We use all of our owned and leased properties for office space. We own two buildings located in St. Petersburg, Florida. Our principal executive office contains approximately 40,000 square feet of commercial office space and associated property. Our second building contains approximately 7,800 square feet of commercial office space. Both buildings are used as our principal executive offices.
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. 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. As a result of these transactions, along with the organic growth of premium in states in which we currently write premium, we have grown our policies in-force by 10.2% from 528,193 policies in-force at December 31, 2017 to 582,096 policies in-force at December 31, 2018.
(1) Loss ratio, net is calculated as losses and LAE. net of losses ceded to reinsurers, relative to net premiums earned. We use this operating metric to analyze our loss trends.
(2) Expense ratio is calculated as the sum of all operating expenses less interest expense relative to net premiums earned. We use this operating metric to analyze our expense trends.
Combined ratio excluding the effects of current year catastrophe losses, prior year reserve development and ceding commission income earned (underlying combined ratio) is a non-GAAP ratio, which is computed by subtracting the effect of current year catastrophe losses, prior year development, and ceding commission income earned related to our quota share reinsurance agreement from the combined ratio. We believe that this ratio is useful to investors and it is used by management to reveal the trends in our business that may be obscured by current year catastrophe losses, prior year development, and ceding commission income earned. Current year catastrophe losses cause our loss trends to vary significantly between periods as a result of their incidence 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. Ceding commission income compensates the Company for expenses it incurs in generating the premium ceded under our quota share reinsurance agreement. 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.
Operating expenses excluding the effects of ceding commission income earned, merger expenses, and amortization of intangible assets (underlying expense) is a non-GAAP measure which is computed by subtracting ceding income earned related to our quota share reinsurance agreement, merger expenses and amortization of intangibles. Ceding commission income compensates the Company for expenses it incurs in generating the premium ceded under our quota share reinsurance agreement. Merger expenses are directly related to past mergers and are not reflective of current period operating performance. Similarly, amortization expense is related to the amortization of intangible assets acquired through mergers and therefore the expense does not arise through normal operations. 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 operating expenses. The underlying expense measure should not be considered a substitute for operating expenses and does not reflect the overall profitability of our business.
Our gross written premiums increased by $211,553,000, or 20.3%, to $1,252,401,000 for the year ended December 31, 2018, from $1,040,848,000 for the year ended December 31, 2017, primarily reflecting organic growth in new and renewal business generated in all regions. The breakdown of the year-over-year changes in both direct and assumed written premiums by region and gross written premium by line of business are shown in the table below.
We expect our gross written premium growth to continue as we increase our policies in-force in the states in which we currently write policies and as we expand into other states in which we are currently licensed to write property and casualty insurance.
Expenses for the year ended December 31, 2018 increased $74,634,000, or 11.4%, to $728,297,000 for the year ended December 31, 2018, from $653,663,000 for 2017. The increase in expenses was primarily due to an increase in losses and LAE combined with the change in presentation of ceding commission income in 2018 from other revenue to policy acquisition costs. The calculations of our combined loss ratios and underlying loss ratios are shown below.
(1) For the year ended December 31, 2018, we presented $42.4 million of ceding commissions earned as a $9.3 million decrease to ceded earned premium and a $33.1 million decrease in policy acquisition costs, which reduced other revenue and remove the distortive impact to our underlying expense ratio
(2) Underlying expense is a non-GAAP financial measure and is reconciled above to total operating expenses, 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.
Loss and LAE increased by $43,054,000, or 11.8%, to $408,589,000 for the year ended December 31, 2018, from $365,535,000 for the year ended December 31, 2017. Loss and LAE expense as a percentage of net earned premiums decreased 3.1 points to 59.3% for the year ended December 31, 2018, compared to 62.4% for the year ended December 31, 2017. Excluding catastrophe losses and reserve development, our gross underlying loss and LAE ratio for the year ended December 31, 2018 would have been 25.8%, an increase of 0.3 points from 25.5% during the year ended December 31, 2017.
Operating and underwriting expenses increased by $12,915,000, or 46.7%, to $40,590,000 for the year ended December 31, 2018, from $27,675,000 for the year ended December 31, 2017, primarily due to approximately $3,715,000 of increased agent incentive costs from our new contingent commission program, along with approximately $3,070,000 in incurred expenses related to our investment in software and approximately $1,464,000 of assessments incurred in Texas and North Carolina throughout the year.
(1) Underlying Loss and LAE is a non-GAAP financial measure and is reconciled above to Loss and LAE, the most directly comparable GAAP measure. Additional information regarding non-GAAP financial measures presented can be found in this Form 10-K is in the “Definitions of Non-GAAP Measures” section, above.
Policy acquisition costs increased by $57,786,000, or 49.1%, to $175,444,000 for the year ended December 31, 2017, from $117,658,000 for the year ended December 31, 2016. The primary driver of the increase in costs was the managing general agent fees paid to AmRisc in relation to AmCo commercial premium, which was a cost increase anticipated with the acquisition of AmCo. The remaining change was the result of policy acquisition costs varying directly with changes in gross premiums earned and were generally consistent with our growth in premium production and higher average market commission rates outside of Florida.
Operating and underwriting expenses increased by $7,151,000 or 34.8%, to $27,675,000 for the year ended December 31, 2017, from $20,524,000 for the year ended December 31, 2016, primarily due to increased costs related to our ongoing growth, incurred expenses related to software improvements and costs related to the increase in underwriting reports.
ANALYSIS OF FINANCIAL CONDITION - DECEMBER 31, 2018 COMPARED TO DECEMBER 31, 2017
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 equityholders in a bankruptcy proceeding.
Effective December 31, 2018, we extended our quota share reinsurance agreement that was set to expire on December 31, 2018 for a period through May 31, 2019. This quota share reinsurance agreement has a cession rate of 20% for all subject business. Effective January 1, 2019, we renewed the aggregate excess of loss agreement to provide coverage against accumulated losses from specified catastrophe events, for a term of 12 months.
Excluding our flood business, for which we cede 100% of the risk of loss, reinsurance costs for 2018 were 40.1% of gross premiums earned compared to 38.6% of gross premiums earned for 2017. The increase in this ratio was driven primarily by our quota share reinsurance program, which was in effect for eleven months during 2018, but for only one month during 2017.
We amortize our ceded unearned premiums over the annual agreement period, and we record that amortization in ceded premiums earned on our Consolidated Statements of Comprehensive Income (Loss). The table below summarizes the amounts of our ceded premiums written under the various types of agreements, as well as the amortization of ceded unearned premiums:
Current year catastrophe losses disaggregated between name and numbered storms and all other catastrophe loss events are shown in the following table.
Unpaid losses and LAE totaled $661,203,000 and $482,232,000 as of December 31, 2018 and 2017, respectively. The balance has increased year over year as a result of increased reserves for both weather-related and non weather-related activity during 2018 compared to 2017.
During the years ended December 31, 2018 and 2017, we contributed $94,000,000, including our contribution to form our new subsidiary as described below, and $30,000,000 of capital to our insurance subsidiaries, respectively. We may make future contributions of capital to our insurance subsidiaries as circumstances require.
On December 5, 2016, we issued $30,000,000 of senior notes to private investors at an interest rate of 5.75% in excess of the three-month LIBOR. The notes were redeemed at par value on December 13, 2017 without a pre-payment penalty. Please refer to Note 11 in the Notes to Consolidated Financial Statements for a discussion of the additional terms associated with these notes.
On May 26, 2016, we issued a $5,200,000, 15-year term note payable to Branch Banking & Trust (BB&T) with the intent to use the funds to renovate, furnish and equip the principal location of our corporate executive offices. The note bears interest at 1.65% in excess of the one-month LIBOR. The interest rate resets monthly and was 4.00% at December 31, 2018. Please refer to Note 11 in the Notes to Consolidated Financial Statements for a discussion of the additional terms associated with this note.
Financial Statements for additional information on the acquisition transaction, and Note 11 in the Notes to Consolidated Financial Statements for a discussion of the additional terms associated with this note.
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 purchases of subsidiaries. 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, 2018, cash used in investing activities increased $118,298,000 as the result of $24,183,000 higher net purchases of investments in 2018 when compared to 2017 and $95,284,000 in cash provided by investing activities as a result of the merger with AmCo in 2017 that did not recur during the year ended December 31, 2018.
Please refer to Note 2(s) in our Notes to Consolidated Financial Statements for a discussion of recent accounting standards that may affect us.
(2) Represents agreements entered into to purchase goods and services in the normal course of business.
Represents repayment of $150,000,000 senior notes payable on December 15, 2027, principal payments totaling $8,824,000 over the remaining life of the SBA note, and principal payments totaling $4,304,000 over the remaining life of the BB&T note. Additionally, all future interest payments are calculated using the current rates provided at December 31, 2018, and are included. All future payments are shown net of amortization of debt issuance costs. See Note 11 in our Notes to Consolidated Financial Statements for additional information regarding our long-term debt.
As of December 31, 2018, UPC, FSIC, IIC, ACIC, and BlueLine Cayman Holdings had unpaid loss and LAE of $661,203,000. The specific amounts and timing of obligations related to known and unknown reserves and related LAE reserves are not set contractually, and the amounts and timing of these obligations are unknown. Nonetheless, based upon our cumulative claims paid over the last 19 years, we estimate that the loss and LAE reserves will be paid in the periods shown above. While we believe that historical performance of loss payment patterns is a reasonable source for projecting future claims payments, there is inherent uncertainty in this estimated projected settlement of loss and LAE reserves, and as a result these estimates will differ, perhaps significantly, from actual future payments.
To the shareholders and the Board of Directors of the United Insurance Holdings Corp.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of the Sponsoring Organizations of the Treadway Commission and our report dated March 15, 2019, expressed an adverse opinion on the Company’s internal control over financial reporting as a result of a material weakness.
We have audited the accompanying consolidated balance sheet of United Insurance Holdings Corp. and its subsidiaries (the Company) as of December 31, 2017, the related consolidated statements of comprehensive income, stockholders’ equity and cash flows for each of the years in the two-year period ended December 31, 2017, and the related notes to the consolidated financial statements and schedules (collectively, 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, 2017, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.
See accompanying notes to consolidated financial statements. Statements include related party transactions as detailed in Note 15.
United Insurance Holdings Corp. (referred to in this document as we, our, us, the Company or UPC Insurance) is a property and casualty insurance holding company that sources, writes and services residential personal and commercial property and casualty insurance policies using a network of agents, four wholly-owned insurance subsidiaries, and one majority-owned insurance subsidiary. Our largest insurance subsidiary is United Property & Casualty Insurance Company (UPC), which was formed in Florida in 1999 and has operated continuously since that time. Our four other insurance subsidiaries are Family Security Insurance Company, Inc. (FSIC), acquired via merger on February 3, 2015, Interboro Insurance Company (IIC), acquired via merger on April 29, 2016, American Coastal Insurance Company (ACIC), acquired via merger on April 3, 2017, and Journey Insurance Company (JIC). JIC was formed in strategic partnership with a subsidiary of Tokio Marine Kiln Group Limited (Kiln) on August 30, 2018. The Kiln subsidiary holds a noncontrolling interest in JIC. See Note 4 in these Notes to Consolidated Financial Statements for additional information regarding these transactions.
Our primary product is homeowners' 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 the state of Florida. 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 reclassified certain amounts in the 2017 and 2016 financial statements to conform to the 2018 presentation. These reclassifications had no impact on our results of operations or stockholders’ equity, as previously reported.
We currently classify all of our investments in fixed maturities, other investments and short-term investments as available-for-sale, and report them and our equity securities at fair value. Subsequent to our acquisition of available-for-sale securities, we record changes in value through the date of disposition as unrealized holding gains and losses, net of tax effects, and include them as a component of comprehensive income (loss). We include realized gains and losses, which we calculate using the specific-identification method for determining the cost of securities sold, in net income. We amortize any premium or discount on fixed maturities over the remaining maturity period of the related securities using the effective interest method, and we report the amortization in net investment income. We recognize dividends and interest income when earned. As of January 1, 2018, in accordance with Accounting Standards Update (ASU) 2016-01 (ASU 2016-01), we present our unrealized gains or losses on equity investments on the income statement.
If a debt security is impaired and we either intend to sell the security or it is more likely than not that we will have to sell the security before we are able to recover the amortized cost, then we record the full amount of the impairment in net income. If we determine that an impairment of a debt security is other-than-temporary and we neither intend to sell the security nor it is more likely than not that we will have to sell the security before we are able to recover its cost or amortized cost, then we separate the impairment into (a) the amount of impairment related to credit loss and (b) the amount of impairment related to all other factors. We record the amount of the impairment related to the credit loss as an impairment charge in net income, and we record the amount of the impairment related to all other factors in accumulated other comprehensive income (loss).
See Note 3 in our Notes to Consolidated Financial Statements for a discussion regarding the fair value measurement of our investments at December 31, 2018.
Premiums receivable represents amounts due from our policyholders for billed premiums and related policy fees. We perform a policy-level evaluation to determine the extent to which the balance of premium receivable exceeds the balance of unearned premium. We then age any resulting exposure based on the last date the policy was billed to the policyholder, and we establish an allowance for credit losses for any amounts outstanding for more than 90 days. When we receive payments on amounts previously charged off, we credit bad debt expense in the period we receive the payment. The balances of our allowance for uncollectible premiums totaled $362,000 and $384,000 at December 31, 2018 and 2017, respectively.
See Note 7 in our Notes to Consolidated Financial Statements for a discussion of our property, equipment and capitalized software that were held during 2018 and 2017.
We estimate our reserves for unpaid losses using individual case-basis estimates for reported claims and actuarial estimates for incurred but not reported (IBNR) claims, and we continually review and adjust our estimated losses as necessary based on our historical experience and as we obtain new information. If our unpaid loss reserves prove to be deficient or redundant, we increase or decrease the liability in the period in which we identify the difference, thereby impacting net income. Though our estimate of the ultimate cost of settling all reported and unreported claims may change at any point in the future, a reasonable possibility exists that our estimate may vary significantly in the near term from the estimated amounts included in our consolidated financial statements.
The valuation methodology utilized is 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. These estimates and the judgments and assumptions upon which the estimates are based will, in all likelihood, differ in some respects from actual future results. Declines in the estimated fair value of our reporting units could result in goodwill impairments in future periods which could materially adversely affect our results of operations or financial position.
For the 2018 and 2017 annual goodwill impairment tests, we utilized the qualitative assessment for one of our reporting units and determined it was not more likely than not that the fair value of the reporting units tested using the applicable methods was less than their carrying amount and, therefore goodwill was not impaired for either period. For our second reporting unit, we used the quantitative approach in 2018 and determined that the goodwill was not impaired.
We record any income tax penalties and income-tax-related interest as income tax expense in the period incurred. We did not incur any material tax penalties or income-tax-related interest during the years ended December 31, 2018, 2017 or 2016.
We expense all advertising costs as an operating expense when we incur those costs. For the years ended December 31, 2018, 2017 and 2016, we incurred advertising costs of $1,674,000, $1,013,000, and $907,000, respectively.
a geographic concentration resulting from the fact that, though we now operate in 12 states, we still write approximately 52% of our gross written premium in Florida in 2018;
a concentration of credit risk with regard to our cash, because we choose to deposit all of our cash at six 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. We recorded no bad debt expense related to reinsurance during the years ended December 31, 2018, 2017 or 2016.
In May 2017, the Financial Accounting Standards Board (FASB) issued ASU No. 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting (ASU 2017-09). This standard provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. ASU 2017-09 is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods, with early adoption permitted for certain requirements. We did not early adopt and the new guidance did not impact the way in which we account for share-based payment transactions. Therefore, the adoption as of January 1, 2018 had no impact on our results of operations.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09). Insurance contracts are excluded from the scope of this standard. Under the standard, guidance is provided on revenue recognition for
entities that enter into contracts with customers to transfer goods or services or enter into contracts for the transfer of nonfinancial assets. The transaction price is attributed to underlying performance obligations in the contract and revenue is recognized as the entity satisfies the performance obligation and transfers control of the good or service to the customer. ASU 2014-09 is effective beginning in the first quarter of 2018. We adopted this standard as of January 1, 2018. The adoption of this new accounting standard did not have an impact on our consolidated financial statements and related disclosures.
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, with early adoption permitted for certain requirements. We do not intend to early adopt and are assessing the impact of adopting this new accounting standard on our consolidated financial statements and related disclosures.
When we sell investments, we calculate the gain or loss realized on the sale by comparing the sales price (fair value) to the cost or adjusted/amortized cost of the security sold. We determine the cost or adjusted/amortized cost of the security sold using the specific-identification method. The following table details our realized gains (losses) by major investment category for the years ended December 31, 2018, 2017, and 2016:
The table below summarizes our fixed maturities at December 31, 2018 by contractual maturity periods. Actual results may differ as issuers may have the right to call or prepay obligations, with or without penalties, prior to the contractual maturities of those obligations.
We have a comprehensive portfolio monitoring process to identify and evaluate each fixed income security whose carrying value may be other-than-temporarily impaired.
During our quarterly evaluations of our securities for impairment, we determined that none of our investments in fixed-income securities that reflected an unrealized loss position were other-than-temporarily impaired. The issuers of our debt securities continue to make interest payments on a timely basis. We do not intend to sell nor is it likely that we would be required to sell the debt securities before we recover our amortized cost basis. Due to the adoption of ASU 2016-01 as of January 1, 2018, equity securities are reported at fair value with changes in fair value recognized in valuation of equity investments and are no longer included in impairment write-downs, change in intent write-downs and sales. During the years ended December 31, 2018, 2017, and 2016 we recorded no other-than-temporary impairment charges.
Level 2: Assets and liabilities whose values are based on the following:
We estimate the fair value of our investments using the closing prices on the last business day of the reporting period, obtained from active markets such as the NYSE, Nasdaq and NYSE American. For securities for which quoted prices in active markets are unavailable, we use a third-party pricing service that utilizes quoted prices in active markets for similar instruments, benchmark interest rates, broker quotes and other relevant inputs to estimate the fair value of those securities for which quoted prices are unavailable. Our estimates of fair value reflect the interest rate environment that existed as of the close of business on December 31, 2018 and 2017. Changes in interest rates subsequent to December 31, 2018 may affect the fair value of our investments.
Any change in the estimated fair value of our fixed-income securities would impact the amount of unrealized gain or loss we have recorded, which could change the amount we have recorded for our investments and other comprehensive income (loss) on our Consolidated Balance Sheet as of December 31, 2018.
The carrying amounts for the following financial instrument categories approximate their fair values at December 31, 2018 and 2017, because of their short-term nature: cash and cash equivalents, accrued investment income, premiums receivable, reinsurance recoverable, reinsurance payable, other assets, and other liabilities. The carrying amount of the notes payable to the Florida State Board of Administration, the Branch Banking & Trust Corporation (BB&T) and our senior notes approximate fair value as the interest rates and terms are variable.
(1) Distributions will be generated from investment gains, from operating income, from underlying investments of the funds, and from liquidation of the underlying assets of the funds. We estimate that the underlying assets of the funds will be liquidated over the next three months to 10 years.
At December 31, 2017, we held commercial portfolio loans of $20,000,000. We believe that making sound loans is a necessary and desirable means of employing funds available for investment. Recognizing our obligation to our stockholders, management is expected to seek to develop and make sound, profitable loans that resources permit and that opportunity affords. These were short-term collateralized loans (less than one year), which were repaid in full in April 2018, primarily from cash flows of the borrowers.
(1) Adjustments are for the period from January 1, 2016 through April 3, 2017.
In connection with the acquisition, we paid an investment advisory fee of $7,000,000. This amount was included in general and administrative expenses on the Company’s Consolidated Statements of Comprehensive Income (Loss) during the year ended December 31, 2017.
On April 29, 2016, we completed the acquisition of IIC. The purchase price for IIC consisted of $48,450,000 in cash, $8,550,000 in a note payable that matured during October 2017 and an accrued liability for $3,471,000 paid during July 2016. The acquisition of IIC supported our growth strategy and further strengthened our overall position in the property and casualty insurance market in the state of New York.
In connection with the acquisition, we paid an investment advisory fee of $224,000. This amount was included in general and administrative expenses on the Company’s Consolidated Statements of Comprehensive Income (Loss) during the year ended December 31, 2016.
Depreciation and amortization expense under property and equipment was $4,222,000, $5,806,000 and $2,424,000, respectively, for the years ended December 31, 2018, 2017 and 2016. During the years ended December 31, 2018 and 2017, we incurred non-cash capitalized software write-off charges as a result of our decision to discontinue the use of one of the software development projects that we previously developed and capitalized.
The changes in the carrying amount of goodwill for the years ended December 31, 2018 and 2017 were as follows:
We completed our most recent goodwill impairment testing during the fourth quarter of 2018 and determined that there was no impairment in the value of our assets as of December 31, 2018. No impairment loss in the value of goodwill was recognized during the years ended December 31, 2018 and 2017. Additionally, there was no accumulated impairment related to goodwill at December 31, 2018 or 2017.
The following is a summary of intangible assets excluding goodwill recorded as other assets on our Consolidated Balance Sheets at December 31, 2018 and 2017:
No impairment in the value of amortizing or non-amortizing intangible assets was recognized during the years ended December 31, 2018 and 2017.
Estimated amortization expense of our intangible assets to be recognized by the Company over the next five years is as follows:
Our program includes excess of loss, aggregate excess of loss and quota share treaties. Our excess of loss contract, in effect from June 1, 2018 through May 31, 2019, provides coverage for catastrophe losses from named or numbered windstorms and earthquakes up to a $3,100,000,000 exhaustion point. In addition to this contract, we have an aggregate excess of loss contract, effective January 1, 2018, which provides coverage for all catastrophe perils other than hurricanes, tropical storms, tropical depressions and earthquakes. We ceded $20,000,000 of catastrophe losses for this treaty for the year ended December 31, 2018. The quota share agreement provides coverage for all catastrophe perils and attritional losses incurred by our insurance subsidiary, UPC. For all catastrophe perils, the quota share agreement provides ground-up protection effectively reducing our retention for catastrophe losses.
Ceded losses incurred increased by $230,954,000 during the year ended December 31, 2018, compared to the year ended December 31, 2017, primarily because we incurred more ceded losses in 2018 than in 2017 as a result of the development on Hurricane Irma, which occurred during 2017, and Hurricanes Florence and Michael, which occurred during 2018. A portion of the losses we incurred in 2018, 2017, and 2016 exceeded our retained loss thresholds; therefore, we received reinsurance recoveries for losses that we incurred on these storms and expect to receive additional recoveries during 2019.
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.
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.
The following is information about incurred claims development and paid claims development as of December 31, 2018, net of reinsurance, as well as cumulative claim frequency and the total of IBNR liability plus expected development on reported claims included within the net incurred claims amounts. The incurred claims development and paid claims development data reflect the acquisitions of FSIC, IIC, and AmCo in February 2015, April 2016, and April 2017, respectively, on a retrospective basis (includes FSIC, IIC and AmCo data for years prior to our acquisition of the insurance affiliates). The information about incurred claims development and paid claims development for the years ended December 31, 2009 to 2015 is presented as supplementary information.
The following is supplementary information about average historical claims duration as of December 31, 2018.
The table below presents all long-term debt outstanding as of December 31, 2018 and 2017:
At December 31, 2018, the annual maturities of our long-term debt were as follows:
On December 13, 2017, we issued $150,000,000 of senior notes ($150M senior notes) that will mature in 10 years 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 $150M senior notes are senior unsecured obligations of the Company. We may redeem the $150M 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 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 $150M senior notes at par.
On September 22, 2006, we issued a $20,000,000, 20-year note payable to the Florida State Board of Administration (the SBA Note). For the first three years of the SBA note we were required to pay interest only. On October 1, 2009, we began to repay the principal in addition to interest. The SBA Note bears an annual interest rate equivalent to the 10-year U.S. Treasury Bond rate. The rate is adjusted quarterly for the term of the SBA Note based on the 10-year Constant Maturity Treasury rate.
The table below presents the rollforward of our debt issuance costs paid, in conjunction with the debt instruments described above, during the years ended December 31, 2018 and 2017:
We have fully funded two limited partnership investments and have committed to fund our remaining four investments. The amount of unfunded commitments was $2,454,000 and $1,365,000 at December 31, 2018 and 2017, respectively.
We, as lessee, have entered into various short-term to medium-term leases of commercial office space. In addition to office space, we lease office equipment and a parking lot under operating leases and vehicles under capital leases. Lease expense amounted to $589,000, $290,000, and $205,000 for the years ended December 31, 2018, 2017, and 2016, respectively. At December 31, 2018, future minimum gross lease payments relating to these non-cancellable operating and capital lease agreements are as follows:
On December 22, 2017, the 2017 Tax Act was signed into law. At the time it was enacted, the Tax Act was subject to further clarification and interpretation by the U.S. Treasury Department and Internal Revenue Service. For example, the 2017 Tax Act changed the methodology used by insurance companies to calculate their insurance claims and reserves for tax purposes, including revaluing those tax basis liabilities as of January 1, 2018, based on a methodology and discount factors that had not been published. In November 2018, the U.S. Treasury issued proposed regulations providing the interest rate to be used in determining the tax-related discount on insurance claims and reserves. The 2017 Tax Act provided a transitional deferred tax liability (taxes payable over an 8-year period). Since the established transition liability was completely offset by an increase in related deferred tax asset, the adjustment to the final amount when the factors were published in 2018 did not impact the Company’s effective tax rate. In accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 118 (SAB 118), all changes in deferred taxes resulting from clarification and interpretation of the 2017 Tax Act were recorded in 2018, the period in which the guidance was published. As a result, the Company’s implementation of the 2017 Tax Act is complete as of December 31, 2018.
Deferred income taxes, which are included in other assets or other liabilities as appropriate, reflect the net tax effects of temporary differences between the carrying amounts of asses and liabilities for financial reporting purposes and the amounts used for income tax purposes.
2018, and during the year then ended, our insurance subsidiaries met all regulatory requirements of the states in which they operate. In March 2018, we received a recoupable assessment for $570,000 from the Texas Fair Plan Association. In September 2018, we received an assessment for $894,000 from North Carolina Joint Underwriting Association. We did not receive any additional significant assessments from regulatory authorities in the states in which our insurance subsidiaries operate.
Governmental agencies or certain quasi-governmental entities can also levy assessments upon policyholders, and we collect the amount of the assessments from policyholders as surcharges for the benefit of the assessing agency. We currently collect assessments levied upon policyholders on behalf of Citizens Property Insurance Corporation in the amount of 1.0%, and on behalf of FHCF in the amount of 1.3%. We multiply the premium written on each policy, except our flood policies, by these assessment percentages to determine the additional amount that we will collect from the policyholder and remit to the assessing agencies.
Our insurance subsidiaries must maintain capital and surplus ratios or balances as determined by the regulatory authority of the states in which they are domiciled. At December 31, 2018, we met these requirements. The amount of surplus as regards policyholders for our regulated entities at December 31, 2018 and 2017, was $437,449,000, and $389,384,000 respectively.
The amount of restricted net assets of UPC, ACIC, FSIC, IIC, and JIC at December 31, 2018 was $156,719,000, $143,699,000, $48,513,000, $40,890,000, and $60,130,000 respectively.
One of our former executive officers who acted as an executive officer during the period covered by this Form 10-K, Ms. Salmon, is also a former partner at the law firm of Groelle & Salmon, PA, where her spouse remains partner and co-owner. Groelle & Salmon, PA provides legal representation to us related to our claims litigation, and also provided representation to us for several years prior to Ms. Salmon joining UPC Insurance in 2014. During the years ended December 31, 2018 and 2017, while Ms. Salmon was employed at the Company, Groelle & Salmon, PA billed us approximately $2,407,000 and $3,188,000, respectively. Ms. Salmon’s spouse has a 50% interest in these billings, or approximately $1,204,000 and $1,594,000 for the years ended December 31, 2018 and 2017, respectively. Effective September 7, 2018, Ms. Salmon stepped down from her role at UPC Insurance.
In addition to the direct premiums written, we recorded $5,146,000 and $3,564,000 in ceded premiums to AmRisc as a reinsurance intermediary for the year ended December 31, 2018 and 2017, respectively. We also incurred $19,000 and $25,000, respectively, during those periods for rent under a sublease agreement with AmRisc.
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, 2018, 2017, and 2016, our contributions to the plan on behalf of the participating employees were $861,000, $604,000, and $444,000, respectively.
We report changes in other comprehensive income items within comprehensive income (loss) on the Consolidated Statements of Comprehensive Income (Loss), and we include accumulated other comprehensive income (loss) as a component of stockholders’ equity on the Consolidated Balance Sheets.
On November 6, 2018, ACIC and IIC paid dividends of $50,000,000 and $1,764,000, respectively, to the Company.
Performance-based restricted stock grants vest based on return on average equity compared to a defined group of peer companies. On the grant date, we issue the target number of performance stock units. They are subject to forfeitures if performance goals are not met. The actual number of performance stock units earned can vary from zero to 150 percent of the target for the 2018 awards.
(1) The sum of the quarterly reported amounts does not equal the full year due to a presentation change in ceding commission income incurred during the second quarter of 2018.
On February 20, 2019, our Board of Directors declared a $0.06 per share quarterly cash dividend which was paid on March 13, 2019 to stockholders of record on March 6, 2019.
On February 25, 2019, the Company made capital contributions of $4,000,000 and $1,000,000 to UPC and FSIC, respectively.