UNIVERSAL INSURANCE HOLDINGS, INC. Unless the context otherwise requires, all references to "we," "us," "our," and "Company" refer toUniversal Insurance Holdings, Inc. ("UVE") and its wholly-owned subsidiaries. You should read the following discussion together with our unaudited condensed consolidated financial statements ("Financial Statements") and the related notes thereto included in "Part I, Item 1-Financial Statements," and our audited condensed consolidated financial statements and the related notes thereto included in "Part II, Item 8-Financial Statements and Supplementary Data" in our Annual Report on Form 10-K for the year endedDecember 31, 2022 . Operating results for any one quarter are not necessarily indicative of results to be expected for any quarter or for the year.
Cautionary Note Regarding Forward-Looking Statements
In addition to historical information, this report may contain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The forward-looking statements anticipate results based on our estimates, assumptions and plans that are subject to uncertainty. These forward-looking statements may be identified by their use of words like "plans," "seeks," "expects," "will," "should," "anticipates," "estimates," "intends," "believes," "likely," "targets," and other words with similar meanings. These statements may address, among other things, our strategy for growth, catastrophe exposure and other risk management, product development, investment results, regulatory approvals, market position, expenses, financial results, litigation and reserves. We believe that these statements are based on reasonable estimates, assumptions and plans. However, if the estimates, assumptions or plans underlying the forward-looking statements prove inaccurate or if other risks or uncertainties arise, actual results could differ materially from those communicated in these forward-looking statements. A detailed discussion of the risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is set forth below, which are a summary of those in the section titled "Risk Factors" (Part I, Item 1A) of our Annual Report on Form 10-K for the year endedDecember 31, 2022 . We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.
Risks and uncertainties that may affect, or have affected, our financial condition and operating results include, but are not limited to, the following:
•As a property and casualty insurer, we may face significant losses, and our financial results may vary from period to period, due to exposure to catastrophic events and severe weather conditions, the frequency and severity of which could be affected by climate change.
•Changing climate conditions may adversely affect our financial condition, profitability or cash flows.
•Because we conduct the majority of our business in
•Actual claims incurred have exceeded, and in the future may exceed, reserves established for claims, adversely affecting our operating results and financial condition. •If we fail to adequately price the risks we underwrite, or if emerging trends outpace our ability to adjust prices timely, or if we lose desirable exposures to competitors by overpricing our risks, we may experience underwriting losses depleting surplus at the Insurance Entities and capital at the holding company.
•Unanticipated increases in the severity or frequency of claims adversely affect our profitability and financial condition.
•The failure of the risk mitigation strategies we utilize could have a material adverse effect on our financial condition or results of operations.
•Pandemics, including COVID-19 and other outbreaks of disease, could impact our business, financial results, and growth.
•Because we rely on independent insurance agents, the loss of these independent agent relationships and the business they control or our ability to attract new independent agents could have an adverse impact on our business.
•We rely on models as a tool to evaluate risk, and those models are inherently uncertain and may not accurately predict existing or future losses.
•Reinsurance may be unavailable in the future at reasonable levels and prices or on reasonable terms, which may limit our ability to write new business or to adequately mitigate our exposure to loss.
•Reinsurance subjects us to the credit risk of our reinsurers, which could have a material adverse effect on our operating results and financial condition.
•Our financial condition and operating results are subject to the cyclical nature of the property and casualty insurance business.
•We have entered new markets and expect that we will continue to do so, but there can be no assurance that our diversification and growth strategy will be effective. •Our success depends, in part, on our ability to attract and retain talented employees, and the loss of any one of our key personnel could adversely impact our operations.
•We could be adversely affected if our controls designed to ensure compliance with guidelines, policies and legal and regulatory standards are not effective.
•The failure of our claims professionals to effectively manage claims could adversely affect our insurance business and financial results.
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•Litigation or regulatory actions could result in material settlements, judgments, fines or penalties and consequently have a material adverse impact on our financial condition and reputation.
•Our future results are dependent in part on our ability to successfully operate in a highly competitive insurance industry.
•A downgrade in our financial strength or stability ratings may have an adverse effect on our competitive position, the marketability of our product offerings, and our liquidity, operating results and financial condition.
•Breaches of our information systems or denial of service on our website could have an adverse impact on our business and reputation.
•We may not be able to effectively implement or adapt to changes in technology, which may result in interruptions to our business or a competitive disadvantage.
•Lack of effectiveness of exclusions and other loss limitation methods in the insurance policies we write or changes in laws and/or potential regulatory approaches relating to them could have a material adverse effect on our financial condition or our results of operations.
•We are subject to market risk, which may adversely affect investment income.
•Our overall financial performance depends in part on the returns on our investment portfolio.
•We are subject to extensive regulation and potential further restrictive regulation may increase our operating costs and limit our growth and profitability.
•UVE is a holding company and, consequently, its cash flow is dependent on dividends and other permissible payments from its subsidiaries.
•Regulations limiting rate changes and requiring us to participate in loss sharing or assessments may decrease our profitability.
•The amount of statutory capital and surplus that each of the Insurance Entities has and the amount of statutory capital and surplus it must hold vary and are sensitive to a number of factors outside of our control, including market conditions and the regulatory environment and rules.
•To service our debt, we will require a significant amount of cash. Our ability to generate cash depends on many factors.
•Our indebtedness could adversely affect our financial results and prevent us from fulfilling our obligations under the Notes.
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Table of Contents OVERVIEW We are a vertically integrated holding company offering property and casualty insurance and value-added insurance services. In addition, we generate revenue from our investment portfolio, reinsurance brokerage services, the receipt of managing general agency fees from policy holders and from other sources of revenue (collectively "Other Revenue Sources"). We develop, market and underwrite insurance products for consumers predominantly in the personal residential homeowners' line of business and perform substantially all insurance-related services for our primary insurance entities, including risk management, claims management, and distribution. Our primary insurance entities,Universal Property & Casualty Insurance Company ("UPCIC") andAmerican Platinum Property and Casualty Insurance Company ("APPCIC" and together with UPCIC, the "Insurance Entities"), offer insurance products through both appointed independent agent network and our online distribution channels across 19 states withFlorida representing as ofMarch 31, 2023 82.3% of our direct premiums written, and with licenses to write insurance in two additional states. We seek to produce an underwriting profit (defined as earned premium-net minus losses, loss adjustment expense ("LAE"), policy acquisition costs and other operating costs) over the long term, along with growing our Other Revenue Sources. The following Management's Discussion and Analysis ("MD&A") is intended to assist in an understanding of our financial condition and results of operations. This MD&A should be read in conjunction with our Financial Statements and accompanying Notes appearing elsewhere in this Report (the "Notes"). In addition, reference should be made to our audited Consolidated Financial Statements and accompanying Notes to Consolidated Financial Statements and "Part II, Item 7-Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K for the year endedDecember 31, 2022 . Except for the historical information contained herein, the discussions in this MD&A contain forward-looking statements that involve risks and uncertainties. Our future results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include, but are not limited to, those discussed above under "-Cautionary Note Regarding Forward-Looking Statements."
Trends
Florida Trends
We are currently working through a cycle to improve long-term rate adequacy and earnings for the Insurance Entities by increasing rates and managing exposures, while taking advantage of what we believe to be opportunities in a dislocated market. TheFlorida personal lines homeowners' market currently can be characterized as a "hard market", where insurance premium rates are escalating, insurers are reducing coverages, and underwriting standards are tightening as insurers closely monitor insurance rates and manage coverage capacity. Due to conditions in theFlorida market and factors more generally affecting theU.S. and global reinsurance markets, reinsurance capacity in recent years has also been subject to less favorable pricing and terms. These market forces decrease competition among admitted insurers, and ultimately result in the increased use ofCitizens Property Insurance Corporation ("Citizens"), which was created to beFlorida's residual property insurance market. In recent years, in response to rising claims, increased reinsurance costs and deteriorating conditions in theFlorida residential market, most admitted market competitors have implemented significant rate increases. Meanwhile, Citizens' rate increases are limited by law, resulting in its policies, in a hard market, becoming priced lower than admitted market policies. This causes Citizens to become viewed as a desirable alternative to the admitted market as admitted market insurers manage through the hard market challenges. Our Insurance Entities likewise have taken and continue to take action to manage through this hard market by increasing rates and prudently managing exposures while also seeking to maintain their competitive position in theFlorida market supporting our current policyholders and agents. While addressing rate adequacy for the Insurance Entities, we continue to experience increased costs for losses and LAE in theFlorida market, where an industry has developed around the solicitation, filing and litigation of personal residential claims. These dynamics have been made worse by the litigation financing industry, which in some cases funds these actions. In addition, rising inflation, as seen in the cost of labor and material supplies, has further escalated costs associated with the settlement of claims. These conditions and the resulting increases in losses and LAE are chief contributing factors for the rate increases in this market. Adverse actions by public adjusters and attorneys have resulted in a pattern of continued increases in year-over-year levels of represented claims, increases in purported claim amounts, and increased demands for attorneys' fees. Active solicitation of personal residential claims inFlorida by policyholder representatives, remediation companies and repair companies has led to an increase in the frequency and severity of personal residential claims inFlorida , exceeding historical levels and levels seen in other jurisdictions. Information prepared by theFlorida Office of Insurance Regulation ("FLOIR") show that claims inFlorida are litigated at a substantially disproportionate rate when compared to other states. This is largely due to aFlorida statute in effect prior toDecember 16, 2022 , providing a one-way right of attorneys' fees against insurers which has, when coupled with certain other statutes and judicial rulings, produced a legal environment inFlorida that encourages litigation, in many cases without regard to the underlying merits of the claims. The one-way right to attorneys' fees essentially means that unless an insurer's position is substantially upheld in litigation, the insurer must pay the plaintiff's attorneys' fees in addition to its own defense costs. This affects not only claims that are litigated to resolution, but also the settlement discussions that take place with nearly all litigated claims. This also affects a large number of claims from inception or during the adjusting process as a substantial and growing percentage of policyholders obtain representation early in the process, and sometimes even before notifying insurers of their claims. These market conditions also add, and will continue to add, complexity to efforts to efficiently and expeditiously adjust claims. This is due to an increasing number of policyholders who have one or more recent prior losses with the Insurance Entities or with other insurers, which then require evaluation during subsequent claims and determinations regarding whether property has been repaired consistently with the scope and amount of damage previously asserted. 34
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Table of Contents The one-way right to attorney fees creates a nearly risk-free environment, and incentive, for attorneys to pursue litigation against insurers. TheFlorida legislature attempted to curtail these abuses through a series of law changes beginning in 2019. However, the reforms passed in 2019 and thereafter have not proven to be effective in reversing or even significantly moderating the trend of increased losses and loss adjustments expenses and the resulting impact on premiums for consumers. More recently, inDecember 2022 , theFlorida legislature took more definitive steps to address the primary underlying causes of abuses in theFlorida market. The legislature eliminated the statutory one-way right to attorneys' fees; prohibited assignments of post-loss benefits under insurance policies; improved the usefulness of offers of judgment as a means of fostering resolutions of disputed claims; made incremental adjustments to reduce Citizens' competitiveness with the private market; and adopted several other related measures. GovernorRon DeSantis signed the bill into law onDecember 16, 2022 . Because some of the changes will affect only future policies, the impact of the new laws on claims and claims-related costs, including litigation, will not be fully known for some time. Despite our initiatives in implementing prior law changes and responding to adverse claims behaviors and trends, our costs to settle claims inFlorida have increased for the reasons noted herein. Over the past three years, even as we have increased our estimates of prospective losses each year, we have recorded adverse claim development on prior years' loss reserves and further strengthened current year losses during the year to address the increasing impact thatFlorida's market disruptions, as well as the impact of rising costs of building materials and labor, have had on the claims process and the establishment of reserves for losses and LAE. The full extent and duration of these market disruptions and inflationary pressures are unknown and still unfolding, and we will monitor the impact of such disruptions on the recording and reporting of claim costs. The Company has taken a series of steps over time to mitigate the financial impact of these negative trends in theFlorida market. We also have closely monitored rate levels, especially in theFlorida market, and have submitted rate filings based upon evolving data. However, because rate filings rely upon past loss and expense data and take time to develop, file and implement, we can experience significant delays between identifying needed rate adjustments, filing the associated rate changes, and ultimately collecting and earning the resulting increased premiums. This is particularly the case in an era of rising costs such as the currentFlorida market, in which the costs of losses and loss adjustment expenses have increased in recent years due toFlorida's outsized claims litigation environment and inflationary pressure. In addition, the Company has implemented several initiatives in its claims department in response to the adverse market trends. We utilize our process called Fast Track, which is an initiative to handle straightforward, meritorious claims as promptly as possible to mitigate the adverse impacts that can be seen with claims that remain open for longer periods. In addition, we increased our emphasis on subrogation to reduce our net losses while also recovering policyholders' deductibles when losses are attributable to the actions of others. We have an internal staff of trained water remediation experts to address the extraordinary number of purported water damage claims filed by policyholders and vendors. We developed a specialized in-house unit for responding to the unique aspects of represented claims, and we have substantially increased our in-house legal staff in an effort to address the increase in litigated or represented claims as cost-effectively as possible. Additionally, we have taken steps to implement claim settlement rules associated with theFlorida legislation passed in 2019 and subsequently. Following legislation enacted inFlorida's December 2022 special session, we have analyzed the changes and have initiated efforts to implement the new provisions that the legislature intends will curtail abuses in the market. Although the recent law changes mark the legislature's most definitive effort to find effective solutions toFlorida's market problems, it is too early to evaluate the extent to which the changes will be successful or the time period over which any benefits will materialize.
Summary of Recent Rate Increases and Cost of Living Adjustments
InMay 2022 , the Company filed a rate increase with the FLOIR for an overall 14.9% rate increase for UPCIC onFlorida personal residential homeowners' line of business which became effectiveJune 1, 2022 , for new business andNovember 4, 2022 , for renewals.
In addition, in
During 2022 inflation adjustments averaging 11.9% have been implemented. These are adjustments to policy coverage amounts designed to facilitate the policies' adherence to insurance-to-value requirements. The coverage adjustments provide a degree of protection insureds have against inflationary pressures while also resulting in additional premium to the Company to cover the increased claim costs driven by inflation factors.
Changing Climate Conditions
Severe weather events over the last two decades underscore the unpredictability
of climate trends, and changing climate conditions have added to the frequency
and severity of natural disasters and created additional uncertainty as to
future trends and exposures. The insurance industry has experienced increased
catastrophe losses due to a number of potential causal factors, including, in
addition to weather/climate variability, aging infrastructure; more people
living in high-risk areas; population growth in areas with weaker enforcement of
building codes; urban expansion; an increase in the number of amenities included
in, and average size of, a home; and increased inflation, including as a result
of post-pandemic demand surge. Climate studies by government agencies, academic
institutions, catastrophe modeling organizations and other groups indicate that
we are experiencing, and are expected to continue to experience over time, an
increase in frequency and/or intensity of hurricanes, heavy precipitation
events, flash flooding, sea level rise, droughts, heat waves and wildfires.
Developing an awareness of the potential impacts of changing climate conditions
is important to the Company's business.
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Table of Contents Impact of COVID-19 We have not seen a direct material impact from COVID-19 on our business, our financial position, our liquidity, or our ability to service our policyholders and maintain critical operations. Indirectly, inflationary pressures, in part due to supply chain and labor constraints during the pandemic, have affected and continue to affect claims costs and, to a lesser degree, other expenses. The ultimate impact of the COVID-19 pandemic, or future pandemics, on our business and on the economy in general cannot be predicted.
KEY PERFORMANCE INDICATORS
The Company considers the measures and ratios in the following discussion to be key performance indicators for its businesses. Management believes that these indicators are helpful in understanding the underlying trends in the Company's businesses. Some of these indicators are reported on a quarterly basis and others on an annual basis. Please also refer to "Part II, Item 8-Note 2 (Summary of Significant Accounting Policies)" of our Annual Report on Form 10-K for the year endedDecember 31, 2022 for definitions of certain other terms we use when describing our financial results. These indicators may not be comparable to other performance measures used by the Company's competitors and should only be evaluated together with our condensed consolidated financial statements and accompanying notes. In addition to our key performance indicators and other financial measures presented in accordance with United States Generally Accepted Accounting Principles ("GAAP"), management also uses certain non-GAAP financial measures to evaluate the Company's financial performance and the overall growth in value generated for the Company's common shareholders. Management believes that non-GAAP financial measures, which may be defined differently by other companies, help to explain the Company's results to investors in a manner that allows for a more complete understanding of the underlying trends in the Company's business. The non-GAAP measures should not be viewed as a substitute for those determined in accordance with GAAP. The calculation of these key financial measures including the reconciliation of non-GAAP measures to the nearest GAAP measure are found below under "-Non-GAAP Financial Measures."
Definitions of Key Performance Indicators and GAAP and Non-GAAP Measures
Adjusted book value per common share - is a non-GAAP measure that is calculated
as adjusted common stockholders' equity divided by common shares outstanding at
the end of the period. Management believes this metric is meaningful, as it
allows investors to evaluate underlying book value growth by excluding the
impact of unrealized gains and losses due to interest rate volatility.
Adjusted common stockholders' equity - is a non-GAAP measure that is calculated
as GAAP common stockholders' equity less accumulated other comprehensive income
(loss). Management believes this metric is meaningful, as it allows investors to
evaluate underlying growth in stockholders' equity by excluding the impact of
unrealized gains and losses due to interest rate volatility.
Adjusted net income (loss) attributable to common stockholders - is a non-GAAP
measure that is calculated as GAAP net income (loss) attributable to common
stockholders, less net realized gains (losses) on investments and net changes in
unrealized gains (losses) of equity securities, net of tax. Management believes
this metric is meaningful, as it allows investors to evaluate underlying
profitability and enhances comparability across periods by excluding items that
are heavily impacted by investment market fluctuations and other economic
factors and are not indicative of operating trends.
Adjusted operating income (loss) - is a non-GAAP measure that is calculated as
GAAP operating income (loss), less net realized gains (losses) on investments
and net changes in unrealized gains (losses) of equity securities. Management
believes this metric is meaningful, as it allows investors to evaluate
underlying profitability and enhances comparability across periods by excluding
items that are heavily impacted by investment market fluctuations and other
economic factors and are not indicative of operating trends.
Adjusted operating income (loss) margin - is a non-GAAP measure that is computed
as adjusted operating income (loss) divided by core revenue. Management believes
this metric is meaningful, as it allows investors to evaluate underlying
profitability and enhances comparability across periods by excluding items that
are heavily impacted by investment market fluctuations and other economic
factors and are not indicative of operating trends.
Adjusted return on common equity (Adjusted "ROCE") - is a non-GAAP measure that
is calculated as actual or annualized adjusted net income attributable to common
stockholders divided by average adjusted common stockholders' equity, with the
denominator excluding current period income statement net realized gains
(losses) on investments and net changes in unrealized gains (losses) of equity
securities, net of tax. Management believes this metric is meaningful, as it
allows investors to evaluate underlying profitability and enhances comparability
across periods by excluding items that are heavily impacted by investment market
fluctuations and other economic factors and are not indicative of operating
trends.
Book Value Per Common Share - total stockholders' equity, adjusted for preferred
stock liquidation, divided by the number of common shares outstanding as of a
reporting period. Book value per common share is the excess of assets over
liabilities at a reporting period attributed to each share of common stock.
Changes in book value per common share informs shareholders of retained equity
in the Company on a per share basis, which may assist in understanding market
value trends for the Company's stock.
Combined Ratio - the combined ratio is a measure of underwriting profitability
for a reporting period and is calculated by dividing total operating costs and
expenses (which is made up of losses and LAE and general and administrative
expenses) by premiums earned, net, which is net of ceded premium earned. Changes
to the combined ratio over time provide management with
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Table of Contents an understanding of costs to operate its business in relation to net premiums it is earning and the impact of rate, underwriting and other business management actions on underwriting profitability. A combined ratio below 100% indicates an underwriting profit; a combined ratio above 100% indicates an underwriting loss. Core Loss Ratio - a common operational metric used in the insurance industry to describe the ratio of current accident year expected losses and LAE, excluding current accident year weather events beyond those expected, to premiums earned. Core loss ratio is an important measure identifying profitability trends of premiums in force. Core losses consists of losses and LAE excluding current accident year weather events beyond those expected and prior years' reserve development. The financial benefit from the management of claims, including claim fees ceded to reinsurers, is recorded in the condensed consolidated financial statements as a reduction to core losses. The core loss ratio can be measured on a direct basis, using direct earned premiums, or on a net basis, using premiums earned, net (i.e., direct premiums earned less ceded premiums earned). Core revenue - is a non-GAAP measure that is calculated as total GAAP revenue, less net realized gains (losses) on investments and net changes in unrealized gains (losses) of equity securities. Management believes this metric is meaningful, as it allows investors to evaluate underlying revenue trends and enhances comparability across periods by excluding items that are heavily impacted by investment market fluctuations and other economic factors and are not indicative of operating trends.
Debt-to-Equity Ratio - long-term debt divided by stockholders' equity. This ratio helps management measure the amount of financing leverage in place in relation to equity and allows investors to evaluate future leverage capacity.
Debt-to-Total Capital Ratio - long-term debt divided by the sum of total stockholders' equity and long-term debt (often referred to as total capital resources). This ratio helps management measure the amount of financing leverage in place (long-term debt) in relation to total capital resources and allows investors to evaluate future leverage capacity.
Diluted adjusted earnings per common share - is a non-GAAP measure, which is
calculated as adjusted net income available to common stockholders divided by
weighted average diluted common shares outstanding. Management believes this
metric is meaningful, as it allows investors to evaluate underlying
profitability and enhances comparability across periods by excluding items that
are heavily impacted by investment market fluctuations and other economic
factors and are not indicative of operating trends.
Direct Premiums Written ("DPW") - reflects the total value of policies issued
during a period before considering premiums ceded to reinsurers. Direct premiums
written, comprised of renewal premiums, endorsements, and new business, is
initially recorded as unearned premium in the balance sheet, which is then
earned pro-rata over the next year or remaining policy term. Direct premiums
written reflect current trends in the Company's sale of property and casualty
insurance products and amounts that will be recognized as earned premiums in the
future.
DPW (
Expense Ratio (Including Policy Acquisition Cost Ratio and Other Operating Cost
Ratio) - calculated as general and administrative expenses as a percentage of
premiums earned, net. General and administrative expenses are comprised of
policy acquisition costs and other operating costs, which includes such items as
underwriting costs, facilities, and corporate overhead. The expense ratio,
including the sub-expense ratios of policy acquisition cost ratio and other
operating cost ratio, are indicators to management of the Company's cost
efficiency in acquiring and servicing its business and the impact of expense
items to overall profitability.
Losses and Loss Adjustment Expense Ratio or Loss and LAE Ratio - a measure of
the cost of claims and claim settlement expenses incurred in a reporting period
as a percentage of premiums earned in that same reporting period. Losses and LAE
incurred in a reporting period includes both amounts related to the current
accident year and prior accident years, if any, referred to as development.
Ultimate losses and LAE are based on actuarial estimates with changes in those
estimates recognized in the period the estimates are revised. Losses and LAE
consist of claim costs arising from claims occurring and settling in the current
period, an estimate of claim costs for reported but unpaid claims, an estimate
of unpaid claim costs for incurred-but-not-reported claims and an estimate of
claim settlement expenses associated with reported and unreported claims which
occurred during the reporting period. The loss and LAE ratio can be measured on
a direct basis, which includes losses and LAE divided by direct earned premiums,
or on a net basis, which includes losses and LAE divided by premiums earned, net
(i.e., direct premium earned less ceded premium earned). The net loss and LAE
ratio is a measure of underwriting profitability after giving consideration to
the effect of reinsurance. Trends in the net loss and LAE ratio are an
indication to management of current and future profitability.
Monthly Weighted Average Renewal Retention Rate - measures the monthly average
of policyholders that renew their policies over the period of a calendar year.
This measure allows management to assess customer retention.
Premiums Earned, Net - the pro-rata portion of current and previously written
premiums that the Company recognizes as earned premium during the reporting
period, net of ceded premium earned. Ceded premiums are premiums paid or payable
by the Company for reinsurance protection. Written premiums are considered
earned and are recognized pro-rata over the policy coverage period. Premiums
earned, net is a measure that allows management to identify revenue trends.
Policies in Force - represents the number of active policies with coverage in
effect as of the end of the reporting period. The change in the number of
policies in force is a growth measure and provides management with an indication
of progress toward achieving strategic objectives. Inherent seasonality in our
business makes this measure more useful when comparing each quarter's balance to
the same quarter in prior years.
Premium in Force - is the amount of the annual direct written premiums
previously recorded by the Company for policies which are still active as of the
reporting date. This measure assists management in measuring the level of
insured exposure and progress toward meeting revenue goals for the current year,
and provides an indication of business available for renewal in the
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next twelve months. Inherent seasonality in our business makes this measure more useful when comparing each quarter's balance to the same quarter in prior years.
Return on Average Common Equity ("ROCE") - calculated as actual net income (loss) attributable to common stockholders divided by average common stockholders' equity. ROCE is a capital profitability measure of how efficiently management creates profits.
Total Insured Value - represents the amount of insurance limits available on a policy for a single loss based on all policies active as of the reporting date. This measure assists management in measuring the level of insured exposure. Unearned Premiums - represents the portion of direct premiums corresponding to the time period remaining on an insurance policy and available for future earning by the Company. Trends in unearned premiums generally indicate expansion, if growing, or contraction, if declining, which are important indicators to management. Inherent seasonality in our business makes this measure more useful when comparing each quarter's balance to the same quarter in prior years. Weather events - an estimate of losses and LAE from weather events occurring during the current accident year that exceed initial estimates of expected weather events when establishing the core loss ratio for each accident year. This metric informs management of factors impacting overall current year profitability.
REINSURANCE
Reinsurance enables our Insurance Entities to limit potential exposures to catastrophic events. Reinsurance contracts are typically classified as treaty or facultative contracts. Treaty reinsurance provides coverage for all or a portion of a specified group or class of risks ceded by the primary insurer, while facultative reinsurance provides coverage for specific individual risks. Within each classification, reinsurance can be further classified as quota share or excess of loss. Quota-share reinsurance is where the primary insurer and the reinsurer share proportionally or pro-rata in the direct premiums and losses of the insurer. Excess-of-loss reinsurance indemnifies the direct insurer or reinsurer for all or a portion of the loss in excess of an agreed upon amount or retention. Developing and implementing our reinsurance strategy to adequately protect our balance sheet and Insurance Entities in the event of one or more catastrophes while maintaining efficient reinsurance costs has been a key strategic priority for us. In order to limit the Insurance Entities' potential exposure to catastrophic events, we purchase significant reinsurance from third-party reinsurers and theFlorida Hurricane Catastrophe Fund ("FHCF"). The FLOIR requires the Insurance Entities, like all residential property insurance companies doing business inFlorida , to have a certain amount of capital and reinsurance coverage in order to cover losses upon the occurrence of a single catastrophic event and a series of catastrophic events occurring in the same hurricane season. The Insurance Entities' respective 2022-2023 reinsurance programs meet the FLOIR's requirements, which are based on, among other things, successfully demonstrating cohesive and comprehensive reinsurance programs that protect the policyholders of our Insurance Entities as well as satisfying a series of stress test catastrophe loss scenarios based on past historical events. Similarly, the Insurance Entities' respective 2022-2023 reinsurance programs meet the stress test and review requirements ofDemotech, Inc. , for maintaining Financial Stability Ratings® of "A" (Exceptional) and of Kroll for maintaining insurer financial strength ratings of "A-". We believe the Insurance Entities' retentions under their respective reinsurance programs are appropriate and structured to protect policyholders. We test the sufficiency of the reinsurance programs by subjecting the Insurance Entities' personal residential exposures to statistical testing using a third-party hurricane model, RMS RiskLink v18.1 (Build 1945). This model combines simulations of the natural occurrence patterns and characteristics of hurricanes, tornadoes, earthquakes and other catastrophes with information on property values, construction types and occupancy classes. The model outputs provide information concerning the potential for large losses before they occur, so companies can prepare for their financial impact. Furthermore, as part of our operational excellence initiatives, we continually look to enable new technology to refine our data intelligence on catastrophe risk modeling.
Effective
UPCIC's 2022-2023 Reinsurance Program
•First event All States retention of
•All States first event tower extends to
•Assuming a first event completely exhausts the
•Full reinstatement available on$1.138 billion of the$1.288 billion of non-FHCF first event catastrophe coverage for guaranteed second event coverage. For all layers purchased between$111 million and the projected FHCF retention, to the extent that all of our coverage or a portion thereof is exhausted in a catastrophic event and reinstatement premium is due, we have purchased enough reinstatement premium protection ("RPP") limit to pay the premium necessary for the reinstatement of these coverages. 38
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Table of Contents •First event layer of 100% of$66 million in excess of$45 million established by UIH in a captive insurance arrangement. While the Company retains the risk that otherwise would be transferred to third-party reinsurers for this layer, the additional risk is substantially offset by the savings in premiums that would otherwise have been paid to third-party reinsurers. •Specific 2nd event private market excess of loss coverage of$66 million in excess of$45 million sitting behind captive arrangement. EffectiveJanuary 1, 2023 , UPCIC commuted a portion of this coverage to recognize the benefit of a return premium mechanism. Fifty-five percent (55%) of$66 million in excess of$45 million remains available until the natural expiration of the coverage, which isMay 31, 2023 . •Specific 3rd and 4th event private market catastrophe excess of loss coverage of$86 million in excess of$25 million provides frequency protection for multiple events during the treaty period including a$20 million reduction in retention for a 3rd and 4th event.
•For the FHCF Reimbursement Contracts effective
•To further insulate for future years, UPCIC has secured$383 million of catastrophe capacity with contractually agreed limits that extend coverage to include the 2022 and 2023 wind seasons and$277 million of the$383 million extends through the 2024 wind season and is all capacity which sits below the FHCF. UPCIC's catastrophe bond, secured leading up to the 2021-2022 renewal,Cosaint Re Pte. Ltd , continues to provide one limit of$150 million in this year's program and it may also include the 2023 wind season, depending on loss activity in the 2022 wind season.
Reinsurers
The table below provides the
Reinsurer A.M. Best S&P Allianz Risk Transfer AG, Bermuda Branch A+ AA- Chubb Tempest Reinsurance Ltd. A++ AA Everest Re A+ A+ Munich Re A+ AA- Renaissance Reinsurance Ltd. A+ A+ Various Lloyd's of London Syndicates A A+ Florida Hurricane Catastrophe Fund (1) N/A N/A
(1)No rating is available, because the fund is not rated.
APPCIC's 2022-2023 Reinsurance Program
•First event All States retention of
•All States first event tower of
•Full reinstatement available for all private market first event catastrophe layers for guaranteed second event coverage. For the layer purchased between$3.5 million and the projected FHCF retention, to the extent that all of our coverage or a portion thereof is exhausted in a catastrophic event and reinstatement premium is due, we have purchased enough RPP limit to pay the premium necessary for the reinstatement of this coverage. •APPCIC also purchases extensive multiple line excess per risk reinsurance with various reinsurers due to the high-value risks it insures in both the personal residential and commercial multiple peril lines of business. Under this multiple line excess per risk contract, APPCIC has coverage of$8.5 million in excess of$0.5 million ultimate net loss for each risk and each property loss, and$1 million in excess of$0.3 million for each casualty loss. A$19.5 million aggregate limit applies to the term of the contract for property-related losses and a$2.0 million aggregate limit applies to the term of the contract for casualty-related losses. This contract also contains a profit-sharing feature if specific performance measures are met. •For the FHCF Reimbursement Contracts effectiveJune 1, 2022 , APPCIC has continued the election of the 90% coverage level. We estimate the total mandatory FHCF layer will provide approximately$24.2 million of coverage for APPCIC, which inures to the benefit of the open market coverage secured from private reinsurers. 39
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Table of Contents Reinsurers
The table below provides the
Reinsurer A.M. Best S&P Chubb Tempest Reinsurance Ltd. A++ AA DaVinci Reinsurance Limited A A+ Lancashire Insurance Company Limited A A- Renaissance Reinsurance Ltd. A+ A+ Various Lloyd's of London Syndicates A A+
(1)No rating is available, because the fund is not rated.
The cost of the 2022-2023 reinsurance programs for UPCIC and APPCIC is projected
to be
Commutations
Each insurance company participating in the FHCF is required byFlorida regulations and its contract with the FHCF to begin the process of commuting the parties' respective contractual obligations no later than sixty (60) months after the end of a contract year. The commutation process for the FHCF's 2017-18 contract year must begin byJune 1, 2023 . The Insurance Entities have had, and continue to have, covered losses subject to reimbursement by the FHCF due to Hurricane Irma's occurring in the 2017-18 FHCF contract year. The Insurance Entities also expect to have outstanding covered losses and covered losses that are incurred but not yet reported ("IBNR," and together with paid and outstanding losses the "Ultimate Incurred Loss") as ofJune 1, 2023 . The commutation process will result in a final evaluation and estimate of the Ultimate Incurred Loss, leading to the Insurance Entities' and the FHCF's settlement and release of obligations arising from the 2017-18 FHCF contract. The FHCF's commutation process includes an insurer's submitting a final proof of loss byJune 1, 2023 , verifying the amount of its paid losses previously reimbursed or to be reimbursed by the FHCF. The insurer also must submit an estimate of its covered losses on then-outstanding claims and an estimate of its covered IBNR losses. The FHCF's procedure provides for the insurer and the FHCF to then discuss the estimates and seek to agree on the present value of the expected outstanding losses and IBNR. If these discussions do not result in an agreement, the determination will be made by a three-member panel of actuaries in accordance with a procedure set forth in the FHCF contract. The amount of the Insurance Entities Ultimate Incurred Loss attributable to 2017-18 FHCF contract year is not fully known and is subject to uncertainties. The Insurance Entities have long maintained and periodically update claims and data procedures for reporting covered losses to the FHCF. In anticipation of submitting their final proofs of loss as ofJune 1, 2023 , the Insurance Entities continue to review and refine these procedures and the resulting data in accordance with FHCF requirements, including areas identified by the FHCF to participating insurers as common reporting errors observed in its examinations (which, according to FHCF reports, includes more than 80 examinations of participating insurers' Hurricane Irma loss reports). This review has resulted and will continue to result in adjustments to the Insurance Entities' procedures and data. Additionally, the Insurance Entities' estimates of Ultimate Incurred Loss depend on factors that are inherently difficult to quantify, including considerations unique to Hurricane Irma and theFlorida property insurance market that have caused and might continue to cause losses attributable to the 2017-18 contract year to differ from historical patterns, experience in other states, and experience in prior private market or FHCF commutations. There is no assurance that the Insurance Entities will be able to accurately estimate the Ultimate Incurred Loss, that the Insurance Entities and the FHCF will agree on the present value of the Ultimate Incurred Loss, or that the Ultimate Incurred Loss will develop in an amount equal to or less than the amount for which the Insurance Entities is reimbursed. The Insurance Entities commute FHCF contracts as and when required by their FHCF contracts and related regulations. The Insurance Entities also from time to time commute private market reinsurance contracts, such as the commutation as ofJanuary 1, 2023 , summarized above in the description of UPCIC's reinsurance program. The Insurance Entities currently do not anticipate having covered losses from Hurricane Michael exceeding their applicable FHCF attachment points and therefore do not currently expect that commutation of their respective 2018-19 FHCF contract will involve the processes described above to the same extent. Although the Insurance Entities also do not currently have paid losses from Hurricane Ian exceeding their respective FHCF attachment points in their 2022-23 FHCF contracts, UPCIC has projected that its Ultimate Incurred Loss will exceed its FHCF attachment point. Accordingly, assuming its paid losses ultimately exceed its FHCF attachment point, and subject to any intervening changes in FHCF regulations or procedures, UPCIC will commute its 2022-23 FHCF contract in a process similar to that described above beginning not later thanJune 1, 2028 . 40
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Table of Contents
RESULTS OF OPERATIONS AND ANALYSIS OF FINANCIAL CONDITION
Highlights for the quarter ended
•Rate filings and inflation adjustments to policy insured values are increasing written and earned premium as the new rates and property insured values take effect on policy renewals and new business, and earn prospectively over the policy period. •Management is continuing its efforts to prudently manage new and renewal business risk selection, improve risk exposure diversification and moderate new business growth rates, compared to prior years, while rate increases are taking effect to improve profitability. As a result of management's efforts to manage exposures and declining retention rates, the number of total policies in force is decreasing partially offsetting increases in written and earned premium driven by rate increases and inflation increases to insured values.
•Net investment income increased as maturing capital is redeployed into higher interest rates.
•The losses and LAE, net ratio was higher this quarter compared to the same period last year primarily due to increases in management's estimated losses and LAE for the current accident year in the first quarter in addition to the higher cost of reinsurance. •Other operating expenses and acquisition cost management efforts have lowered the expense ratio. InApril 2021 , the commission rate on policy renewals was reduced two percentage points and further reduced onMay 1, 2022 by another two percentage points, in response to premium rate increases during the past year. The benefit of lower commission rates is realized over the next year as policies are renewed under the lower commission rate structure.
•The Company continued to return shareholder value with quarterly dividends.
•InDecember 2022 , theFlorida legislature enacted new legislation intended to improve theFlorida insurance market by making changes to the property insurance claims process, including the repeal of policyholders' statutory one-way right to attorneys' fees in property insurance claims and the elimination of the assignment of benefits, which have been driving up claims costs and loss adjustment expenses over the past several years. We are optimistic these changes will improve the claims environment inFlorida as the changes become effective. 41
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Table of Contents
First quarter of fiscal 2023 results of operations comparisons are to first quarter of fiscal 2022 (unless otherwise specified).
Results of Operations - Three Months Ended
Net income for the three months endedMarch 31, 2023 was$24.2 million compared to net income of$17.5 million for the same period in 2022. Benefiting the quarter were increases in premiums earned, net, an increase in net investment income, an increase in commission revenue, an increase in unrealized gains during the first quarter of 2023 compared to unrealized losses in the prior year, an increase in other revenue and a reduction in general and administrative expenses offset by an increase in realized losses during the first quarter of 2023 compared to modest realized gains in the prior year, a decrease in policy fees, and an increase in losses and LAE. Direct premium earned and premiums earned, net were up 9.8% and 4.9%, respectively, due to premium growth in the majority of states in which we are licensed and writing during the past 12 months mostly as a result of rate increases implemented during 2022 and 2023. The net loss and LAE ratio was 73.1% for the three months endedMarch 31, 2023 , compared to 68.8% for the same period in 2022 reflecting higher core losses and prior years' reserve development offset by lower weather events. As a result of the above and further explained below, the combined ratio for the three months endedMarch 31, 2023 was 100.0% compared to 97.9% for the three months endedMarch 31, 2022 . Also see the discussion above under "Overview-Trends" regarding our response to theFlorida market.
A detailed discussion of our results of operations follows the table below (in thousands, except per share data).
Three Months Ended
March 31, Change
2023 2022 $ %
REVENUES
Direct premiums written $ 410,102 $ 396,481 $ 13,621 3.4 %
Change in unearned premium 45,266 18,122 27,144 149.8 %
Direct premium earned 455,368 414,603 40,765 9.8 %
Ceded premium earned (173,144) (145,539) (27,605) 19.0 %
Premiums earned, net 282,224 269,064 13,160 4.9 %
Net investment income 10,698 4,042 6,656 164.7 %
Net realized gains (losses) on investments (788) 58 (846) NM
Net change in unrealized gains (losses) of equity
securities 957 (3,396) 4,353 NM
Commission revenue 17,282 11,161 6,121 54.8 %
Policy fees 4,167 4,779 (612) (12.8) %
Other revenue 1,968 1,774 194 10.9 %
Total revenues 316,508 287,482 29,026 10.1 %
OPERATING COSTS AND EXPENSES
Losses and loss adjustment expenses 206,154 185,106 21,048 11.4 %
General and administrative expenses 75,927 78,297 (2,370) (3.0) %
Total operating costs and expenses 282,081 263,403 18,678 7.1 %
Interest and amortization of debt issuance costs 1,636 1,608 28 1.7 %
INCOME (LOSS) BEFORE INCOME TAXES 32,791 22,471 10,320 45.9 %
Income tax expense (benefit) 8,618 4,934 3,684 74.7 %
NET INCOME (LOSS) $ 24,173 $ 17,537 $ 6,636 37.8 %
Other comprehensive income (loss), net of taxes 13,791 (42,910) 56,701 NM
COMPREHENSIVE INCOME (LOSS) $ 37,964 $ (25,373) $ 63,337 NM
DILUTED EARNINGS (LOSS) PER SHARE DATA:
Diluted earnings (loss) per common share $ 0.79 $ 0.56 $ 0.23 41.1 %
Weighted average diluted common shares outstanding 30,626 31,227 (601) (1.9) %
NM - Not Meaningful
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Table of Contents Revenues Direct premiums written increased by$13.6 million , or 3.4%, for the quarter endedMarch 31, 2023 , driven by premium growth within ourFlorida business of$2.9 million , or 0.9%, and premium growth in our other states business of$10.7 million , or 17.2%, as compared to the same period during the prior year. Rate increases approved in 2022 and 2023 forFlorida and for certain other states and policy inflation adjustments were the principal driver of higher written premiums. The slower rate of growth in Q1 2023 compared to prior quarters reflects management's intent to effectively manage new and renewal business as well as the competitive effects of Citizens' premium levels being lower than those of the admitted market. In total, policies in force declined 20,875, or 2.5%, from 848,856 atDecember 31, 2022 to 827,981 atMarch 31, 2023 . A summary of the recent rate increases which are driving increases in written premium, theFlorida marketplace and competition from lower cost policies offered by Citizens is discussed above under "-Overview-Trends." Rate changes are applied on new business submissions and renewals from the effective date of their renewal, and then are earned subsequently over the policy period. The recent rate and inflation increases inFlorida are in response to rising claim costs in recent years driven by higher costs of material and labor associated with claims, the cost of weather events, the rising cost of catastrophe and other reinsurance protecting policyholders and, more importantly, the prevalence of represented and litigated claims inFlorida . Due to the time associated with analyzing data, preparing, and submitting rate filings, implementing new rate levels and earning the corresponding premiums, the Insurance Entities' rate adjustments typically lag behind their experience by months or even years. In addition, the Insurance Entities' policies provide for coverage limits to be adjusted at renewal which adjust insured value coverage limits for the impact of changes in inflation occurring since the prior renewal. This is based on third-party industry data sources that monitor inflation factors such as changes in costs for residential building materials and labor. During 2023, management continued efforts to prudently manage policy counts and exposures intended to slow the growth of certain exposures relating to new business compared to prior years while filed rate increases are taking effect. Reduced new business writings, declines in renewal retentions during 2023 and the impact of selected policy non-renewals have resulted in a decline in policies in force during the quarter of 20,875, or 2.46%, from 848,856 atDecember 31, 2022 to 827,981 atMarch 31, 2023 . Direct premiums written continue to increase across the majority of states in which we conduct business due to rate increases. As a result of our business strategy, rate changes and disciplined underwriting initiatives, we have seen a decrease in policies in force, but an increase in premium in force and an increase in total insured value in a majority of states for the past two years. We were authorized to write policies in 19 states during both of the first quarters of 2023 and 2022. In addition, we are authorized to do business inTennessee andWisconsin and are proceeding with product filings in those states. AtMarch 31, 2023 , policies in force decreased 88,764 policies, or 9.7%; premium in force increased$159.6 million , or 9.4%; and total insured value increased$1.6 billion , or 0.5%, compared toMarch 31, 2022 . The following table provides direct premiums written forFlorida and Other States for the three months endedMarch 31, 2023 and 2022 (dollars in thousands): For the Three Months Ended Growth March 31, 2023 March 31, 2022 year over year Direct Direct Premiums State Premiums Written % Written % $ % Florida$ 337,365 82.3 %$ 334,437 84.4 %$ 2,928 0.9 % Other states 72,737 17.7 % 62,044 15.6 % 10,693 17.2 % Total$ 410,102 100.0 %$ 396,481 100.0 %$ 13,621 3.4 % We seek to prudently grow and generate long-term rate adequate premium in each state where we offer policies. Our diversification strategy seeks to increase business outside ofFlorida and to improve geographical distribution withinFlorida .
Direct premium earned increased by
Reinsurance enables our Insurance Entities to limit potential exposures to catastrophic events and other covered events. Ceded premium represents premiums paid to reinsurers for this protection and is a cost which reduces net written and net earned premiums. Hurricane Ian triggered reinstatement premiums, increasing ceded premium written by$24.6 million which is earned fromSeptember 28, 2022 throughMay 31, 2023 , increasing ceded premium earned for the first quarter of 2023 by$9.1 million . In total, ceded premium earned increased$27.6 million , or 19.0%, for the quarter endedMarch 31, 2023 , as compared to the same period of the prior year. The increase in reinsurance costs reflects the reinstatement premium for Hurricane Ian and an increase in the value of exposures we insure; increased pricing when compared to the expired reinsurance program and differences in the structure and design of the respective programs. Reinsurance costs, as a percentage of direct premium earned, increased from 35.1% for the three months endedMarch 31, 2022 to 38.0% for the three months endedMarch 31, 2023 . Reinsurance costs associated with each year's reinsurance program are earned over the annual policy period which typically runs fromJune 1st to May 31st . See the discussion above for the Insurance Entities' 2022-2023 reinsurance programs and "Item 1-Note 4 (Reinsurance)." 43
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Table of Contents Premiums earned, net of ceded premium earned, grew by 4.9%, or$13.2 million , to$282.2 million for the three months endedMarch 31, 2023 , reflecting an increase in direct premium earned partially offset by increased costs for reinsurance. Net investment income was$10.7 million for the three months endedMarch 31, 2023 , compared to$4.0 million for the same period in 2022, an increase of$6.7 million , or 164.7%. Liquidity generated by our investment portfolio from new deposits in 2023 and maturities, principal repayments, and interest received throughout 2022 and into 2023 was invested at higher rates, resulting in an increase in investment returns on our portfolio. Total invested assets were$1.13 billion as ofMarch 31, 2023 compared to$1.11 billion as ofDecember 31, 2022 . The increase is primarily attributable to an increase in investment income and bond prices appreciation. We continue to monitor closely the banking turmoil seen in the first quarter of 2023, including any demand from banks to increase liquidity through asset sales, tightening lending standards, and any impacts those actions may have on the marketplace and our investment portfolio. Cash and cash equivalents were$330.2 million atMarch 31, 2023 compared to$388.7 million atDecember 31, 2022 , a decrease of$58.6 million , or 15.1%. This decrease is largely attributable to Hurricane Ian claim settlements from previous cash calls from reinsurers. See below "-Analysis of Financial Condition" for more information. Cash and cash equivalents are invested short-term until needed to settle loss and LAE payments, reinsurance premium payments, and operating cash needs or until they are deployed by our investment advisors. Yields from cash and cash equivalents, short-term investments and the available-for-sale debt portfolio are dependent on the composition of the portfolio, future market forces, monetary policy and interest rate policy from theFederal Reserve . During most of 2021, theFederal Reserve broadly maintained lower interest rates, which impacted the effective yields on newly purchased available-for-sale debt securities and overnight cash purchases and short-term investments. This overall trend changed in late 2021, and into 2022, as inflation worries began to impact the financial markets, including the markets' concern over futureFederal Reserve actions of rate hikes and other actions to address inflation concerns. As a result, we saw increased yields on securities purchased in late 2021, and throughout 2022, and increased unrealized losses on our portfolio, reflected after-tax in the equity section of our balance sheet as increased market yields negatively impacted the fair value on much of our available-for-sale debt securities, which we generally hold to maturity. We continued to invest in securities bearing higher interest rates throughout the first quarter of 2023, but we have seen a noticeable pause, and at times, lower interest rates during the first quarter of 2023 when compared to the fourth quarter of 2022. The lower unrealized loss in our fixed income portfolio during the first quarter of 2023 was driven by the move in slightly lower market interest rates when compared to the fourth quarter of 2022, as well as older investments amortizing towards par as those investments move closer to their redemption dates. We sell invested assets from our investment portfolio from time to time to meet our investment objectives or to take advantage of market opportunities. During the three months endedMarch 31, 2023 , sales of available-for-sale debt securities resulted in net realized losses of$0.7 million and sales of equity securities resulted in net realized losses of$0.1 million , in total generating net realized losses of$0.8 million during the first quarter of 2023. During the three months endedMarch 31, 2022 , sales of available-for-sale debt securities resulted in net realized losses of$0.2 million and sales of equity securities resulted in net realized gains of$0.3 million , in total generating a net realized gain of$0.1 million during the first quarter of 2022. See "Item 1-Note 3 (Investments)." There was a$1.0 million net unrealized gain in equity securities during the three months endedMarch 31, 2023 , largely driven by the overall equity markets appreciation, compared to a$3.4 million net unrealized loss in equity securities during the three months endedMarch 31, 2022 . Net change in unrealized gains or losses for equity securities still held at the end of the reported period are recorded at fair value in the Condensed Consolidated Balance Sheet with changes in the fair value of equity securities reported in current period earnings in the Condensed Consolidated Statements of Income within net change in unrealized gains (losses) of equity securities as they occur. See "Item 1-Note 3 (Investments)." Commission revenue is comprised principally of brokerage commissions we earn from traditional open market third-party reinsurers, which excludes reinsurance provided by theState of Florida and reinsurance provided by Cosaint Re (catastrophe bond). Commission revenue is earned pro-rata over the reinsurance policy period which runs fromJune 1st to May 31st of the following year. Reinstatement premiums for Hurricane Ian resulted in$13.1 million of additional brokerage commissions which is earned fromSeptember 28, 2022 throughMay 31, 2023 , increasing brokerage commission revenue earned by$4.9 million for the first quarter of 2023. For the three months endedMarch 31, 2023 , commission revenue was$17.3 million , compared to$11.2 million for the three months endedMarch 31, 2022 . The increase in commission revenue of$6.1 million , or 54.8%, for the three months endedMarch 31, 2023 was primarily due additional commissions from Hurricane Ian reinstatement premiums and to increased commissions from third-party reinsurers earned on increased reinsurance premiums which is attributable to growth in our insured values, as well as the difference in pricing and structure associated with our reinsurance program when compared to the prior year. Policy fees for the three months endedMarch 31, 2023 were$4.2 million compared to$4.8 million for the same period in 2022. The decrease of$0.6 million , or 12.8%, was the result of a decrease in the combined total number of new and renewal policies written during the three months endedMarch 31, 2023 compared to the same period in 2022 in states where we are permitted to charge this fee.
Other revenue, representing revenue from policy installment fees, premium
financing and other miscellaneous income, was
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Table of Contents Non-GAAP
Core revenue, representing total GAAP revenue, excluding net realized gains
(losses) on investments and net changes in unrealized gains (losses) of equity
securities, was
Operating Costs and Expenses
Losses and Loss Adjustment Expenses
Losses and LAE, net of reinsurance recoveries was
Losses and LAE experience in recent years including the first quarter of 2023, reflects an adverse litigation environment and other market conditions inFlorida that theFlorida Legislature has been attempting to address with the passage of legislation spanning several years with the most significant changes made during a special session held inDecember 2022 . Losses and LAE, net for the current accident year is estimated to be$202.8 million or 71.9 net loss ratio points for the three months endedMarch 31, 2023 , compared to$179.9 million , or 66.9 net loss ratio points for the three months endedMarch 31, 2022 . Management began with a 44% core loss pick for UPCIC in the first quarter of 2022 and continued to increase it throughout the year. Management has selected a core UPCIC loss pick of 46% for the first quarter of 2023, while considering several factors including historical experience and rate filings implemented to help mitigate recent loss experience. The increase in losses and LAE for the first quarter of 2023 compared to the same period in 2022 is largely due to this increase in loss pick for UPCIC. There were no incremental weather losses reported in the first quarter of 2023 compared to$4.5 million reported for the same period in 2022. Current-accident year losses and LAE also reflect savings from activities performed by the claims affiliate within our holding company system on behalf of our Insurance Entities and our reinsurers when losses and LAE are ceded under our reinsurance contracts. These savings serve to offset LAE at the consolidated level (contra LAE). During the three months endedMarch 31, 2023 , these claims related activities generated a profit margin of$5.8 million compared to$2.1 million during the three months endedMarch 31, 2022 . Prior year development includes changes in estimated losses and LAE for all events occurring in prior years including hurricanes and other weather. Prior year development was$3.3 million , or 1.2 net loss ratio points for the quarter endedMarch 31, 2023 , compared to$0.7 million , or 0.2 net loss ratio points for the quarter endedMarch 31, 2022 . The overall net losses and LAE ratio also increased as a result of an increase in the cost of reinsurance relative to direct premiums earned for the quarter endedMarch 31, 2023 compared to the same period in 2022. This cost includes the reinstatement premium for Hurricane Ian. Our net losses and LAE experience has been largely mitigated by ceding losses from hurricanes on certain events to the FHCF, including Hurricane Irma. See discussion in "-REINSURANCE" section above for a discussion about the pending commutation with the FHCF for the 2017-2018 treaty period. As such, during 2023 we will begin the commutation process which ultimately will result in a final determination of and payment for known, unknown or unreported claims on Hurricane Irma effective as of the commutation date with the potential for gain or loss on the commutation. TheFlorida litigation environment has made it difficult to determine an ultimate liability on Irma claims, and as a result the amount agreed upon or determined in commutation may not be sufficient to fund claim settlements on all Hurricane Irma claims as those claims settle in the future.
General and Administrative Expenses
For the three months endedMarch 31, 2023 , general and administrative expenses were$75.9 million compared to$78.3 million during the same period in 2022, as follows (dollars in thousands): Three Months Ended March 31, Change 2023 2022 $ % $ Ratio $ Ratio Premiums earned, net$ 282,224 $ 269,064 $ 13,160 4.9 % General and administrative expenses: Policy acquisition costs 51,691 18.3 % 54,723 20.3 % (3,032) (5.5) % Other operating costs 24,236 8.6 % 23,574 8.8 % 662 2.8 % Total general and administrative expenses$ 75,927 26.9 %$ 78,297 29.1 %$ (2,370) (3.0) % 45
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Table of Contents General and administrative expenses decreased by$2.4 million , which was the result of a decrease in policy acquisition costs of$3.1 million offset by an increase in other operating costs of$0.7 million . The total general and administrative expense ratio was 26.9% for the three months endedMarch 31, 2023 compared to 29.1% for the same period in 2022. •The decrease in policy acquisition costs of$3.1 million reflects a reduction in the commission rate paid to agents on the renewal ofFlorida policies, which was reduced by two percentage points from 10% to 8% effectiveMay 1, 2022 , which benefits future periods as the new rate structure applies prospectively and a lower level of new business that pays a higher commission rate. The decrease in theFlorida renewal commission rate paid to agents also reduced the ratio of policy acquisition costs to net premiums earned. •The increase in other operating costs of$0.7 million was primarily driven by higher salaries, stock based compensation, and employee related expenses, partially offset by lower policy related expenses. The other operating cost ratio was 8.6% for the three months endedMarch 31, 2023 , compared to 8.8% for the same period in 2022 due to economies of scale as the premium base increases from rate increases. As a result of the trends discussed above for losses and LAE and general and administrative expenses, the combined ratio for the first quarter endedMarch 31, 2023 was 100.0% compared to 97.9% for the same period in 2022.
Interest and Amortization of Debt Issuance Costs
Interest and amortization of debt issuance costs was$1.6 million for each of the three months endedMarch 31, 2023 and 2022. Interest and amortization of debt issuance costs represents amounts we incur on our outstanding long-term debt at the applicable interest rates and amortization of debt issuance costs on our 5.625% Senior Unsecured Notes. See "Item 1-Note 7 (Long-term debt)" for additional details.
Income Tax Expense/(Benefit)
Income tax expense was$8.6 million for the quarter endedMarch 31, 2023 compared to an income tax expense of$4.9 million for the quarter endedMarch 31, 2022 . Our effective tax rate ("ETR") increased to 26.3% for the three months endedMarch 31, 2023 , as compared to 22.0% for the three months endedMarch 31, 2022 . The ETR for the period endingMarch 31, 2023 increased as a result of a higher ratio of permanent items relative to pre-tax book income, principally non-deductible compensation and a reduction in state tax benefit in the first quarter of 2022 compared to the same period in 2023. See "Item 1-Note 9 (Income Taxes)" for additional details.
Other Comprehensive Income (Loss)
Other comprehensive income, net of taxes for the three months endedMarch 31, 2023 , was$13.8 million compared to other comprehensive loss of$42.9 million for the same period in 2022, reflecting after-tax changes in fair value of available-for-sale debt securities held in our investment portfolio and reclassifications out of accumulated other comprehensive income (loss) for available-for-sale debt securities sold. We saw increased market yields on securities purchased in late 2021 and 2022 and increased unrealized losses on our portfolio during those periods, reflected after-tax in the equity section of our balance sheet as increased interest rates negatively impacted the fair value on much of our available-for-sale debt securities. Unrealized losses declined during the first quarter of 2023 in response to: i) interest fluctuations and credit spreads favorably increasing valuations; ii) maturities and principal pay downs on below market securities during the period and; iii) generally a shorter period-to-maturity for the below market securities as the maturity horizon shortens over time on these older securities. See the discussion above under "-Revenues" and "Item 1-Note 11 (Other Comprehensive Income (Loss))" for additional information about the amounts comprising other comprehensive income (loss), net of taxes for these periods.
Non-GAAP
Adjusted operating income (loss) represents GAAP operating income (loss), excluding net realized gains (losses) on investments and net changes in unrealized gains (losses) of equity securities. Adjusted operating income was$34.3 million for the three months endedMarch 31, 2023 compared to adjusted operating income of$27.4 million for the same period in 2022. Adjusted operating income (loss) margin, represents adjusted operating income (loss) divided by core revenue. Adjusted operating loss margin was 10.8% for the three months endedMarch 31, 2023 compared to adjusted operating income margin of 9.4% for the same period in 2022. Adjusted net income (loss) attributable to common stockholders represents GAAP net income (loss) attributable to common stockholders, less after-tax net realized gains (losses) on investments and net changes in unrealized gains (losses) of equity securities. Adjusted net income attributable to common stockholders was$24.0 million for the three months endedMarch 31, 2023 compared to adjusted net income attributable to common stockholders of$20.0 million for the same period in 2022. Diluted adjusted earnings (loss) per common share represents adjusted net income (loss) available to common stockholders divided by weighted average diluted common shares outstanding. Diluted adjusted earnings per common share was$0.79 for the three months endedMarch 31, 2023 compared to diluted adjusted earnings per common share of$0.64 for the same period in 2022. 46
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Analysis of Financial Condition-As of
We believe that the cash flows generated from operations will be sufficient to meet our working capital requirements for at least the next twelve months. We invest amounts considered to be in excess of current working capital requirements.
The following table summarizes, by type, the carrying values of investments as of the dates presented (in thousands):
As of
March 31, December 31,
Type of Investment 2023 2022
Available-for-sale debt securities
Equity securities 92,906 85,469 Investment real estate, net 5,665 5,711 Total$ 1,125,126 $ 1,105,806
See "Item 1-Condensed Consolidated Statements of Cash Flows" and "Item 1-Note 3 (Investments)" for explanations on changes in investments.
Prepaid reinsurance premiums represent the portion of unearned ceded written premium that will be earned pro-rata over the coverage period of our reinsurance program, which runs fromJune 1st to May 31st of the following year. Additionally, prepaid reinsurance includes reinstatement premiums recorded in 2022 related to Hurricane Ian, net of amortizations. The decrease of$158.1 million to$124.3 million as ofMarch 31, 2023 was primarily due to the amortization of ceded written premium for the reinsurance costs earned during the period. Reinsurance recoverable represents the estimated amount of paid and unpaid losses, LAE and other expenses that are expected to be recovered from reinsurers. The decrease of$130.8 million to$678.1 million as ofMarch 31, 2023 was primarily due to the settlement and collection of Hurricane Ian claims and amounts recoverable from reinsurers relating to other ceded events.
Premiums receivable, net represents amounts receivable from policyholders. The
decrease in premiums receivable, net of
Deferred policy acquisition costs ("DPAC") decreased by $5.8 million to $97.9
million as of March 31, 2023 , and is consistent with written premium trends and
changes in commissions paid to agents. In addition, DPAC was affected by the
reductions to Florida renewal commissions implemented during 2022 and other
changes to the Company's commission structure. See "Item 1-Note 5 (Insurance
Operations)" for a roll-forward in the balance of our DPAC.
Deferred income taxes represent the estimated tax assets or tax liabilities
caused by temporary differences between the tax return basis of certain assets
and liabilities and amounts recorded in the financial statements. During the
three months ended March 31, 2023 , net deferred income tax assets increased by
$1.5 million to $58.8 million primarily due to an increase in unearned premiums
and advanced premiums. Deferred income taxes reverse in future years as the
temporary differences between book and tax reverse.
See "Item 1-Note 6 (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 decreased by $168.4 million to $870.4 million as of March 31, 2023 . The
majority of the decrease is the settlement of losses from Hurricane Ian and
prior hurricanes and prior large weather events. Overall, unpaid losses and LAE
decreased, as claims settlements exceeded new emerging claims. Unpaid losses and
LAE are net of estimated subrogation recoveries.
Unearned premiums represent the portion of direct premiums written that will be
earned pro-rata in the future. The decrease of $45.3 million from December 31,
2022 to $898.6 million as of March 31, 2023 reflects premium trends and the
seasonality of our business, which varies from month to month.
Advance premium represents premium payments made by policyholders ahead of the
effective date of the policies. The increase of $37.3 million from December 31,
2022 to $92.2 million as of March 31, 2023 reflects customer payment behavior
and the payment behavior of mortgage escrow service providers as well as premium
trends.
We exclude net negative cash balances, if any, from cash and cash equivalents
that we have with any single financial institution based on aggregating the book
balance of all accounts at the institution which have the right of offset. If
the aggregation results in a net negative book balance, that balance is
reclassified from cash and cash equivalents in our Consolidated Balance Sheet to
book overdraft. These amounts represent outstanding checks or drafts not yet
presented to the financial institution in excess of amounts on deposit at the
financial institutions. We maintain a short-term cash investment strategy sweep
to maximize investment returns on cash balances. Book overdraft totaled $77.7
million as of March 31, 2023 compared to no book overdraft as of December 31,
2022 . The increase of $77.7 million is the result of lower cash balances
available for offset as of March 31, 2023 compared to December 31, 2022 . See
"-Liquidity and Capital Resources" for more information.
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Table of Contents Reinsurance payable, net, represents the unpaid reinsurance premium installments owed to reinsurers, unpaid reinstatement premiums due to reinsurers and cash advances received from reinsurers, if any. OnJune 1st of each year, we renew our core catastrophe reinsurance program and record the estimated annual cost of our reinsurance program. These estimated annual costs are increased or decreased during the year based on premium adjustments or as a result of new placements during the year. The annual cost initially increases reinsurance payable, which is then reduced as installment payments are made over the policy period of the reinsurance, which typically runs fromJune 1st to May 31st . The balance decreased by$292.6 million to$91.9 million as ofMarch 31, 2023 as a result of timing of the above items and the timing and settlement of the final reinsurance installment typically settled in the second quarter. The balance atMarch 31, 2023 principally represents funds held from reinsurers on claims not yet settled on Hurricane Ian. See "-Liquidity and Capital Resources" for more information about timing of reinsurance premium installment payments. Income taxes payable represents amounts due to taxing jurisdictions within one year and arise when income tax liabilities exceed tax payments. As ofMarch 31, 2023 , the income taxes payable was$13.1 million , compared to a balance recoverable of$1.5 million as ofDecember 31, 2022 .
Other liabilities and accrued expenses increased by
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Liquidity is a measure of a company's ability to generate sufficient cash flows to meet its short- and long-term obligations. Funds generated from operations have been sufficient and we expect them to be sufficient to meet our current and long term liquidity requirements. The balance of cash and cash equivalents, excluding restricted cash, as ofMarch 31, 2023 was$330.2 million , compared to$388.7 million atDecember 31, 2022 . See "Item 1-Condensed Consolidated Statements of Cash Flows" for a reconciliation of the balance of cash and cash equivalents betweenMarch 31, 2023 andDecember 31, 2022 . This decrease is largely attributable to the settlement of Hurricane Ian claims and changes in operational cash flows since year end and was driven by cash flows used in operating, investing, and financing activities. Our cash investment strategy at times includes cash investments where the right of offset against other bank accounts does not exist. A book overdraft occurs when aggregating the book balance of all accounts at a financial institution for accounts which have the right of offset, and if the aggregation results in a net negative book balance, that balance is reclassified from cash and cash equivalents in our Condensed Consolidated Balance Sheet to book overdraft. Cash and cash equivalents balances are available to settle book overdrafts, and to pay reinsurance premiums, expenses and claims. Reinsurance premiums are paid in installments during the reinsurance policy period, which runs fromJune 1st to May 31st of the following year. The FHCF reimbursement premiums are paid in three installments onAugust 1st ,October 1st andDecember 1st , and third-party reinsurance premiums are paid in four installments typically onJuly 1st ,October 1st ,January 1st andApril 1st , resulting in significant payments at those times. This year theApril 1st installments were paid during the first quarter. See "Item 1-Note 12 (Commitments and Contingencies)" and additional discussion below under the caption "-Material Cash Requirements" for more information. The balance of restricted cash and cash equivalents as ofMarch 31, 2023 andDecember 31, 2022 represents cash equivalents on deposit with certain regulatory agencies in the various states in which our Insurance Entities do business. Liquidity is required at the holding company for us to cover the payment of holding company general operating expenses, provide for contingencies if needed, dividends to shareholders (if and when authorized and declared by our Board of Directors), payment for the possible repurchase of our common stock (if and when authorized by our Board of Directors), payment of our tax obligations to taxing authorities, settlement of taxes between subsidiaries in accordance with our tax sharing agreement, capital contributions to subsidiaries or surplus note contributions to the Insurance Entities, if needed, and interest and principal payments on outstanding debt obligations of the holding company. Effective in 2021 for UPCIC and 2022 for APPCIC, the holding company has put in place an ongoing surplus note arrangement with the Insurance Entities, which has been approved by FLOIR as the Insurance Entities' domestic regulator. Surplus notes are unsecured debt issued by the Insurance Entities that are subordinated to all claims by policyholders and creditors, with interest and principal payments on the surplus notes to the holding company being made only upon the FLOIR's express approval. Surplus notes are considered bonds in function and payout structure, but are accounted for as equity in the statutory reporting of the Insurance Entities. The holding company has outstanding with the Insurance Entities$147.3 million in surplus notes and accrued interest as ofMarch 31, 2023 . Under the terms of the surplus notes, interest accrues at a variable rate which resets annually (currently 10.54% for 2023). The declaration and payment of future dividends to our shareholders, and any future repurchases of our common stock, will be at the discretion of our Board of Directors and will depend upon many factors, including our operating results, financial condition, debt covenants and any regulatory constraints. New regulations or changes to existing regulations imposed on the Company and its affiliates may also impact the amount and timing of future dividend payments to the parent. Principal sources of liquidity for the holding company include dividends paid by our service entities generated from income earned on fees paid by the Insurance Entities to affiliated companies for general agency, inspections and claims adjusting services. Dividends are also paid from income earned from brokerage commissions paid by third party reinsurers earned on reinsurance contracts placed by our wholly-owned subsidiary,Blue Atlantic Reinsurance Corporation , and policy fees charged to policyholders. An additional source of liquidity is interest income on the intercompany surplus notes are paid by the Insurance Entities to the holding company. We also maintain high quality investments in our portfolio as a source of liquidity along with ongoing interest and dividend income from those investments. 48
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Table of Contents The maximum amount of dividends that can be paid byFlorida insurance companies without prior approval of the FLOIR is subject to restrictions as referenced below and in "Item 1-Note 5 (Insurance Operations)." Dividends from the Insurance Entities can only be paid from accumulated unassigned funds derived from net operating profits and net realized capital gains. Subject to such accumulated unassigned funds, the maximum dividend that may be paid by the Insurance Entities toProtection Solutions, Inc. ("PSI", formerly known asUniversal Insurance Holding Company of Florida ), without prior approval (an "ordinary dividend") is further limited to the lesser of statutory net income from operations of the preceding calendar year or statutory unassigned surplus as of the preceding year end. During the three months endedMarch 31, 2023 and the year endedDecember 31, 2022 , the Insurance Entities did not pay dividends to PSI. As ofMarch 31, 2023 , the Insurance Entities did not have the capacity to pay ordinary dividends. OnNovember 23, 2021 , we issued$100 million of 5.625% Senior Unsecured Notes due 2026. We used the net proceeds to support the Insurance Entities' statutory capital requirements and for general corporate purposes. If necessary, the Company also has amounts available under our unsecured revolving loan as discussed in "Item 1-Note 7 (Long-term debt)." Liquidity for the Insurance Entities is primarily required to cover payments for reinsurance premiums, claims payments including potential payments of catastrophe losses (offset by recovery of any reimbursement amounts under our reinsurance agreements), fees paid to affiliates for managing general agency services, inspections and claims adjusting services, agent commissions, premium and income taxes, regulatory assessments, general operating expenses, and interest and principal payments on debt obligations. The principal source of liquidity for the Insurance Entities consists of the revenue generated from the collection of premiums earned, net, interest and dividend income from the investment portfolio, the collection of reinsurance recoverable and financing fees. Our insurance operations provide liquidity as premiums are generally received months or even years before potential losses are paid under the policies written. In the event of catastrophic events, many of our reinsurance agreements provide for "cash advance" whereby reinsurers advance or prepay amounts to us, thereby providing liquidity, which we utilize 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 average credit rating on our available-for-sale securities was A+ as ofMarch 31, 2023 andDecember 31, 2022 . Credit ratings are a measure of collection risk on invested assets. Credit ratings are provided by third party nationally recognized rating agencies and are periodically updated. Management establishes guidelines for minimum credit rating and overall credit rating for all investments. The duration of our available-for-sale securities was 4.0 years atMarch 31, 2023 compared to 4.0 years atDecember 31, 2022 . Duration is a measure of a bond's sensitivity to interest rate changes and is used by management to limit the potential impact of longer-term investments. The Insurance Entities are responsible for losses related to catastrophic events in excess of coverage provided by the Insurance Entities' reinsurance programs and retentions before our reinsurance protection commences. Also, the Insurance Entities are 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 default by reinsurers may have a material adverse effect on either of the Insurance Entities or on our business, financial condition, results of operations and liquidity. See "Item 1-Note 4 (Reinsurance)" for more information. Capital Resources 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 stockholders' equity, total long-term debt, total capital resources, debt-to-total capital ratio, debt-to-equity ratio, book value and ROCE for the periods presented (dollars in thousands): As of March 31, December 31, 2023 2022 Stockholders' equity$ 321,806 $ 287,896 Total long-term debt 102,578 102,769 Total capital resources$ 424,384 $ 390,665 Debt-to-total capital ratio 24.2 % 26.3 % Debt-to-equity ratio 31.9 % 35.7 % Book Value$ 10.57 $ 9.47 ROCE 31.7 % (6.2) % 49
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Table of Contents Capital resources, net increased by$33.7 million for the three months endedMarch 31, 2023 , reflecting a net increase in total stockholders' equity and long-term debt. The change in stockholders' equity was principally the result of our 2023 net income, increases in the after-tax changes in the fair value of our available-for-sale debt securities, and increases from share-based compensation offset by dividends to shareholders. Available-for-sale debt securities increased in fair value by$18.3 million (before tax) during the first quarter of 2023, resulting in the pre-tax net unrealized loss position of$137.3 million atDecember 31, 2022 to decrease to$119.0 million atMarch 31, 2023 . Current market outlooks are signaling furtherFederal Reserve tightening which could continue to have a negative impact on the valuation of available-for-sale debt securities. The reduction in long-term debt was primarily the result of principal payments on long-term debt of$0.4 million offset by amortization of debt issuance costs of$0.2 million on our 5.625% Senior Unsecured Notes due 2026 during 2023. See "-Liquidity and Capital Resources" for more information. The debt-to-total capital ratio is total long-term debt divided by total capital resources, whereas the debt-to-equity ratio is total long-term debt divided by stockholders' equity. These ratios help management measure the amount of financing leverage in place in relation to equity and allows investors to evaluate future leverage capacity.
Book value is total stockholders' equity, adjusted for preferred stock liquidation, divided by the number of common shares outstanding as of a reporting period. Book value per common share is the excess of assets over liabilities at a reporting period attributed to each share of common stock.
ROCE is calculated by actual net income (loss) attributable to common stockholders divided by average common stockholders' equity. ROCE is a capital profitability measure of how efficiently management creates profits.
Non-GAAP
Adjusted common stockholders' equity, representing GAAP common stockholders' equity, less accumulated other comprehensive income (loss), was$411.7 million as ofMarch 31, 2023 ,$454.7 million as ofMarch 31, 2022 and$391.6 million as ofDecember 31, 2022 . Adjusted book value per common share, representing adjusted common stockholders' equity divided by outstanding common shares at the end of the reporting period, was$13.52 as ofMarch 31, 2023 ,$14.69 as ofMarch 31, 2022 and$12.89 as ofDecember 31, 2022 . Adjusted return on common equity representing actual or annualized adjusted net income (loss) attributable to common stockholders divided by average adjusted common stockholders' equity, with the denominator excluding current period income statement after-tax net realized gains (losses) on investments and net changes in unrealized gains (losses) of equity securities, was 23.9% as ofMarch 31, 2023 , 17.8% as ofMarch 31, 2022 and (3.0)% as ofDecember 31, 2022 .
Surplus Note
As described in our Annual Report on Form 10-K for the year endedDecember 31, 2022 , UPCIC entered into a$25.0 million surplus note with theState Board of Administration of Florida ("SBA") underFlorida's Insurance Capital Build-Up Incentive Program onNovember 9, 2006 . The surplus note has a twenty-year term, with quarterly payments of principal and interest based on the 10-year Constant Maturity Treasury Index. As ofDecember 31, 2022 , UPCIC's net written premium to surplus ratio and gross written premium to surplus ratio were in excess of the required minimums and, therefore, UPCIC is not subject to increases in interest rates. See "Item 1-Note 7 (Long-term debt)" for additional details. As ofMarch 31, 2023 , UPCIC was in compliance with the terms of the surplus note and with each of the loan's covenants as implemented by rules promulgated by the SBA. Total adjusted capital and surplus, which includes the surplus note, was in excess of regulatory requirements for both UPCIC and APPCIC.
Long-term Debt
InNovember 2021 , we issued and sold$100 million of 5.625% Senior Unsecured Notes due 2026 (the "Notes") to certain institutional accredited investors and qualified institutional buyers. The Notes mature onNovember 26, 2026 , at which time the entire$100 million of principal is due and payable. At any time on or afterNovember 23, 2023 , the Company may redeem all or part of the Notes. See "Item 1-Note 7 (Long-term debt)" for additional details. As ofMarch 31, 2023 , we were in compliance with all applicable covenants.
Revolving Loan
As discussed in "Item 1-Note 7 (Long-term Debt)," the Company entered into a
364-day credit agreement and related revolving loan ("2021 Revolving Loan") with
JPMorgan Chase Bank, N.A . ("JPMorgan") in August 2021 . The Company and JPMorgan
subsequently agreed during the term of the 2021 Revolving Loan to extend its
expiration date until October 31, 2022 . The Company renewed this agreement on
October 31, 2022 , increasing the credit facility to $37.5 million and modifying
other terms. The October 31, 2022 Revolving Loan agreement ("2022 Revolving
Loan") makes available to the Company an unsecured revolving credit facility
with an aggregate commitment not to exceed $37.5 million (previously $35.0
million ) and carries an interest rate of prime rate plus a margin of 2%. The
Company must pay an annual commitment of 0.50% of the unused portion of the
commitment. Borrowings under the 2022 Revolving Loan mature on October 30, 2023 ,
364 days after the inception date of the 2022 Revolving Loan. The 2022 Revolving
Loan is subject to annual renewals. The 2022 Revolving Loan contains customary
financial and other covenants with which the Company is in compliance. The
Company did not borrow any amount under the 2021 Revolving Loan and as of March
31, 2023 , the Company has not borrowed any amount under the 2022 Revolving Loan.
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Table of Contents We will also continue to evaluate opportunities to access the capital markets to raise additional capital. We anticipate any proceeds will be used for general corporate purposes, including investing in the capital and surplus of the Insurance Entities. In addition to the liquidity generally provided from operations, we maintain a conservative, well-diversified investment portfolio, predominantly comprised of fixed income securities with an average credit rating of A+, that focuses on capital preservation and providing an adequate source of liquidity for potential claim payments and other cash needs. The portfolio's secondary investment objective is to provide a total rate of return with emphasis on investment income. Historically, we have consistently generated funds from operations, allowing our cash and invested assets to grow. We have not had to liquidate investment holdings to fund either operations or financing activities.
Common Stock Repurchases
OnDecember 15, 2022 , our Board of Directors authorized a successor share repurchase program under which we may repurchase up to$8.0 million of shares of our common stock throughDecember 15, 2024 , which represents the unused portion of theNovember 2022 Share Repurchase Program authorization announced onNovember 3, 2020 . We may repurchase shares from time to time at our discretion, based on ongoing assessments of our capital needs, the market price of our common stock and general market conditions. We did not repurchase any shares of our common stock during the three months endedMarch 31, 2023 . Also, see "Part II, Item 2-Unregistered Sales ofEquity Securities and Use of Proceeds" for more information.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements that are reasonably likely to have a material effect on the financial condition, results of operations, liquidity, or capital resources of the Company, except for multi-year reinsurance contract commitments for future years that will be recorded at the commencement of the coverage period. See "Item 1-Note 12 (Commitments and Contingencies)" for more information.
Cash Dividends
The following table summarizes the dividends declared and paid by the Company
during the three months ended
Cash Dividend
Dividend Shareholders Dividend Per Common Share
2023 Declared Date Record Date Payable Date Amount
First Quarter February 9, 2023 March 9, 2023 March 16, 2023 $ 0.16
MATERIAL CASH REQUIREMENTS
The following table represents our material cash requirements for which cash
flows are fixed or determinable as of
Total Next 12 Months Beyond 12 Months
Reinsurance payable and multi-year
commitments (1) $ 406,848 $ 183,069 $ 223,779
Unpaid losses and LAE, direct (2) 870,407 499,614 370,793
Long-term debt (3) 128,017 7,272 120,745
Total material cash requirements $ 1,405,272 $ 689,955 $ 715,317
(1)The amount represents the payment of reinsurance premiums payable under multi-year commitments. See "Item 1-Note 12 (Commitments and Contingencies)."
(2)There are generally no notional or stated amounts related to unpaid losses and LAE. Both the amounts and timing of future loss and LAE payments are estimates and subject to the inherent variability of legal and market conditions affecting the obligations and make the timing of cash outflows uncertain. The ultimate amount and timing of unpaid losses and LAE could differ materially from the amounts in the table above. Further, the unpaid losses and LAE do not represent all the obligations that will arise under the contracts, but rather only the estimated liability incurred throughMarch 31, 2023 . Unpaid losses and LAE are net of estimated subrogation recoveries. In addition, these balances exclude amounts recoverable from our reinsurance program. See "Item 1-Note 4 (Reinsurance)" and "-Note 6 (Liability for Unpaid Losses and Loss Adjustment Expenses)."
(3)Long-term debt consists of a Surplus note and 5.625% Senior unsecured notes. See "Item 1-Note 7 (Long-term debt)."
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related data presented herein have been prepared in
accordance with GAAP, which require the measurement of financial position and
operating results in terms of historical dollars without considering changes in
the relative purchasing power of money over time due to inflation. Our primary
assets are monetary in nature. As a result, interest rates have a more
significant impact on our performance than the effects of the general levels of
inflation. Interest rates do not necessarily move in the same direction or of
the same magnitude as the cost of paying losses and LAE.
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Table of Contents Insurance premiums are established before we know the amount of loss and LAE and the extent to which inflation may affect such expenses. Consequently, we attempt to anticipate the future impact of inflation when establishing rate levels. While we attempt to charge adequate rates, we may be limited in raising premium levels for competitive and regulatory reasons. Inflation also affects the market value of our investment portfolio and the investment rate of return. Any future economic changes which result in prolonged and increasing levels of inflation could cause increases in the dollar amount of incurred loss and LAE and thereby materially adversely affect future liability requirements.
ARRANGEMENTS WITH VARIABLE INTEREST ENTITIES
We entered into a reinsurance captive arrangement with a VIE in the normal course of business, and consolidated the VIE since we are the primary beneficiary.
For a further discussion of our involvement with the VIE, see "Item 1-Note 14 (Variable Interest Entities)."
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
There have been no material changes during the period covered by this Quarterly Report on Form 10-Q to Critical Accounting Policies and Estimates previously disclosed in "Part II, Item 7-Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K for the year endedDecember 31, 2022 . 52
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Table of Contents NON-GAAP FINANCIAL MEASURES Non-GAAP financial measures should be considered in addition to, and not as a substitute for or superior to, financial measures presented in accordance with GAAP. For more information regarding our key performance indicators, please refer to the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations-Key Performance Indicators."
The following table presents the reconciliation of GAAP revenue to core revenue, which is a non-GAAP measure (in thousands):
Three Months Ended
March 31,
2023 2022
GAAP revenue $ 316,508 $ 287,482
less: Net realized gains (losses) on investments (788) 58
less: Net change in unrealized gains (losses) of equity
securities 957 (3,396)
Core Revenue $ 316,339 $ 290,820
The following table presents the reconciliation of GAAP operating income (loss)
to adjusted operating income (loss), which is a non-GAAP measure (in thousands):
Three Months Ended
March 31,
2023 2022
GAAP income (loss) before income tax expense (benefit) $ 32,791 $ 22,471
add: Interest and amortization of debt issuance costs 1,636 1,608
GAAP operating income (loss) 34,427 24,079
less: Net realized gains (losses) on investments (788) 58
less: Net changes in unrealized gains (losses) of equity securities
957 (3,396)
Adjusted operating income (loss) $
34,258
The following table presents the reconciliation of GAAP operating income (loss)
margin to adjusted operating income (loss) margin, which is a non-GAAP measure
(in thousands):
Three Months Ended
March 31,
2023 2022
GAAP operating income (loss) $ 34,427 $ 24,079
GAAP revenue 316,508 287,482
GAAP operating income (loss) margin 10.9 % 8.4 %
Adjusted operating income (loss) 34,258 27,417
Core revenue 316,339 290,820
Adjusted operating income (loss) margin 10.8 % 9.4 %
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The following table presents the reconciliation of GAAP net income (loss) available to common stockholders to adjusted net income (loss) available to common stockholders, which is a non-GAAP measure (in thousands):
Three Months Ended
March 31,
2023 2022
GAAP net income (loss) $ 24,173 $ 17,537
less: Preferred dividends 3 3
GAAP net income (loss) available to common stockholders 24,170 17,534
less: Net realized gains (losses) on investments (788) 58
less: Net changes in unrealized gains (losses) of equity securities
957 (3,396)
add: Income tax effect on above adjustments 42 (823)
Adjusted net income (loss) available to common stockholders
Weighted average common shares outstanding - Diluted 30,626 31,227 Diluted earnings (loss) per common share$ 0.79 $ 0.56 Diluted adjusted earnings (loss) per common share $
0.79
The following table presents the reconciliation of GAAP stockholders' equity to
adjusted stockholders' equity and book value per common share to adjusted book
value per common share, which is a non-GAAP measure (in thousands):
As of
March 31, March 31, December 31,
2023 2022 2022
Stockholders' equity $ 321,806 $ 396,341 $ 287,896
less: Preferred equity 100 100 100
Common stockholders' equity 321,706 396,241 287,796
less: Accumulated other comprehensive income (loss) (89,991) (58,478) (103,782)
Adjusted common stockholders' equity $ 411,697 $ 454,719 $ 391,578
Common shares outstanding 30,440 30,946 30,389
Book value per common share $ 10.57 $ 12.80 $ 9.47
Adjusted book value per common share $ 13.52 $ 14.69 $ 12.89
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The following table presents the reconciliation of GAAP ROCE to adjusted ROCE, which is a non-GAAP measure (in thousands):
Three Months Ended
March 31, Year Ended December 31,
2023 2022 2022Actual or annualized net income (loss) available to common stockholders
$ 96,680 $ 70,136 $ (22,267) Average common stockholders' equity 304,751 412,922 358,699 ROCE 31.7 % 17.0 % (6.2) % Actual or annualized adjusted net income (loss) available to common stockholders$ 96,172 $ 80,196 $ (12,618)
Actual or adjusted average common
stockholders' equity* 401,574 451,202 423,199 Adjusted ROCE 23.9 % 17.8 % (3.0) %
Adjusted average common stockholders' equity excludes current period after-tax net * realized gains (losses) on
investments and net changes in unrealized gains (losses) of equity securities.
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