During 2016, we renewed our lease of approximately 800 square feet of office space at 7192 Kalanianaole Highway, Honolulu, Hawaii. We paid approximately $22.08 per square foot in 2015 and approximately $23.16 per square foot during 2016.
share of common stock of AmCo will be converted into shares of common stock of UIHC equal to 209,563.55 multiplied by the lesser of (a) one and (b) a fraction, the numerator of which is 130% of $14.81 and the denominator of which is the 30-day trailing volume-weighted average closing stock price of UIHC common stock as of the day of the closing of the mergers. Immediately following the completion of the mergers, current UIHC stockholders and RDX members will own approximately 51% and 49% of the outstanding shares of UIHC common stock, respectively.
1 Loss ratio, net is calculated as losses and loss adjustment expenses relative to net premiums earned.
Combined ratio excluding the effects of current year catastrophe losses and reserve development (underlying combined ratio) is a non-GAAP ratio, which is computed as the difference between three GAAP operating ratios: the combined ratio, the effect of current year catastrophe losses on the combined ratio and the effect of prior year development on 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
In making these determinations, management makes subjective and complex judgments that frequently require estimates about matters that are inherently uncertain. Many of these policies, estimates and related judgments are common in the insurance industry. It is reasonably likely that changes in these estimates could occur from time to time and result in a material impact on our consolidated financial statements.
estimated recovery value is less than the amortized cost of the security, a credit loss exists and an other-than-temporary impairment for the difference between the estimated recovery value and amortized cost is recorded in earnings. The portion of the unrealized loss related to factors other than credit remains classified in accumulated other comprehensive income. If we determine that the fixed income security does not have sufficient cash flow or other information to estimate a recovery value for the security, we may conclude that the entire decline in fair value is deemed to be credit related and the loss is recorded in earnings.
There are a number of assumptions and estimates inherent in evaluating impairments of equity securities and determining if they are other-than-temporary, including: (1) our ability and intent to hold the investment for a period of time sufficient to allow for an anticipated recovery in value; (2) the length of time and extent to which the fair value has been less than cost; (3) the financial condition, near-term and long-term prospects of the issue or issuer, including relevant industry specific market conditions and trends, geographic location and implications of rating agency actions and offering prices; and (4) the specific reasons that a security is in an unrealized loss position, including overall market conditions which could affect liquidity.
Once assumptions and estimates are made, any number of changes in facts and circumstances could cause us to subsequently determine that a fixed income or equity security is other-than-temporarily impaired, including: (1) general economic conditions that are worse than previously forecasted or that have a greater adverse effect on a particular issuer or industry sector than originally estimated; (2) changes in the facts and circumstances related to a particular issue or issuer's ability to meet all of its contractual obligations; and (3) changes in facts and circumstances that result in changes to management's intent to sell or result in our assessment that it is more likely than not we will be required to sell before recovery of the amortized cost basis of a fixed income security or cause a change in our ability or intent to hold an equity security until it recovers in value. Changes in assumptions, facts and circumstances could result in additional charges to earnings in future periods to the extent that losses are realized. The charge to earnings, while potentially significant to net income, would not have a significant effect on stockholders' equity, since our securities are designated as available for sale and carried at fair value and as a result, any related unrealized loss, net of taxes would already be reflected as a component of accumulated other comprehensive income in stockholders' equity.
As discussed in Note 2 in our Notes to Consolidated Financial Statements, the qualitative assessment is an assessment of historical information and relevant events and circumstances to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. We may elect not to perform the qualitative assessment and perform a two-step quantitative impairment test.
With respect to our investments, we primarily attempt to preserve capital, maximize after-tax investment income, maintain liquidity and minimize risk. To accomplish our goals, we purchase debt securities in sectors that we believe represent the most attractive relative value, and we maintain a moderate equity exposure. We must comply with applicable state insurance regulations that prescribe the type, quality and concentrations of investments our insurance affiliates can make; therefore, our current investment policy limits investment in non-investment-grade fixed maturities and limits total investment amounts in preferred stock, common stock and mortgage notes receivable. We do not invest in derivative securities.
At December 31, 2016, securities in an unrealized loss position for a period of twelve months or longer reflected unrealized losses of $236,000; approximately $26,000 of the total related to one fixed maturity security, while twenty-four equity securities reflected unrealized losses of $210,000. We currently have no plans to sell these twenty-five securities, and we expect to fully recover our cost basis. We reviewed all of our securities and determined that we did not need to record impairment charges at December 31, 2016. Similarly, we did not record impairment charges at December 31, 2015.
During the second quarter of 2016, we placed our reinsurance program for the 2016 hurricane season. We purchased catastrophe excess of loss reinsurance protection of $1,515,197,000. The contracts reinsure for personal lines property excess catastrophe losses caused by multiple perils including hurricanes, tropical storms, and tornadoes. The agreements were effective as of June 1, 2016, for a one-year term and incorporate the mandatory coverage required by and placed with the Florida Hurricane Catastrophe Fund. The private agreements provide coverage against severe weather events such as hurricanes, tropical storms and tornadoes. Effective January 1, 2017, we placed a reinsurance agreement to provide coverage against accumulated losses from specified catastrophe events, that will expire on December 31, 2017.
We generally use the term "loss(es)" to collectively refer to both loss and loss adjusting expenses. We establish reserves for both reported and unreported unpaid losses that have occurred at or before the balance sheet date for amounts we estimate we will be required to pay in the future, including provisions for claims that have been reported but are unpaid at the balance sheet date and for obligations on claims that have been incurred but not reported at the balance sheet date. Our policy is to establish these loss reserves after considering all information known to us at each reporting period. At any given point in time, our loss reserve represents our best estimate of the ultimate settlement and administration costs of our insured claims incurred and unpaid.
Unpaid losses and loss adjustment expenses totaled $140,855,000 and $76,792,000 as of December 31, 2016 and December 31, 2015, respectively.
See Note 10 in our Notes to Unaudited Consolidated Financial Statements for additional information regarding our losses and loss adjustments.
Our total gross written premium increased by $138,420,000, or 24.3%, to $708,156,000 for the year ended December 31, 2016 from $569,736,000 for the year ended December 31, 2015, primarily due to the strong organic growth in new and renewal business generated in our Gulf and Northeast regions. Increases in direct written premium of over $159,335,000 were partially offset by reductions in assumed premium as we sharply curtailed our takeout activity in 2016 compared to the prior year. The breakdown of the year-over-year changes in both direct written and assumed premiums by region is shown in the table below.
Loss and LAE increased $115,245,000, or 62.9%, to $298,353,000 for the year ended December 31, 2016 from $183,108,000 for the year ended December 31, 2015. Loss and LAE expense as a percentage of net earned premiums increased 10.8 points to 65.3% for the year, compared to 54.5% for the same period last year. Excluding catastrophe losses and reserve development, our gross underlying loss and LAE ratio for the year was 33.8%, an increase of 2.7 points from 31.1% during 2015, due primarily to an increase in fire and weather related losses as well as lower average premiums. Retained catastrophe losses of $55,842,000 during 2016 included losses from spring storms in Florida and Texas, the August Louisiana storms, Hurricane Hermine, Tropical Storm Colin, Hurricane Matthew, and certain other losses not covered by our reinsurance programs. Prior year loss reserve development of $16,988,000 for the year was driven primarily by non-catastrophe claims in Florida for accident year 2015.
Operating expenses increased by $5,208,000, or 34.0%, to $20,524,000 for the year ended December 31, 2016 from $15,316,000 for the year ended December 31, 2015, primarily due to increased costs related to our ongoing growth and continuing expansion into new states.
We experienced unfavorable reserve development in the current year and its historical impact on our net loss and net underlying loss ratios is outlined in the following table.
Overall our attritional loss experience by accident year excluding catastrophes has been trending upwards for the last two accident years due to lower premiums per unit of exposure resulting from our growth outside of Florida and higher overall frequency and severity of water-related losses.
(2) All assumed premiums shown above are from policy assumptions from Citizens that are written in Florida and are shown net of opt-outs.
(1) Each region is comprised of the following states: Gulf includes Hawaii, Louisiana and Texas, Northeast includes Massachusetts, New Jersey, and Rhode Island, and Southeast includes Georgia, North Carolina and South Carolina.
Expenses for the twelve months ended December 31, 2015 increased $100,106,000, or 46.4%, to $316,003,000 for the year ended December 31, 2015 from $215,897,000 for the same period in 2014, primarily due to increased losses, policy acquisition costs, operating costs and general and administrative expenses. The calculation of our underlying loss and combined ratios is shown below:
Losses and LAE increased $65,031,000, or 55.1% to $183,108,000 for the year ended December 31, 2015, from $118,077,000 in 2014 primarily due to the growth of policies in-force and a $27,736,000 increase in current year catastrophe losses. Current year catastrophe losses increased to $28,565,000 for the twelve months ended December 31, 2015 from $829,000, for the same period in 2014.
$65,657,000 for the same period in 2014, primarily due to our ongoing growth in gross earned premium.
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 purchase, renovate, furnish and equip our home office. The note bears interest at 1.65% in excess of the one month LIBOR. The interest rate resets monthly and was 2.44% at December 31, 2016. Please refer to Note 11 in the Notes to Consolidated Financial Statements for a discussion on the additional terms associated with this note.
On December 5, 2016, we issued $30,000,000 of senior notes to private investors. The notes bear interest at 5.75% in excess of the three month LIBOR. The notes will mature ten years after the issue date, have no scheduled amortization, and may be redeemed at par value any time without a pre-payment penalty. Please refer to Note 11 in the Notes to Consolidated Financial Statements for a discussion on the additional terms associated with these notes.
During the first quarter of 2016 we contributed $5,000,000 of capital to FSIC, during the second quarter of 2016 we contributed $6,000,000 of capital to UPC Re, and during the fourth quarter of 2016 we contributed $30,000,000 of capital to UPC. We will continue to contribute capital as required to fund the growing operations of our insurance affiliates. We did not contribute any capital to our insurance affiliates during 2015; however, we contributed $30,845,000 of capital during 2014.
During the year ended December 31, 2016, our operations generated cash of $65,747,000, compared to generating $98,319,000 of cash during the same period in 2015. The $32,572,000 year over year decrease in operating cash was primarily driven by a $107,163,000 increase in claims payments as a result of the increase in exposures and payments on claims from current and prior accident years and an increase in reinsurance payments of $62,568,000 because we purchased more reinsurance coverage under our 2016-2017 contracts than we purchased under our 2015-2016 contracts. Operating expenses and agents' commission payments increased $29,381,000 and $22,727,000, respectively, due to our continuing growth. Partially
offsetting these increases in cash outflows was the increase in cash inflows related to an increase in premiums collected of $173,688,000. In addition, we paid $7,194,000 of income taxes during the year ended December 31, 2016 compared to paying $13,223,000 of income taxes for the same period in 2015.
During the year ended December 31, 2016, our financing activities provided cash of $49,912,000 compared to using $(7,909,000) of cash in 2015. The increase in cash provided by financing activity primarily relates to the $35,200,000 in net proceeds from borrowings generated during 2016, while no such borrowings proceeds were generated during 2015. See Note 11 in our Notes to Consolidated Financial statements for additional information on the borrowings. In addition, repayments of borrowings decreased $2,043,000 because we paid off the outstanding loan payable balance acquired in the FSH transaction during the first quarter of 2015, while no such repayment occurred in 2016.
The following table summarizes our expected payments for contractual obligations at December 31, 2016:
Represents principal payments over the life of the SBA Note debt. Also includes a note payable for $8,550,000 which we are obligated to pay as consideration for the IIC transaction, a $5,200,000 term note payable to BB&T, and $30,000,000 senior notes payable. See Note 11 in our Notes to Consolidated Financial Statements for additional information regarding our long-term debt.
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.
See Note 16 in our Notes to Consolidated Financial Statements for a discussion of our related party transactions.
We have audited the accompanying consolidated balance sheets of United Insurance Holdings Corp. and subsidiaries (the “Company”) as of December 31, 2016 and 2015, and the related consolidated statements of comprehensive income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2016, and the financial statement schedules of United Insurance Holdings Corp. listed in Item 15. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), United Insurance Holdings Corp. and subsidiaries internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated March 15, 2017 expressed an unqualified opinion on the effectiveness of United Insurance Holdings Corp’s internal control over financial reporting.
United Insurance Holdings Corp. is a property and casualty insurance holding company that sources, writes, and services residential and commercial property and casualty insurance policies using a network of agents and three wholly owned insurance subsidiaries. Our primary insurance subsidiary is UPC, which was formed in Florida in 1999 and has operated continuously since that time. Our other subsidiaries include UIM, the managing general agent that manages substantially all aspects of UPC's business; Skyway Claims Services, LLC (our claims adjusting affiliate) that provides services to our insurance affiliates; and UPC Re (our reinsurance affiliate) that provides a portion of the reinsurance protection purchased by our insurance affiliates. On February 3, 2015, we acquired FSH and its two wholly owned subsidiaries, FSIC and FSU via merger. On April 29, 2016, we acquired IIC via merger. See Note 4 in our Notes to Consolidated Financial Statements for additional information regarding these acquisitions.
See Note 3 in our Notes to Consolidated Financial Statements for a discussion regarding the fair value measurement of our investments at December 31, 2016.
written. The regulatory authority in Hawaii allows managing general agents to charge policyholders a $50 fee on each policy written, while the regulatory authority in Texas allows managing general agents to charge policyholders a $25 or $75 fee, depending on the type of policy issued. Regulatory authorities in Massachusetts and Texas also allow managing general agents to charge a $25 inspection fee and regulatory authorities in Louisiana allow managing general agents to charge up to a $125 inspection fee, depending on the type of homeowner policy issued. We defer such fees as unearned revenue and then include them in income on a pro rata basis over the term of the underlying policies. We record our pay-plan fees, which we charge to all policyholders that pay their premium in more than one installment, as income when collected. We report all policy-related fees in other revenue on our Consolidated Statements of Comprehensive Income.
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, 2016, 2015 or 2014.
a geographic concentration resulting from the fact that, though we now operate in twelve states, we still write approximately 47% of our gross written premium in Florida
a concentration of credit risk with regard to our cash, because we choose to deposit all our cash at six financial institutions
Goodwill is the excess of cost over the estimated fair value of net assets acquired. We attribute all goodwill associated with the acquisition of FSIC and IIC to one reporting unit.
Goodwill is not amortized but is tested for impairment at least annually or more frequently if events or circumstances, such as adverse changes in the business climate, indicate that there may be justification for conducting an interim test. The goodwill impairment process requires a comparison of the estimated fair value of a reporting unit to its carrying value. We test goodwill for impairment by either performing a qualitative assessment or a two-step quantitative test. The qualitative assessment is an
assessment of historical information and relevant events and circumstances to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount, including goodwill. We may elect not to perform the qualitative assessment for our reporting unit and perform a two-step quantitative impairment test. In performing the two-step quantitative impairment test, we may use a market multiple valuation approach and a discounted cash flow valuation approach.
For the 2016 annual goodwill impairment test, we utilized the qualitative assessment and determined it was not more likely than not that the fair value of the reporting unit tested using the qualitative assessment was less than its carrying amount and, therefore no further testing was needed for the reporting unit. We determined that the fair values of the reporting unit was in excess of the carrying value and, therefore goodwill was not impaired.
Identifiable intangible assets that are amortized generally represent the cost of client relationships, trade names and agency agreements acquired. In valuing these assets, we make assumptions regarding useful lives and projected growth rates, and significant judgment is required. We periodically reviews identifiable intangibles for impairment as events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. If the carrying amounts of the assets exceed their respective fair values, additional impairment tests are performed to measure the amount of the impairment loss, if any.
Non-amortizing intangible assets generally represent the cost of insurance licenses acquired. Non-amortizing intangible assets are tested for impairment in the fourth quarter of each fiscal year by comparing the fair value of the licenses acquired to their carrying values. We established fair value for purposes of impairment testing using the income approach. If the carrying value of a license acquired exceeds its fair value, an impairment loss is recognized equal to that excess. For 2016, we determined that the fair values of the intangible assets were not impaired.
In March 2016, the FASB issued Accounting Standards Update No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (ASU 2016-09). This update is intended to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2016, including interim periods within those annual periods, 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.
In January 2016, the FASB issued Accounting Standards Update No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01). This update substantially revises standards for the recognition, measurement and presentation of financial instruments. This standard revises an entity's accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. It also amends certain disclosure requirements associated with the fair value of financial instruments. ASU 2016-01 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 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 tables detail our realized gains (losses) by major investment category for the years ended December 31, 2016, 2015 and 2014:
We have a comprehensive portfolio monitoring process to identify and evaluate each fixed income and equity security whose carrying value may be other-than-temporarily impaired.
For each fixed income security in an unrealized loss position, we determine if the loss is temporary or other-than-temporary. If our management decides to sell the security or determines that it is more likely than not that we will be required to sell the security before recovery of the cost or amortized cost basis for reasons such as liquidity needs, contractual or regulatory requirements, then the security's decline in fair value is considered other-than-temporary and is recorded in earnings.
For equity securities, we consider various factors, including whether we have the intent and ability to hold the equity security for a period of time sufficient to recover its cost basis. If we lack the intent and ability to hold to recovery, or if we believe the recovery period is extended, the equity security's decline in fair value is considered other-than-temporary and is recorded in earnings.
Our portfolio monitoring process includes a quarterly review of all securities to identify instances where the fair value of a security compared to its cost or amortized cost (for fixed income securities) or cost (for equity securities) is below established thresholds. The process also includes the monitoring of other impairment indicators such as ratings, ratings downgrades and payment defaults. The securities identified, in addition to other securities for which we may have a concern, are evaluated for potential other-than-temporary impairment using all reasonably available information relevant to the collectability or recovery of the security. Inherent in our evaluation of other-than-temporary impairment for these fixed income and equity securities are assumptions and estimates about the financial condition and future earnings potential of the issue or issuer. Some of the factors that may be considered in evaluating whether a decline in fair value is other-than-temporary are: (1) the financial condition, near-term and long-term prospects of the issue or issuer, including relevant industry specific market conditions and trends, geographic location and implications of rating agency actions and offering prices; (2) the specific reasons that a security is in an unrealized loss position, including overall market conditions which could affect liquidity; and (3) the length of time and extent to which the fair value has been less than amortized cost or cost.
* This amount represents the actual number of discrete securities, not the number of shares of those securities. The numbers are not presented in thousands.
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 MKT. 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, 2016 and 2015. Changes in interest rates subsequent to December 31, 2016 may affect the fair value of our investments.
The carrying amounts for the following financial instrument categories approximate their fair values at December 31, 2016 and 2015 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 payable approximate fair value as the interest rates are variable. The carrying amount of our note payable with Interboro, LLC approximates fair value due to the short term nature of the loan.
The table below presents the rollforward of our Level 3 investments held at fair value during the year ended December 31, 2016:
On October 20, 2015, we acquired our investment in DCR Mortgage Partners VII, L.P. (DCR VII), a limited partnership, that is currently being accounted for at cost. Our total investment in the partnership is $2,000,000 and we are not required to fund any additional amounts in excess of our initial investment. When the funding for the partnership closes, DCR VII will acquire and manage performing, sub-performing, and non-performing loans secured by income-producing commercial real estate. As the limited partnership was still in the formation phase at December 31, 2016, the cost basis of our investment approximated its fair value.
On September 27, 2013, we acquired our investment in RCH Mortgage Fund VI Investors, LP (RCH). RCH is a limited partnership that acquires and manages performing, sub-performing, and non-performing loans secured by income-producing commercial real estate.
On September 25, 2012, we acquired our investment in DCR Mortgage Partners VI, L.P. (DCR VI). DCR VI is a limited partnership that acquires and manages performing, sub-performing, and non-performing loans secured by income-producing commercial real estate.
(2) Adjustments are for the period from January 1, 2015 through December 31, 2015.
On February 3, 2015, we completed the acquisition of FSH and its two wholly owned subsidiaries. The acquisition of FSIC supports the Company's growth strategy and further strengthens the Company's overall position in the property and casualty insurance market in the states of Louisiana and Hawaii. The total purchase price paid to acquire the companies was $13,507,000 that was paid in shares of our common stock in two installments. The first payment occurred at the closing of the transaction when we issued 503,857 shares of our common stock that had a fair value of $12,994,000 on the date of closing the transaction. One year after the closing of the transaction, we issued an additional 32,943 shares of our common stock as payment of $513,000 of contingent consideration that we owed to the former shareholders of FSH pursuant to the terms of the purchase agreement.
The unaudited pro forma financial information has been prepared as if the FSH acquisition had taken place on January 1, 2015. The unaudited pro forma information is not necessarily indicative of the results that we would have achieved had the
Depreciation and amortization expense under property and equipment was $2,424,000, $1,803,000 and $731,000, respectively, for the years ended December 31, 2016, 2015 and 2014.
Using a qualitative assessment, we completed our most recent goodwill impairment testing during the fourth quarter of 2016 and determined that there was no impairment in the value of the asset as of December 31, 2016.
No impairment loss in the value of goodwill was recognized during the years ended December 31, 2016 and 2015. Additionally, there was no accumulated impairment related to goodwill at December 31, 2016 or 2015.
The following is a summary of intangible assets excluding goodwill and value of business acquired (VOBA) at December 31, 2016 or 2015:
No impairment in the value of amortizing or non-amortizing intangible assets was recognized during the years ended December 31, 2016 and 2015.
The total cost of the 2016-17 catastrophe reinsurance program is estimated to be $191,500,000.
The aggregate excess of loss agreement provides coverage only for other-catastrophe perils. Under this agreement, for other-catastrophe losses in excess of $1,000,000 but less than $15,000,000, UPC will retain, in the aggregate, 100% of those losses up to $30,000,000. The reinsurers will then be liable for all losses excess of $30,000,000 in the aggregate not to exceed
Reflects losses from winter storms, hail storms, Texas flooding, Hurricane Anna and Tropical Storm Bill in 2015.
Reflects losses from the Richland hailstorm, Hurricane Arthur and the Revere Tornado in 2014.
During the years ended December 31, 2016 and 2015, we realized recoveries under our reinsurance agreements totaling $18,412,000 and $10,282,000, respectively. These recoveries were primarily related to losses from Hurricane Matthew, Hurricane Hermine, Winter Storm Olympia, Tropical Storm Colin, tornadoes, thunderstorms, hail storms, and flooding in 2016.
We write flood insurance under an agreement with the National Flood Insurance Program. We cede 100% of the premiums written and the related risk of loss to the federal government. We earn commissions for the issuance of flood policies based upon a fixed percentage of net written premiums and the processing of flood claims based upon a fixed percentage of incurred losses, and we can earn additional commissions by meeting certain growth targets for the number of in-force policies. We recognized commission revenue from our flood program of $1,056,000, $959,000, and $1,078,000 for the years ended December 31, 2016, 2015, and 2014, respectively.
Ceded losses incurred increased by $27,913,000 during the year ended December 31, 2016, compared to the year ended December 31, 2015, primarily because we paid more ceded losses in 2016 than in 2015. A portion of the losses we incurred in 2016 and 2015 exceeded our retained loss thresholds, therefore we received reinsurance recoveries for some of the losses that we incurred on these storms. The losses we incurred in 2014 related to storms that occurred in the same year but did not exceed our retained loss thresholds.
We generally use the term loss(es) to collectively refer to both loss and loss adjusting expenses. We establish reserves for both reported and unreported unpaid losses that have occurred at or before the balance sheet date for amounts we estimate we will be required to pay in the future. Our policy is to establish these loss reserves after considering all information known to us at each reporting period. At any given point in time, our loss reserve represents our best estimate of the ultimate settlement and administration cost of our insured claims incurred and unpaid. Since the process of estimating loss reserves requires significant judgment due to a number of variables, such as fluctuations in inflation, judicial decisions, legislative changes and changes in claims handling procedures, our ultimate liability will likely differ from these estimates. We revise our reserve for unpaid losses as additional information becomes available, and reflect adjustments, if any, in our earnings in the periods in which we determine the adjustments are necessary.
Reserves for unpaid losses fall into two categories: case reserves and reserves for claims incurred but not reported.
Reserves for losses incurred but not reported (IBNR reserves) - Our IBNR reserves include true IBNR reserves plus “bulk” reserves. Bulk reserves represent additional amounts that cannot be allocated to particular claims, but which are necessary to estimate ultimate losses on reported and unreported claims. We estimate our IBNR reserves by projecting
the ultimate losses using the methods discussed below and then deducting actual loss payments and case reserves from the projected ultimate losses. We review and adjust our IBNR reserves on a quarterly basis based on information available to us at the balance sheet date.
setting ultimate losses equal to actual incurred losses plus expected unreported losses. As an experience year matures and expected unreported losses become smaller, the initial expected loss assumption becomes gradually less important. Two parameters are needed to apply the B-F method: the initial expected loss cost and the expected reporting pattern (LDFs). This method is often used for long-tail lines and in situations where the incurred loss experience is relatively immature or lacks sufficient credibility for the application of other methods. The paid B-F method is analogous to the incurred B-F method using paid losses and development patterns in place of incurred losses and patterns.
On an annual basis, our consulting actuary issues a statement of actuarial opinion that documents the actuary’s evaluation of the adequacy of our unpaid loss obligations under the terms of our policies. We review the analysis underlying the actuary’s opinion and compare the projected ultimate losses per the actuary’s analysis to our own projection of ultimate losses to ensure that our reserve for unpaid losses recorded at each annual balance sheet date is based upon our analysis of all internal and external factors related to known and unknown claims against us and to ensure our reserve is within guidelines promulgated by the National Association of Insurance Commissioners (NAIC).
The following is information about incurred claims development and paid claims development as of December 31, 2016, 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 and IIC in February 2015 and April 2016, respectively, on a retrospective basis (includes FSIC and IIC 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, 2007, to 2015 is presented as supplementary information.
At December 31, 2016, the annual maturities of our long-term debt were as follows:
Our SBA note requires that UPC maintain either a 2:1 ratio of net written premium to surplus, or net writing ratio, or a 6:1 ratio of gross written premium to surplus, or gross writing ratio, to avoid additional interest penalties. The SBA note agreement defines surplus for the purpose of calculating the required ratios as the $20,000,000 of capital contributed to UPC under the agreement plus the outstanding balance of the note. Should UPC fail to exceed either a net writing ratio of 1.5:1 or a gross writing ratio of 4.5:1, UPC's interest rate will increase by 450 basis points above the 10-year Constant Maturity Treasury rate which was 2.45% at the end of December 2016. Any other writing ratio deficiencies result in an interest rate penalty of 25 basis points above the stated rate of the note, which was 1.56% at December 31, 2016. Our SBA note further provides that the SBA may, among other things, declare its loan immediately due and payable for all defaults existing under the SBA note; however, any payment is subject to approval by the insurance regulatory authority. At December 31, 2016, we were in compliance with the covenants as specified in the SBA note.
The BB&T note requires that at all times while there has been no "Non-Recurring Losses", UPC will maintain a minimum Cash Flow Coverage ratio of 1.2:1. The Cash Flow Coverage ratio is defined as UPC's cash flow to borrower's debt services. Cash flow is defined as earnings before taxes, plus depreciation and amortization and interest. Debt service is defined as prior year's current maturities of long term debt plus interest expense. This ratio will be tested annually, based on UPC's audited financial statements. For the annual period only following a "Non-Recurring Loss", UPC will maintain a minimum Cash Flow Coverage ratio of 1.0:1. At December 31, 2016, UPC's Cash Flow Coverage ratio was 9.2:1, which is well above the 1.2:1 required ratio at times when there has been no "Non-Recurring Losses".
For purposes of both of the foregoing, "Non-Recurring Losses" is defined as losses from our insurance subsidiaries' operations, as determined from time to time in the bank's sole discretion. This covenant will only be effective if the Pre Non-Recurring Losses test is failed, and is only available and effective for one (1) annual test period. Thereafter, the Non-Recurring Loss Cash Flow Coverage Ratio of 1.2:1 will immediately apply.
In the event of default, BB&T, may among other things, declare its loan immediately due and payable, require us to pledge additional collateral to the bank, and take possession of and foreclose upon our home office which has been pledged to the bank as security for the loan. At December 31, 2016, we were in compliance with the covenants as specified in the BB&T note.
The Indenture contains customary event of default provisions. It also contains covenants that, among other things, restrict the Company's ability to incur indebtedness without first providing written notification and receiving approval from the majority of the holders of the notes, limit the Company's ability to create, incur or assume liens other than permitted liens that secure any indebtedness on any asset or property of the Company, require the Company to maintain reinsurance coverage during the life of the notes, and maintain a maximum debt to capital ratio of 20% beginning from December 31, 2017.
The statute of limitations related to our consolidated Federal income tax returns and our Florida income tax returns expired for all tax years up to and including 2012; therefore, only the 2013 through 2016 tax years remain subject to examination by taxing authorities. No taxing authorities are currently examining any of our federal or state income tax returns.
The insurance industry is heavily-regulated. State laws and regulations, as well as national regulatory agency requirements, govern the operations of all insurers such as our insurance affiliates. The various laws and regulations require that insurers maintain minimum amounts of statutory surplus and risk-based capital, restrict insurers' ability to pay dividends, specify allowable investment types and investment mixes, and subject insurers to assessments. At December 31, 2016, we received an assessment for $415,000 from the North Carolina Joint Underwriting Association related to Hurricane Matthew. We did not receive any additional significant assessments from regulatory authorities in the states in which our insurance affiliates operate.
Our insurance affiliates, UPC, FSIC and IIC are domiciled in Florida, Hawaii, and New York, respectively. They must maintain capital and surplus ratios or balances as determined by the regulatory authority of the states in which they are domiciled. The table below shows the minimum capital and surplus requirements, as well as the amount of surplus as regards policyholders for our regulated entities at December 31, 2016 and 2015.
(2) There is not a reportable value for IIC at December 31, 2015 as we did not own the company until April 2016.
Florida law limits an insurer’s investment in equity instruments and also restricts investments in medium to low quality debt instruments. We were in compliance with all investment restrictions at December 31, 2016 and 2015.
The SBA note is considered a surplus note pursuant to statutory accounting principles. As a result, UPC is subject to the authority of the Insurance Commissioner of the State of Florida with regard to its ability to repay principal and interest on the surplus note. Any payment of principal or interest requires permission from the insurance regulatory authority.
The table below reconciles our consolidated GAAP net income to the statutory net income of our insurance affiliates:
At December 31, 2016, we were not involved in any material non claims-related legal actions.
See Note 11 for information regarding commitments related to long-term debt, and Note 13 for commitments related to regulatory actions.
We have office equipment leases with various expiration dates. Lease expense amounted to $205,000, $922,000, and $783,000 for the years ended December 31, 2016, 2015, and 2014, respectively. At December 31, 2016, our minimum future lease payment s under non-cancellable operating leases are:
We are authorized to issue 875,000 shares of "blank check" preferred stock, which may be issued from time to time in one or more series upon authorization by our board of directors. Our Board, without further approval of the stockholders, is authorized to fix the designations, powers, including voting powers, preferences and the relative, participating optional or other special rights of the shares of each series and any qualifications, limitations and restrictions thereof. As of December 31, 2016, we had not issued any shares of preferred stock.
We granted 115,405 shares of restricted common stock awards during the twelve-month period ended December 31, 2016, which had a weighted-average grant date fair value of $16.90 per share. We granted 130,442 shares of restricted stock during the twelve-month period ended December 31, 2015, which had a weighted-average grant date fair value of $20.38 per share.
We had approximately $1,106,000 of unrecognized stock compensation expense on December 31, 2016 related to non-vested stock-based compensation granted, that we expect to recognize over the next three years. We recognized $877,000, $808,000 and $280,000 of stock-based compensation expense during the twelve months ended December 31, 2016, 2015 and 2014, respectively.