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. Our insurance subsidiaries, UPC and ACIC, are domiciled in Florida, while FSIC and IIC are domiciled in Hawaii and New York, respectively. At December 31, 2017, and during the year then ended, our insurance subsidiaries met all regulatory requirements of the states in which they operate, and they did not incur any material assessments.

The NAIC has Risk-Based Capital (RBC) guidelines for insurance companies that are designed to assess capital adequacy and to raise the level of protection that statutory surplus provides for policyholders. Most states, including Florida, Hawaii and New York, have enacted statutory requirements adopting the NAIC RBC guidelines, and insurers having less statutory surplus than required will be subject to varying degrees of regulatory action, depending on the level of capital inadequacy. State insurance regulatory authorities could require an insurer to cease operations in the event the insurer fails to maintain the required statutory capital.

The state laws of Florida, Hawaii and New York permit an insurer to pay dividends or make distributions out of that part of statutory surplus derived from net operating profit and net realized capital gains. The state laws further provide calculations to determine the amount of dividends or distributions that can be made without the prior approval of the insurance regulatory authorities in those states and the amount of dividends or distributions that would require prior approval of the insurance regulatory authorities in those states. Statutory RBC requirements may further restrict our insurance subsidiaries’ ability to pay dividends or make distributions if the amount of the intended dividend or distribution would cause statutory surplus to fall below minimum RBC requirements.

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. We expense an assessment when the particular governmental agency or quasi-governmental entity levies it upon us; therefore, expected recoveries 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 Property Insurance Corporation (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 subsidiaries 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, 2017 and 2016.



	Minimum Requirement		December 31, 2017		December 31, 2016
UPC ⁽¹⁾	$	45,187,000	$	164,281,000	$	155,587,000
ACIC ⁽¹⁾⁽²⁾	$	16,565,000	$	160,238,000	N/A
FSIC	$	3,250,000	$	22,038,000	$	16,269,000
IIC	$	4,700,000	$	42,827,000	$	40,442,000

⁽¹⁾ UPC and ACIC are 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 ACIC at December 31, 2016 as we did not own the company until April 2017.

The amount of restricted net assets of UPC, ACIC, FSIC, and IIC at December 31, 2017 was $144,526,000, $162,234,000, $26,027,000, and $46,699,000, respectively.

NAIC 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, 2017 and 2016.

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 SBA note. Any payment of principal or interest requires permission from the insurance regulatory authority.

We have reported our insurance subsidiaries’ 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 NAIC, 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 subsidiaries 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 subsidiaries:



	Year Ended December 31,
	2017			2016			2015
Consolidated GAAP net income	$	10,145		$	5,698		$	27,358
Increase (decrease) due to:
Commissions	401			17,486			339
Deferred income taxes	9,413			(3,255		)	(2,518		)
Deferred policy acquisition costs	(17,935		)	(6,342		)	(4,962		)
Allowance for doubtful accounts	240			(24		)	97
Prepaid expenses	101			(538		)	131
Premium tax	(1,800		)	—			—
Investment PGAAP adjustments	1,148			—			—
Other, net	(71		)	166			—
Operations of non-statutory subsidiaries	(6,930		)	(10,621		)	(10,077		)
Statutory net income acquired⁽¹⁾	6,120			3,513			152
Statutory net income of insurance subsidiaries	$	832		$	6,083		$	10,520

⁽¹⁾Statutory net income acquired for 2017, 2016, and 2015 relates to the acquisitions of ACIC, IIC, and FSH, respectively.

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



	December 31,
	2017			2016
Consolidated GAAP stockholders’ equity	$	537,125		$	241,327
Increase (decrease) due to:
Deferred policy acquisition costs	(35,689		)	(15,373		)
Deferred income taxes	961			(3,338		)
Investments	955			1,386
Non-admitted assets	9			(623		)
Surplus debentures	10,000			11,176
Provision for reinsurance	(3,583		)	(7,648		)
Equity of non-statutory subsidiaries	(138,833		)	(32,615		)
Commissions	19,502			18,570
Prepaid expenses	(468		)	(564		)
Other, net	(595		)	—
Statutory surplus as regards policyholders of insurance subsidiaries	$	389,384		$	212,298