STATUTORY ACCOUNTING AND REGULATION

The insurance industry is heavily-regulated. State laws and regulations, as well as national regulatory agency requirements, govern the operations of all insurers such as our insurance affiliates. The various laws and regulations require that insurers maintain minimum amounts of statutory surplus and risk-based capital, restrict insurers' ability to pay dividends, specify allowable investment types and investment mixes, and subject insurers to assessments. At December 31, 2016, we received an assessment for $415,000 from the North Carolina Joint Underwriting Association related to Hurricane Matthew. We did not receive any additional significant assessments from regulatory authorities in the states in which our insurance affiliates operate.

Governmental agencies or certain quasi-governmental entities can levy assessments upon us in the states in which we write policies. See Note 2(k) for a description of how we recover assessments imposed upon us.

The table below summarizes the activity related to assessments levied upon our insurance affiliates:



	2016			2015			2014
Expected recoveries of assessments, January 1	$	—		$	—		$	7
Assessments expensed	1,472			226			72
Assessments recovered	—			1			(2		)
Assessments not recoverable	(1,472		)	(227		)	(77		)
Expected recoveries of assessments, December 31	$	—		$	—		$	—

We expense an assessment when the particular governmental agency or quasi-governmental entity levies it upon us; therefore, expected recoveries in the table above are not assets and we will record the amounts as income when collected from policyholders.

Governmental agencies or certain quasi-governmental entities can also levy assessments upon policyholders, and we collect the amount of the assessments from policyholders as surcharges for the benefit of the assessing agency. We currently collect assessments levied upon policyholders on behalf of Citizens in the amount of 1.0%, and on behalf of FHCF in the amount of 1.3%. We multiply the premium written on each policy, except our flood policies, by these assessment percentages to determine the additional amount that we will collect from the policyholder and remit to the assessing agencies.

Our insurance affiliates, UPC, FSIC and IIC are domiciled in Florida, Hawaii, and New York, respectively. They must maintain capital and surplus ratios or balances as determined by the regulatory authority of the states in which they are domiciled. The table below shows the minimum capital and surplus requirements, as well as the amount of surplus as regards policyholders for our regulated entities at December 31, 2016 and 2015.



	Minimum Requirement		December 31, 2016		December 31, 2015
UPC ⁽¹⁾	$	5,000	$	155,587	$	135,288
FSIC	$	3,250	$	16,269	$	15,572
IIC	$	4,700	$	40,442	N/A⁽²⁾

⁽¹⁾ UPC is required to maintain capital and surplus equal to the greater of 10% of its total liabilities or $5,000,000.

⁽²⁾There is not a reportable value for IIC at December 31, 2015 as we did not own the company until April 2016.

The amount of restricted net assets of UPC, FSIC, and IIC at December 31, 2016 was $140,606,000, $18,825,000, and $45,606,000, respectively.

Florida law limits an insurer’s investment in equity instruments and also restricts investments in medium to low quality debt instruments. We were in compliance with all investment restrictions at December 31, 2016 and 2015.

The SBA note is considered a surplus note pursuant to statutory accounting principles. As a result, UPC is subject to the authority of the Insurance Commissioner of the State of Florida with regard to its ability to repay principal and interest on the surplus note. Any payment of principal or interest requires permission from the insurance regulatory authority.

We have reported our insurance affiliates' assets, liabilities and results of operations in accordance with GAAP, which varies from statutory accounting principles prescribed or permitted by state laws and regulations, as well as by general industry practices. The following items are principal differences between statutory accounting and GAAP:


•	Statutory accounting requires that we exclude certain assets, called non-admitted assets, from the balance sheet.


•	Statutory accounting requires us to expense policy acquisition costs when incurred, while GAAP allows us to defer to the extent realizable, and amortize policy acquisition costs over the estimated life of the policies.


•	Statutory accounting requires that surplus notes, also known as surplus debentures, be recorded in statutory surplus, while GAAP requires us to record surplus notes as a liability.


•	Statutory accounting allows certain investments to be carried at amortized cost or fair value based on the rating received from the Securities Valuation Office of the National Association of Insurance Commissioners, while they are recorded at fair value for GAAP because the investments are held as available for sale.


•	Statutory accounting allows ceding commission income to be recognized when written if the cost of acquiring and renewing the associated business exceeds the ceding commissions, but under GAAP such income is deferred and recognized over the coverage period.


•	Statutory accounting requires that unearned premiums and loss reserves are presented net of related reinsurance rather than on a gross basis under GAAP.

•

Statutory accounting requires a provision for reinsurance liability be established for reinsurance recoverable on paid losses aged over ninety days and for unsecured amounts recoverable from unauthorized reinsurers. Under GAAP there is no charge for uncollateralized amounts ceded to a company not licensed in the insurance affiliate's domiciliary state and a reserve for uncollectable reinsurance is charged through earnings rather than surplus or equity.


•	Statutory accounting requires an additional admissibility test and the change in deferred income tax is reported directly in capital and surplus, rather than being reported as a component of income tax expense under GAAP.

Our insurance affiliates must file with the various insurance regulatory authorities an “Annual Statement” which reports, among other items, statutory net income (loss) and surplus as regards policyholders, which is called stockholders' equity under GAAP.

The table below reconciles our consolidated GAAP net income to the statutory net income of our insurance affiliates:



	Year Ended December 31,
	2016			2015			2014
Consolidated GAAP net income	$	5,698		$	27,358		$	41,013
Increase (decrease) due to:
Commissions	17,486			339			(12,258		)
Deferred income taxes	(3,255		)	(2,518		)	64
Deferred policy acquisition costs	(6,342		)	(4,962		)	(788		)
Allowance for doubtful accounts	(24		)	97			5
Assessments	—			—			(78		)
Prepaid expenses	(538		)	131			(136		)
Other, net	166			—			—
Operations of non-statutory subsidiaries	(10,621		)	(10,077		)	(14,915		)
January net income for FSIC	—			152			—
January through April net income for IIC	3,513			—			—
Statutory net income of insurance affiliates	$	6,083		$	10,520		$	12,907

The table below reconciles our consolidated GAAP stockholders’ equity to the surplus as regards policyholders of our insurance affiliates:



	December 31,
	2016			2015
Consolidated GAAP stockholders’ equity	$	241,327		$	239,211
Increase (decrease) due to:
Deferred policy acquisition costs	(15,373		)	(9,031		)
Deferred income taxes	(3,338		)	917
Investments	1,386			185
Non-admitted assets	(623		)	(1,066		)
Surplus debentures	11,176			12,353
Provision for reinsurance	(7,648		)	(734		)
Equity of non-statutory subsidiaries	(32,615		)	(96,825		)
Commissions	18,570			876
Prepaid expenses	(564		)	(26		)
Paid in surplus	—			5,000
Statutory surplus as regards policyholders of insurance affiliates	$	212,298		$	150,860