See “Item 8 - Consolidated Statements of Cash Flows” for explanations of changes in investments.
Premiums receivable, net represents amounts receivable from policyholders. The increase in premiums receivable, net of $2.7 million to $56.5 million as of December 31, 2017 relates to both the growth in and seasonality of the Company’s business.
Deferred policy acquisition costs increased $8.1 million to $73.1 million as of December 31, 2017, which is in line with the underlying premium growth. See “Item 8 - Note 5 (Insurance Operations)” for a roll-forward in the balance of our deferred policy acquisition costs.
Income taxes recoverable increased $6.2 million to $9.5 million as of December 31, 2017, from $3.3 million as of December 31, 2016. The increase represents amounts due from taxing jurisdictions within one year and when income taxes payments exceed income tax liabilities. Income taxes recoverable as of December 31, 2017 were $9.5 million, which represents amounts recoverable or to be applied to future periods for federal and state income taxes.
See “Item 8 - Note 17 (Liability for Unpaid Losses and Loss Adjustment Expenses)” for a roll-forward in the balance of our unpaid losses and LAE. Unpaid losses and LAE increased $189.9 million to $248.4 million during the year ended December 31, 2017. The increase in 2017 was a result of losses recorded in the third and fourth quarters of 2017 for Hurricane Irma. Unpaid losses and LAE are net of estimated subrogation recoveries. The Company recorded $446.7 million in losses for Hurricane Irma and paid $263.9 million by December 31, 2017, offset by $270.1 million in reinsurance payments.
Advance premium represents premium payments made by policyholders ahead of the effective date of the policies. The increase of $8.4 million to $26.2 million as of December 31, 2017 reflects both organic growth and seasonality of our business as described under “- Overview”.
Reinsurance payable, net increase of $29.5 million to $110.4 million as of December 31, 2017, which represents the unpaid ceded written premiums owed to reinsurers in connection with the renewal of the Company’s 2017/2018 catastrophe reinsurance program, (which began June 1, 2017), includes $26.8 million in cash advances received from reinsurers in connection with Hurricane Irma’s anticipated recoveries.
Book overdrafts represent outstanding checks or drafts in excess of cash on deposit and are examined monthly to determine if legal right of offset exists for accounts with the same banking institution. In 2017, the Company implemented a new short-term investment cash sweep to maximize investment returns on cash balances. Due to the sweep activities, certain outstanding items were recorded as book overdrafts totaling $36.7 million as of December 31, 2017.
Additional paid-in-capital increased $3.9 million resulting from share-based compensation expense of $10.5 million, stock option exercises of $5.6 million and common stock issued of $0.6 million for the year ended December 31, 2017. This was offset by the common stock value acquired through cashless stock option exercise and tax withholdings on the intrinsic value of stock option exercise and performance units vested for share-based payment transactions of $12.8 million for the year ended December 31, 2017.
During the third and fourth quarters of 2017, Hurricane Irma was a significant liquidity event to the Company. The Company’s reinsurance program performed as expected providing sufficient liquidity in the form of cash advances for paid losses ceded to the reinsurers. During 2017, the Company collected a total of $270.1 million from reinsurers and paid $263.9 million of losses that were covered under the reinsurance program. In addition, certain costs were recovered from the reinsurers. All ceded losses during 2017 were out of amounts prefunded to the Company under the cash advance provision of the reinsurance agreements, and did not affect the Company’s investment portfolio.
Our insurance operations provide liquidity in that premiums are generally received months or even years before losses are paid under the policies written. In the event of catastrophic events, many of the Company’s reinsurance agreements provide for “cash advance” whereby reinsurers advance or prepay amounts to the Company, providing liquidity, which the Company utilizes in the claim settlement process. In addition, the Insurance Entities maintain substantial investments in highly liquid, marketable securities, which would generate funds upon sale.
The Insurance Entities are responsible for losses related to catastrophic events in excess of coverage provided by the Insurance Entities’ reinsurance programs or deductibles before the Company’s reinsurance protection commences. Also, the Company is responsible for all other losses that otherwise may not be covered by the reinsurance programs and any amounts arising in the event of a reinsurer default. Losses or a reinsurer default may have a material adverse effect on either of the Insurance Entities or our business, financial condition, results of operations and liquidity.
Capital resources provide protection for policyholders, furnish the financial strength to support the business of underwriting insurance risks, and facilitate continued business growth. The following table provides our stockholder equity, total long-term debt, total capital, debt to equity capital ratio and debt-to-equity ratio for the periods presented (dollars in thousands):
On September 5, 2017, our Board of Directors authorized the repurchase of up to $20 million of the Company’s outstanding common stock through December 31, 2018. The Company repurchased 8,192 shares of common stock under the 2018 Share Repurchase Program during the year ended December 31, 2017 at an aggregate cost of approximately $0.2 million.
During the year ended December 31, 2017, we repurchased an aggregate of 770,559 shares of UVE’s common stock in the open market. Also see “Part II, Item 5 - Unregistered Sales of Equity Securities and Use of Proceeds” for share repurchase activity during the three months ended December 31, 2017.
Based upon consultations with our independent actuarial consultants and their statement of opinion on losses and LAE, we believe that the liability for unpaid losses and LAE is currently adequate to cover all claims and related expenses that may arise from incidents reported and IBNR, net of estimated subrogation. Our carried reserves as of December 31, 2017 were confirmed by our year end independent actuarial analysis and are in excess of their point or central estimate of their findings. Our annual actuarial process includes two reviews during the year by our independent actuarial firm. We use these external reviews to confirm data and emerging trends to observed changes. The actuarial process, including the external independent reviews, results in re-estimates of carried reserves for both current and prior accident years. See “Item 7 - (Liability for Unpaid Losses and LAE)” and “Item 8 - Note 17 (Liability for Unpaid Losses and Loss Adjustment Expenses)” for a further discussion of the actuarial estimation process used for loss and LAE reserving. As a result of the ongoing actuarial process, reserves for the current accident year were strengthened in the fourth quarter to align with 2016 full year actuarial loss estimates and the impact of weather events that occurred in 2016. Re-estimates of each prior accident year’s ultimate losses and LAE were performed during the year and changes resulting in both favorable and unfavorable development were recorded. We believe the changes we have made in adjudicating and settling claims are conservatively reflected in the actuarial process. We will continue to validate our actuarial process as the benefits of our accelerated claims settlement
process become more apparent and will continue to monitor policyholder AOB and the resulting increase in litigation. The cumulative redundancy or deficiency in prior year reserve changes is reflected in the chart above.
have an adverse effect on our competitive position, the marketability of our product offerings, and our liquidity, operating results and financial condition.”
The following table represents our contractual obligations for which cash flows are fixed or determinable as of December 31, 2017 (in thousands):
In August 2016, the FASB revised U.S. GAAP with the issuance of ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments intended to reduce diversity in practice in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The new ASU will apply to: 1) debt prepayment or debt extinguishment costs, 2) settlement of zero-coupon debt instruments, 3) contingent consideration payments made after business combination, 4) proceeds from the settlement of insurance claims, 5) proceeds from the settlement of corporate-owned life insurance policies, 6) distributions received from equity method investments, 7) beneficial interests in securitization transactions, and 8) separately identifiable cash flows and application of the predominance principle. The ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Historically, the items outlined above have not been applicable to the Company. Should they occur in the future, we will address them in accordance with the new ASU upon and subsequent to adoption.
In June 2016, the FASB revised U.S. GAAP with the issuance of ASU 2016-13, Financial Instruments -Credit Losses (Topic 326) that introduces a new process for recognizing credit losses on financial instruments based on an estimate of current expected credit losses. The new ASU will apply to: 1) loans, accounts receivable, trade receivables, and other financial assets measured at amortized cost, 2) loan commitments and certain other off-balance sheet credit exposures, 3) debt securities and other financial assets measured at fair value through other comprehensive income, and 4) beneficial interests in securitized financial assets. The ASU changes the current practice of recording a permanent write down, (other than temporary impairment), for probable credit losses, which is more restrictive than the new ASU requirement that would estimate credit losses, then recorded through a temporary allowance account that can be re-measured as estimated credit losses change. The ASU further limited estimated credit losses relating to available for sale securities to the amount which fair value is below amortized cost. The ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. We are currently evaluating the impact that this standard will have on our consolidated financial statements.
In January 2016, the FASB revised U.S. GAAP with the issuance of ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities to improve the recognition and measurement of financial instruments. The new ASU requires certain equity investments to be measured at fair value with changes in fair value reported in earnings and requires changes in instrument-specific credit risk for financial liabilities recorded at fair value under the fair value option to be reported in other comprehensive income (“OCI”). The new ASU is effective for fiscal years beginning after December 15, 2017. The adoption of this ASU will impact how we account for unrealized gains and losses for equity investments which will be through the income statement and may result in a change of presentation in the statement of cash flows. Upon adoption on January 1st 2018, a cumulative effect adjustment of $4.4 million to the balance sheet will be made to reclassify unrealized losses on equity securities to retained earnings from other comprehensive income.
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2017, 2016 and 2015
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016 and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in the COSO framework.
The Company's management is responsible for these 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 the Company’s financial statements and an opinion on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Represents change in fair value of available for sale investments, net of income tax provision of $76 thousand for the year ended December 31, 2017 and a change in fair value of available for sale investments, net of income tax benefit of $1,486 thousand and $1,369 thousand for the years ended December 31, 2016 and 2015, respectively.
Excess tax benefits (shortfall), net for the years ended December 31, 2016 and 2015 were recognized in additional paid-in capital. For the year ended December 31, 2017 excess tax benefits (shortfall) were recognized in income tax expense in the consolidated statements of income when the share-based awards vest or are settled. See “-Note 2 (Summary of Significant Accounting Policies - Recently Adopted Accounting Pronouncements).”
As discussed in “-Note 8 (Stockholders’ Equity)”, in April 2016 the Company entered into a Purchase and Exchange Agreement with RenaissanceRe Ventures Ltd. pursuant to which the Company sold an aggregate of 583,771 shares of UVE common stock at a price of $17.13 per share for a total consideration of $10 million of which $7.035 million represents cancellation of outstanding indebtedness, non-cash portion, and the balance of $2.965 million was received in cash. The non-cash portion of the transaction has been excluded from the consolidated statement of cash flows.
Premiums Receivable. Generally, premiums are collected prior to or during the policy period as permitted under the Insurance Entities payment plans. Credit risk is minimized through the effective administration of policy payment plans whereby rules governing policy cancellation minimize exposure to credit risk. The Company performs a policy level evaluation to determine the extent the premiums receivable balance exceeds the unearned premiums balance. The Company then ages this exposure to establish an allowance for doubtful accounts based on prior credit experience. As of December 31, 2017 and 2016, the Company recorded allowances for doubtful accounts in the amounts of $680 thousand and $527 thousand, respectively.
Intangible Assets. Goodwill and indefinite-lived intangible assets arising from the acquisition of a business is initially measured at cost and not subject to amortization. We assess goodwill and indefinite-lived intangible assets for potential impairments at the end of each fiscal year, or during the year if an event or other circumstance indicates that we may not be able to recover the carrying amount of the asset. Goodwill is included under Other Assets in the Consolidated Balance Sheets.
Insurance Liabilities. Unpaid losses and loss adjustment expenses (“LAE”) are provided for as claims are incurred. The provision for unpaid losses and loss adjustment expenses includes: (1) the accumulation of individual case estimates for claims and claim adjustment expenses reported prior to the close of the accounting period; (2) estimates for unreported claims based on industry data; and (3) estimates of expenses for investigating and adjusting claims based on the experience of the Company and the industry. The Company estimates and accrues its right to subrogate reported or estimated claims against other parties. Subrogated claims are recorded at amounts estimated to be received from the subrogated parties, net of related costs and netted against unpaid losses and LAE.
Provision for Premium Deficiency. It is the Company’s policy to evaluate and recognize losses on insurance contracts when estimated future claims, deferred policy acquisition costs and maintenance costs under a group of existing contracts will exceed anticipated future premiums. No accruals for premium deficiency were considered necessary as of December 31, 2017 and 2016.
Income (Loss) Per Share of Common Stock. Basic earnings per share excludes dilution and is computed by dividing the Company’s net income (loss) available to common stockholders, by the weighted-average number of shares of Common Stock outstanding during the period. Diluted earnings per share is computed by dividing the Company’s net income (loss) by the weighted average number of shares of Common Stock outstanding during the period plus the impact of all potentially dilutive common shares, primarily preferred stock, unvested shares and options. The dilutive impact of stock options and unvested shares is determined by applying the treasury stock method and the dilutive impact of the preferred stock is determined by applying the “if converted” method.
Fair Value Measurements. The Company’s policy is to record transfers of assets and liabilities, if any, between Level 1 and Level 2 at their fair values as of the end of each reporting period, consistent with the date of the determination of fair value. There were no transfers during the years ended December 31, 2017 or 2016.
Share-based Compensation. The Company accounts for share-based compensation based on the estimated grant-date fair value. The Company recognizes these compensation costs in general and administrative expenses and generally amortizes them on a straight-line basis over the requisite service period of the award, which is the vesting term. Individual tranches of performance-based awards are amortized separately since the vesting of each tranche is subject to independent annual measures. The fair value of stock option
awards are estimated using the Black-Scholes option pricing model with the grant-date assumptions discussed in “-Note 9 (Share-Based Compensation).” The fair value of the restricted share grants are determined based on the market price on the date of grant.
Statutory Accounting. UPCIC and APPCIC are highly regulated and prepare and file financial statements in conformity with the statutory accounting practices prescribed or permitted by the Florida Office of Insurance Regulation (the “FLOIR”) and the National Association of Insurance Commissioners (“NAIC”) which differ from U.S. GAAP. The FLOIR requires that insurance companies domiciled in Florida prepare their statutory financial statements in accordance with the Manual (the “Manual”), as modified by the FLOIR. Accordingly, the admitted assets, liabilities and capital and surplus of UPCIC and APPCIC as of December 31, 2017 and 2016 and the results of operations and cash flows, for the years ended December 31, 2017, 2016 and 2015, for their regulatory filings have been prepared in accordance with statutory accounting principles as promulgated by the FLOIR and the NAIC. The statutory accounting principles are more restrictive than U.S. GAAP and are designed primarily to demonstrate the ability to meet obligations to policyholders and claimants.
In March 2016, the Financial Accounting Standards Board (“FASB”) revised U.S. GAAP with the issuance of Accounting Standard Update (“ASU”) 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for share-based payment transactions. The new ASU requires excess income tax benefits (windfalls) and deficiencies (shortfalls) to be recognized in the income statement when the awards vest or are settled. The former guidance required the recognition of excess tax benefits or deficiencies in stockholders’ equity. In addition, all income tax-related cash flows resulting from share-based payments will be reported as operating activities in the statement of cash flows under the new ASU. The ASU also, allows the Company to repurchase more of an employee's shares for tax withholding purposes without triggering liability accounting; clarifies that all cash payments for tax withholdings made on an employee’s behalf should be presented as a financing activity on the Company’s statement of cash flows; provides an accounting policy election to account for forfeitures as they occur; and modifies the calculation of dilutive earnings per share to no longer use proceeds from tax benefits or deficiencies. The Company adopted this ASU effective January 1, 2017, which resulted in the recognition of an excess tax benefit of $5.8 million for the twelve months ended December 31, 2017.
Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay with or without penalty.
Amounts represent prepaid reinsurance premiums reinsurance receivables, net recoverables for paid and unpaid losses, including incurred but not reported reserves, loss adjustment expenses, and offsetting reinsurance payables.
The Company’s reinsurance arrangements had the following effect on certain items in the Consolidated Statements of Income for the periods presented (in thousands):
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 the Florida (“UVECF”), without prior regulatory approval is limited by the provisions of Florida Insurance Code. 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.
The Florida Insurance Code requires insurance companies to maintain capitalization equivalent to the greater of ten percent of the insurer’s total liabilities but not less than $10.0 million. The following table presents the amount of capital and surplus calculated in accordance with statutory accounting principles, which differ from U.S. GAAP, and an amount representing ten percent of total liabilities for both UPCIC and APPCIC as of the dates presented (in thousands):
As of the dates in the table above, both UPCIC and APPCIC exceeded the minimum statutory capitalization requirement. UPCIC also met the capitalization requirements of the other states in which it is licensed as of December 31, 2017. UPCIC and APPCIC are also required to adhere to prescribed premium-to-capital surplus ratios and have met those requirements at such dates. Combined net income for UPCIC and APPCIC, as determined in accordance with statutory accounting practices is $35.6 million, $58.2 million and $53.6 million for the years ended December 31, 2017, 2016 and 2015, respectively.
Through UVECF, the Insurance Entities’ parent company, UVE made capital contributions for the periods presented (in thousands):
On November 9, 2006, UPCIC entered into a $25.0 million surplus note with the State Board of Administration of Florida (the “SBA”) under Florida’s Insurance Capital Build-Up Incentive Program (the “ICBUI”). The surplus note has a twenty-year term and accrues interest, adjusted quarterly based on the 10-year Constant Maturity Treasury Index. The carrying amount of the surplus note is included in the statutory capital and surplus of UPCIC of approximately $12.9 million as of December 31, 2017.
The following table provides an estimate of principal payments to be made for the amounts due on the surplus note as of December 31, 2017 (in thousands):
As of December 31, 2017 and 2016, the Company had shares outstanding of Series A Preferred Stock. Each share of Series A Preferred Stock is convertible by the Company into shares of Common Stock.
The Series A Preferred Stock pays a cumulative dividend of $0.25 per share per quarter. The Company declared and paid aggregate dividends to the holder of record of the Company’s Series A Preferred Stock of $10 thousand for each of the years ended December 31, 2017 and 2016.
The following table summarizes the activity relating to shares of the Company’s Common Stock during the periods presented (in thousands):
All shares acquired represent shares tendered to cover the strike price for options and tax withholdings on the intrinsic value of options exercised or performance share units or restricted stock (as defined in “-Note 9 (Share-Based Compensation)”) vested. These shares have been cancelled by the Company.
In April 2016, the Company sold 583,771 shares of UVE common stock in a private placement to RenRe Ventures at a price of $17.13 per share for total consideration of $10 million, which was comprised of $2.965 million in cash and $7.035 million in cancellation of outstanding indebtedness, including accrued interest.
In September 2017, the Board of Directors authorized a share repurchase program under which UVE may repurchase in the open market in compliance with Exchange Act Rule 10b-18, up to $20 million of its outstanding shares of common stock through December 31, 2018. UVE repurchased 8,192 shares, at an aggregate price of approximately $0.2 million, pursuant to such repurchase program through December 31, 2017.
Under the Company’s 2009 Omnibus Incentive Plan, as amended (the “Incentive Plan”), 2,064,493 shares remained reserved for issuance and were available for new awards under the Incentive Plan as of December 31, 2017.
All shares outstanding as of December 31, 2017 are expected to vest.
The Company used the modified Black-Scholes model to estimate the fair value of employee Stock Options on the date of grant utilizing the assumptions noted below. The risk-free rate is based on the U.S. Treasury bill yield curve in effect at the time of grant for the expected term of the option. The expected term of options granted represents the period of time that the options are expected to be
PSUs are awarded to certain employees in consideration for services rendered pursuant to terms of employment agreements and provide those employees with a continued incentive to share in the success of the Company. Each performance share unit has a value equal to one share of common stock and generally vests over a three year service period commencing on the grant date.
The plan titled the “Universal Property & Casualty 401(K) Profit Sharing Plan and Trust” (the “401(k) Plan”) is a defined contribution plan that allows employees to defer compensation through contributions to the 401(k) Plan. The contributions are invested on the employees’ behalf, and the benefits paid to employees are based on contributions and any earnings or loss. The 401(k) Plan includes a Company contribution of 100 percent of each eligible participant’s contribution that does not exceed five percent of their compensation during the 401(k) Plan year. The Company may make additional profit-sharing contributions. However, no additional profit-sharing contribution was made during the years ended December 31, 2017, 2016 and 2015.
The following table provides payments made by the Company to related parties for the periods presented (in thousands):
There were no amounts due to SPC Global RE Advisors LLC as of December 31, 2015. Payments due to SPC Global RE Advisors LLC were generally made in the month the services were provided.
Recent changes in federal tax law and applicable statutory rates have affected the Company’s balances of deferred income tax assets and liabilities. On December 22, 2017, the Tax Cuts and Jobs Act of 2017 was signed into law. Under US GAAP, the effect of a change in tax law is recorded discretely as a component of the income tax provision related to continuing operations in the period of enactment. The effect of the change in tax law resulted in a reduction to the Company’s net deferred income tax assets of $4.7 million and a corresponding offset to income tax expense in the consolidated statement of income for the year ended December 31, 2017.
Management believes that it is more likely than not that a portion of the benefit relating to the state capital loss carryforward will not be realized. In recognition of this risk, the Company has provided an additional valuation allowance during 2017 of $297 thousand on the balance of the deferred income tax asset as of December 31, 2017. If management’s assumptions change and determine the Company will be able to realize these capital loss carryforwards, the income tax benefits related to any reversal of the valuation allowance on deferred income tax assets as of December 31, 2017, will be accounted for as a future reduction in income tax expense.
The Company has adopted Accounting for Uncertainty in Income Taxes (“ASC 740”) 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 an income tax position taken or expected to be taken in an income tax return. The Company’s policy is to classify interest and penalties related to unrecognized tax positions, if any, in its provision for income taxes. As of December 31, 2017 and 2016, the Company determined that no uncertain tax liabilities are required.
Lawsuits are filed against the Company from time to time. Many of these lawsuits involve claims under policies that we underwrite and reserve for as an insurer. We are also involved in various legal proceedings and litigation unrelated to claims under our policies that arise in the ordinary course of business operations. Management believes that any liabilities that may arise as a result of these legal matters will not have a material adverse effect on our financial condition or results of operations. The Company contests liability and/or the amount of damages as appropriate in each pending matter.
Redeemable preferred stock: Comprise preferred stock securities that are redeemable. The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active.
Short-term investments: Comprise investment securities subject to re-measurement with original maturities within one year but more than three months. The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active.
The fair value of the promissory note was not materially different than its carrying value.
Set forth is the supplementary information about average historical claims duration as of December 31, 2017:
LAE, which are the estimated expenses associated with the settlement of case reserves and IBNR.
Reserves for losses and LAE are determined in three primary sectors. These sectors are (1) the estimation of reserves for Florida non-catastrophe losses, (2) hurricane losses, and (3) non-Florida non-catastrophe losses and any other losses. Evaluations are performed for gross loss, LAE and subrogation 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 or type of loss. 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, sinkhole claims, and water damage claims. Although these sectors are aggregated into the single tables noted above, analyses are performed in these three sectors, due to the analogous nature of the product and similar claim settlement traits.
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, recovered subrogation or LAE plus individual case reserves established by claim adjusters) for an accident period to create an estimate of how losses or recoveries 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 claims occurred, regardless of the date they were reported to the company. These analyses are used to prepare estimates of required reserves for payments or recoveries to be made in the future. Transactions are organized into half-year accident periods for purposes of the reserve estimates. Key data elements used to determine our reserve estimates include historical claim counts, loss and LAE payments, subrogation received, case reserves, earned policy exposures, and the related development factors applicable to this data.
The methodology used to determine claim counts is based first around the event and then based on coverage. One event could have one or more claims based on the policy coverage, for example an event could have a claim for the first party coverage and a claim for third party liability regardless of the number of third party claimants. If multiple third-party liability claims are reported together they would be counted as one claim.