10-K 1 uve-10k_20151231.htm 10-K uve-10k_20151231.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K

 

(Mark One)

x

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2015

or

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number 001-33251

 

UNIVERSAL INSURANCE HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

  

Delaware

65-0231984

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

1110 West Commercial Blvd., Suite 100, Fort Lauderdale, Florida 33309

(Address of principal executive offices)

Registrant’s telephone number, including area code: (954) 958-1200

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class 

Name of each exchange on which registered 

Common Stock, $.01 Par Value

New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

None.

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    x  Yes    ¨  No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    ¨  Yes    x  No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes    ¨  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  Yes    ¨  No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

 

Large accelerated filer

x

Accelerated filer

¨

 

 

 

 

Non-accelerated filer

¨

Smaller Reporting Company

¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    ¨  Yes    x  No

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold as of June 30, 2015: $788,970,070.

Indicate the number of shares outstanding of Common Stock of Universal Insurance Holdings, Inc. as of February 19, 2016: 35,110,229

 

 

 

 

 


Table of Contents

 

UNIVERSAL INSURANCE HOLDINGS, INC.

TABLE OF CONTENTS

 

 

 

 

 

Page No.

 

 

PART I

 

 

 

 

 

 

 

Item 1.

 

Business

 

3

 

 

 

 

 

Item 1A.

 

Risk Factors

 

23

 

 

 

 

 

Item 1B.

 

Unresolved Staff Comments

 

34

 

 

 

 

 

Item 2.

 

Properties

 

34

 

 

 

 

 

Item 3.

 

Legal Proceedings

 

34

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

34

 

 

 

 

 

 

 

PART II

 

 

 

 

 

 

 

Item 5.

 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

35

 

 

 

 

 

Item 6.

 

Selected Financial Data

 

38

 

 

 

 

 

Item 7.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

39

 

 

 

 

 

Item 7A.

 

Quantitative and Qualitative Disclosures About Market Risk

 

61

 

 

 

 

 

Item 8.

 

Financial Statements and Supplementary Data

 

63

 

 

 

 

 

Item 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

96

 

 

 

 

 

Item 9A.

 

Controls and Procedures

 

96

 

 

 

 

 

Item 9B.

 

Other Information

 

96

 

 

 

 

 

 

 

PART III

 

 

 

 

 

 

 

Item 10.

 

Directors, Executive Officers and Corporate Governance

 

97

 

 

 

 

 

Item 11.

 

Executive Compensation

 

97

 

 

 

 

 

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

97

 

 

 

 

 

Item 13.

 

Certain Relationships and Related Transactions, and Director Independence

 

97

 

 

 

 

 

Item 14.

 

Principal Accountant Fees and Services

 

97

 

 

 

 

 

 

 

PART IV

 

 

 

 

 

 

 

Item 15.

 

Exhibits and Financial Statement Schedules

 

98

 

 

 

 

 

Signatures

 

103

 

 

 

 

 

Exhibit 21:

 

List of Subsidiaries

 

 

 

 

 

 

 

Exhibit 23.1:

 

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

 

 

 

 

 

Exhibit 31.1:

 

CERTIFICATION

 

 

 

 

 

 

 

Exhibit 31.2:

 

CERTIFICATION

 

 

 

 

 

 

 

Exhibit 32:

 

CERTIFICATION

 

 

 

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Table of Contents

 

DOCUMENTS INCORPORATED BY REFERENCE

Information called for in PART III of this Form 10-K is incorporated by reference to the registrant’s definitive Proxy Statement to be filed within 120 days of the close of the registrant’s fiscal year in connection with the registrant’s annual meeting of shareholders.

 

 

NOTE ABOUT FORWARD-LOOKING STATEMENTS

This report contains, in addition to historical information, “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 forward-looking statements anticipate results based on our estimates, assumptions and plans that are subject to uncertainty. Forward-looking statements may appear throughout this report, including without limitation, the following sections: “Business,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Risk Factors.” 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 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 risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in the section titled “Risk Factors” (Part I, Item 1A of this report). We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.

 

 

PART I

ITEM 1.

BUSINESS

INTRODUCTION

Universal Insurance Holdings, Inc. (“UVE,” and together with its wholly-owned subsidiaries, “we,” “our,” “us,” or “the company”) is the largest private personal residential homeowners insurance company in Florida by direct written premium in-force, with a 9.0% market share as of September 30, 2015, according to the most recent data reported by the Florida Office of Insurance Regulation (the “FLOIR”). We perform substantially all aspects of insurance underwriting, policy issuance, general administration and claims processing and settlement internally. We currently write personal residential homeowners insurance policies, predominantly in Florida with $817.7 million in direct written premium for the year ended December 31, 2015. We also write homeowners insurance policies in Delaware, Georgia, Hawaii, Indiana, Maryland, Massachusetts, Minnesota, North Carolina, Pennsylvania and South Carolina, with $65.7 million in direct written premium in those states for the year ended December 31, 2015. We are also licensed to issue policies in Alabama, Michigan, New Hampshire, Virginia and West Virginia.  Our business outside of Florida represents approximately 16% of our total insured value, or $24,271 million, as of December 31, 2015.  

Over the past several years, we have grown our business both within Florida and elsewhere in the United States through our distribution network of approximately 7,800 licensed independent agents. In writing business, we adhere to a disciplined underwriting approach – writing risks that are priced adequately and meet our underwriting standards – designed to achieve profitable growth as opposed to merely increasing the total number of policies written. We believe we are better positioned and able to expand profitably and service our policyholders within our markets than many of our competitors due to our established internal capabilities; protection afforded us by our reinsurance program; our experienced management team that successfully navigated prior active hurricane seasons, such as 2004 and 2005; our strong surplus and capital base; our success in growing organically in Florida without relying on the assumption of blocks of policies from Citizens Property Insurance Corporation (“Citizens”), the Florida state-sponsored insurer of last resort; and our growing geographic diversification. We also believe that our reinsurance program is structured such that if we were to experience an active hurricane season like the hurricane seasons in 2004 and 2005, we would be able to pay policyholder claims, maintain sufficient surplus to grow profitably and take advantage of the resulting market dislocation that would likely follow. We believe that our longevity in the Florida market and our resulting depth of experience will enable us to continue to successfully grow our business in both hard markets (periods of capital shortages resulting in a lack of insurance availability, relatively low levels of price competition, more selective underwriting of risks and relatively high premium rates) and soft markets (periods of relatively high levels of price competition, less restrictive underwriting standards and generally low premium rates).  

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Below is an organization chart that summarizes our corporate structure:

Universal Property & Casualty Insurance Company (“UPCIC”) and American Platinum Property and Casualty Insurance Company (“APPCIC,” and together with UPCIC, the “Insurance Entities”) are our insurance operating subsidiaries. Most of our policies are written by UPCIC. Universal Risk Advisors (“URA”) is our managing general agent and manages our distribution network and negotiates our reinsurance. Universal Inspection Corporation conducts inspections as part of our underwriting process, and Universal Adjusting Corporation (“UAC”) manages our claims processing and adjustment functions. Blue Atlantic Reinsurance Corporation (“BARC”) is our reinsurance intermediary. These service companies are vertically aligned with our Insurance Entities to maintain quality throughout the policy origination and claim settlement process. In addition, our servicing subsidiaries reduce, to us, the costs typically associated with outsourced business functions, enhance our ability to expand geographically due to economies of scale in our operations and allow us to expand our business incrementally and more effectively.

OUR STRATEGY

Increase our Policies in-Force in Florida through Continued Profitable and Organic Growth

We intend to continue profitably growing our business organically in Florida through our established network of approximately 4,500 independent Florida agents, the top 20% of whom originated approximately 70% of our direct written premium for the year ended December 31, 2015, and approximately 1,000 of whom have written business with our company for over a decade. Many of our competitors have experienced growth in recent years primarily as a result of assuming policies from Citizens. Because we perform all of our own marketing and underwriting as part of our organic growth strategy, we believe that we are more deliberate in seeking out profitable business from our independent agent force and selective in the policies we write as compared to Citizens, which generally must provide coverage to policyholders who have been unable to obtain insurance elsewhere. We have not assumed any policies from Citizens or its predecessor, Florida Residential Property and Casualty Joint Underwriting Association, since a single, small transaction in 1998, and have no plans to do so in the future. By contrast, in some cases, our competitors received approval to assume as many as 55,000 to 173,000 policies from Citizens in a single year. As of September 30, 2015, Citizens had approximately 570,000 policies outstanding (down from a peak level of approximately 1.5 million policies in late 2011). We believe that our continuing commitment to organic growth and to servicing our policyholders has created not only a superior premium base but also positive, long-term relationships with our independent agents and policyholders, which will foster our continued growth in and outside of Florida. For the nine months ended September 30, 2015, we issued 133,782 new policies, compared to 171,989 new policies issued by Citizens and 683,380 new policies (in each case, excluding mobile homeowners and farmowners) issued by the remaining top 25 personal and commercial residential homeowners insurers in Florida combined during the same period, according to the most recent data published by the FLOIR.

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Increase our Policies in-Force Outside of Florida to Grow Profitably and Diversify Revenue and Risk

We intend to continue our expansion outside of Florida primarily to take advantage of opportunities to write profitable business as well as to diversify our revenue and risk. We are targeting states with underserved homeowners insurance markets where we believe there is price adequacy for our products and where policyholders would benefit from our market knowledge and integrated service model. In new markets, we seek to replicate the successful growth strategy we implemented in Florida, including the careful appointment of new agents that we believe will generate profitable business for our company. We intend to leverage our existing agent network to generate new relationships and business. We will continue in our commitment to careful, profitable business growth through such independent agents, with the intent to grow quickly when the opportunity arises, including following any market dislocation. Our strategy involves taking the time to learn about each new market and its unique risks in order to carefully develop our own policy forms, rates and informed underwriting standards.

We also believe further geographic diversification will decrease our relative reinsurance costs as our risk profile changes to include more risks not tied to the Florida hurricane season. We believe that such diversification will produce more earnings stability as we expand to states with different market cycles than Florida and where the risks insured could offset Florida losses during an active hurricane season. We write homeowners policies in Delaware, Georgia, Hawaii, Indiana, Maryland, Massachusetts, Minnesota, North Carolina, Pennsylvania and South Carolina, and are also licensed to issue policies in Alabama, Michigan, New Hampshire, Virginia and West Virginia. As of December 31, 2015, policies outside of Florida accounted for 16% of our total insured value, or $24,271 million, an increase from 12.1% as of December 31, 2014.

Optimize our Reinsurance Program as our Risk Profile Changes

We will continue to obtain what we believe to be appropriate reinsurance limits, coverage and terms so that our policyholders and shareholders are adequately protected in the event of an active hurricane season. Significant additional, new capital entering portions of the reinsurance marketplace has provided us with the opportunity to obtain favorable pricing and contract terms. Our dedicated reinsurance team at BARC includes seasoned industry professionals with an average of 24 years of experience, whom we hired from Willis Re almost 10 years ago. BARC differentiates us from our competitors by enabling us to act as our own reinsurance intermediary, developing a bespoke reinsurance program tailored to our needs in both soft and hard reinsurance markets.  This team has developed and enhanced existing strong long term relationships with world leading reinsurance companies it brought to the company 10 years ago providing better efficiency in the manner in which we buy reinsurance annually.  We had in excess of 40 reinsurance partners for the 2015-2016 reinsurance year from companies in the United States, Bermuda, London, Continental Europe and Asia.  BARC works in conjunction with URA in providing these services. We also receive reinsurance intermediary services from Aon Benfield and thereby benefit from its depth of experience and knowledge of market standards. Aon Benfield works closely with our teams at BARC and URA in designing our reinsurance program and allowing us to obtain favorable pricing. Our internal team and Aon Benfield continually evaluate prevailing costs and the level of coverage that we determine is necessary in order to proactively capitalize on favorable market conditions.

We eliminated our quota share reinsurance arrangements effective June 1, 2015; purchased additional excess of loss catastrophe cover; and converted from a two-tower reinsurance program to a single tower reinsurance program covering our nationwide business based on our improving financial condition, our evaluation of market conditions and our changing coverage needs. We believe that restructuring our reinsurance program in this manner and continuously re-evaluating that structure has allowed us to take advantage of attractive reinsurance pricing and terms and to retain profitable business by eliminating our quota share program, while still maintaining reinsurance coverage that we believe is sufficient to protect our policyholders and shareholders.

Continue to Provide High Quality Service through our Vertically Integrated Structure

We are committed to proactively managing our losses, loss adjustment expenses (“LAE”) and claims administration procedures through prudent underwriting and the use of internal claims adjustment services. On March 5, 2015, we acquired Aplin Peer & Associates Inc., an independent claims adjusting firm, to supplement our already sizable claims function, increasing our claims adjusting staff from 121 employees to 175 employees as of January 20, 2016. In recent years, we have significantly expedited our claims processing, including creating a mobile adjuster force that can visit a policyholder within days to settle a claim. In 2015, our average time to close claims decreased by over a week as compared to 2013 and 2014. In addition, despite an increase of 12.3% in our policies in-force in 2015, we have reduced our claims operating expenses by 2.3% as compared to 2014. We have also decreased our average LAE in excess of $300 per claim file since 2014.  Our expedited claims processing improves the policyholder experience and, therefore, our relationship with that policyholder’s agent, which we believe increases the persistency of our policies in-force. Our monthly weighted average policy renewal retention rate has increased from 83.2% in 2013, to 86.8% in 2014 and 88.1% in 2015.

In the future, we will continue to capitalize on our vertically integrated structure by retaining certain fees that we pay to our subsidiary service providers for reinsurance brokerage, adjusting and other services. We currently administer 100% of all claims and outsource

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40% of on-site field adjustment assignments, and thereby retain a corresponding portion of fees that would have otherwise been paid to external adjusters. These cost efficiencies will help us better withstand the financial impact of potential catastrophic storms. We also continue to retain select third-party claims adjusters to perform field services for and adjust the remaining portion of our claims in order to maintain our relationships with them, so they can assist us, during periods of high claims volume, in providing high quality and timely service to our policyholders. Accordingly, we believe we are able to reduce expenses during non-catastrophe years while providing a high level of customer service during all years.

OUR COMPETITIVE STRENGTHS

We believe that our success, historical growth and ability to capitalize on our future growth prospects are a result of the following competitive strengths of our business and management team.

Experienced Leadership Team with a Long History in the Florida Personal Residential Insurance Market

In February 2013, we appointed a new leadership team from within our company, comprised of individuals who understood our vision for the future. We have a deep and experienced leadership team with extensive experience in the Florida personal residential insurance market. Our Chairman, President and Chief Executive Officer, Sean P. Downes, has more than 25 years of experience in the insurance industry. Prior to Mr. Downes’ arrival, all of our claims processing was outsourced to third parties. When Mr. Downes joined our company in 1999, he oversaw our claims operations and later oversaw the development of our vertically integrated structure.  Mr. Downes has worked in the Florida insurance industry during all of its most recent active hurricane seasons. In particular, Mr. Downes led the claims team of a multi-line insurance claims adjusting corporation following Hurricane Andrew and served as Chief Operating Officer of UPCIC during the 2004 and 2005 active hurricane seasons. Jon W. Springer, our Chief Operating Officer, has 23 years of experience in the insurance industry, including 9 years leading a team of reinsurance specialists for Willis Re before joining us to implement and oversee our reinsurance program. Prior to becoming our Chief Operating Officer, Mr. Springer was an Executive Vice President of URA and BARC.

We believe this leadership team has led us in a new strategic direction that has realized many benefits for our shareholders and policyholders, evidenced in part by the 71.5% increase in our stockholders’ equity and the 82.9% increase in policyholders’ surplus that we have realized since their tenure began. Further, they are supported by a group of highly qualified individuals with industry expertise and extensive operational history, which enables us to capitalize on our experience of having emerged from the 2004 and 2005 active hurricane seasons in sound financial condition, whereas many of our competitors are new to the market and have not experienced the challenges of an active Florida hurricane season.

Focus on Underwriting Discipline

We seek to consistently generate an underwriting profit on the business we write in hard and soft markets through carefully developed underwriting guidelines informed by our experience in evaluating risks and in handling and processing claims, which enable us to set prices relative to the risk we are assuming. By focusing on appropriately identifying and assessing key risks and exposures in the market, we believe we are able to accurately price eligible risks and generate consistent profits. We assumed only one group of policies from Citizens’ predecessor in 1998 when we first began our operations. Since then, we have grown our business by leveraging our network of approximately 4,500 independent agents in Florida, and by expanding to other geographic areas that present market opportunities. We periodically review the renewal rates and quality of business generated by our independent agents to ensure underwriting profitability and work with agents where we believe improvement is warranted.  As a result of this organic expansion and our vertically integrated structure, all of our operating units possess extensive knowledge of the personal residential homeowners insurance market.

Robust Internal Capabilities

We are vertically integrated with substantially all aspects of insurance underwriting, policy issuance, general administration and claims processing and settlement performed internally. Our ability to provide these services ourselves allows us to compress the cycle time of claim resolution in order to promptly pay valid claims and to control claims handling cost. In particular, by performing our own claims adjustment processes, we can better expedite meritorious claims as well as devote attention to potentially suspicious or inflated claims. As a result, we are generally able to begin the adjustment and mitigation process much earlier than if we relied more heavily on third parties, thereby reducing LAE and ultimate loss payouts. Our statutory net loss and LAE ratio for the nine months ended September 30, 2015 was 39.78%, lower than most of our peer companies. We are also able to retain a significant portion of the management and service fees that we and, indirectly, our reinsurers would otherwise pay to third parties for rendering such services. We do, however, intend to continue having a small portion of claims handled by select third parties as we believe that maintaining relationships with third-party service providers will benefit us in the event we need their assistance in handling claims due to a catastrophic event.

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Because most of our departments work together, we also believe our model provides a superior level of customer service for our policyholders, enhancing our reputation and increasing the likelihood that our policyholders will renew their policies with us. Our monthly weighted average renewal retention rate for 2015 was 88.1%. We believe that when policyholders have high levels of customer satisfaction with our company, we are able to strengthen our reputation and relationships with our independent insurance agent network.

Superior Claims Operations

Over the last decade, we have developed a proprietary claims administration system that allows us to efficiently process nearly all aspects of claims resolution for our policyholders. Our technology system has shortened claims handling and processing times, reduced associated claims resolution costs and has generated positive feedback from our policyholders and independent insurance agents. In addition, we recently launched our Fast Track Initiative, which expedites the claims settlement process to close certain types of claims in as little as 24 hours. The initiative sends select field adjusters to make on-site evaluations, with authorization to make payments to policyholders for certain types of claims. Our internal claims operation allows us to identify any trends or problems that may become apparent as claims are processed such that we can revise and bolster our underwriting guidelines as necessary in order to continue adequately pricing risks. Further, we continue to retain select third-party Florida claims administrators and adjusters as well as one national administrator to perform field services for and adjust a portion of our claims in order to maintain our relationships with them so that they can assist us, during periods of high claims volume, in providing high quality and timely service to our policyholders. We recognize the importance of claims processing and will continue to invest in this functionality.

Strong Independent Agent Distribution Network

We have developed long-term relationships with a network of approximately 7,800 licensed independent insurance agents – with approximately 4,500 in Florida and approximately 3,300 outside of Florida. Of our 4,500 independent Florida agents, approximately 1,000 have written business with us for over a decade. Our relationships with our Florida independent agents are critical to our success in growing our business in the future and are key differentiators when compared with competitors that have relied upon assumptions of policies from Citizens for their growth and, as a result, may not have developed the same degree of loyalty with as large a group of independent agents in Florida. We believe we have been able to build this network due to our reputation, commitment to the Florida market, experience, and integrity in the underwriting process, as well as our consistency in offering our products through hard and soft markets.

Further, the responsiveness of our operating units due to our vertically integrated structure enhances our relationships with our independent agents. By developing and controlling our proprietary technology system, we can rapidly respond to enhancement requests from our independent agents regarding our policy processing system. We undertook a survey of all of our independent agents in August 2015, and over 95.6% of the 770 agents who completed the survey reported being satisfied or more than satisfied with our system’s ease of use in performing functions such as generating quotes, binding policyholders and processing payments. We will continue to leverage our experience in Florida to build relationships with independent agents in other states in order to produce organic business in those states.

MARKET

Florida

According to the U.S. Census Bureau, at June 30, 2015, Florida was the third largest state in terms of population, with approximately 20 million people. The University of Florida Bureau of Economic and Business Research estimates that Florida is expected to reach a population of approximately 26 million people by 2040, an increase of 38% from 2010. Property ownership and development represent key drivers of the Florida economy. Because of its location, Florida is exposed to an increased risk of hurricanes during the entire six months of the Atlantic hurricane season, which spans from June 1 through November 30. While a significant hurricane has not made landfall in Florida since 2005, eight hurricanes in 2004 and 2005, including Hurricanes Charley, Katrina, Rita and Wilma, caused combined estimated nationwide property damage of over $127 billion, a significant portion of which occurred in Florida. As a result, availability of personal residential insurance and claims servicing are vitally important to Florida residents.

The Florida residential insurance market is highly fragmented and dominated by in-state insurance companies, including Citizens. Significant dislocation in the Florida property insurance market began following Hurricane Andrew in 1992 and accelerated following the 2004 and 2005 hurricane seasons. National and regional insurers significantly reduced their share of the market in Florida between 1999 and 2012. As national and regional insurance companies reduced their exposure in Florida, Citizens, which was at the time and remains today, by law, an insurer of last resort, increased efforts to provide affordable residential insurance to those residents unable to obtain coverage in the private market. As a result, Citizens’ policy count grew from roughly 800,000 policies in 2005 to a peak level of approximately 1.5 million policies in late 2011. To reduce Citizens’ risk exposure, beginning in 2010, Florida elected officials

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encouraged Citizens to focus on reducing the size of its portfolio by returning policies to the private market. Depopulation efforts have been successful, as Citizens’ policy count at September 30, 2015 was approximately 570,000. To be eligible for a Citizens policy, an applicant must either be denied comparable coverage offers from the private insurance market or have received coverage offerings from the private insurance market requiring premium payments that are more than 15% higher than a comparable Citizens policy.

According to data compiled by the FLOIR, Citizens was the largest residential insurer in Florida as of September 30, 2015, with a market share of approximately 9.96% based on total direct premiums written in-force for personal residential insurance (excluding mobile homeowners and farmowners). As of December 31, 2015, less than 1,000 of our 550,800 Florida in-force policies, or 0.2%, were assumed from Citizens’ predecessor, as compared to some of our competitors who received approval from Citizens to assume as many as 55,000 to 173,000 policies in each of 2014 and 2015 alone. We believe we have the opportunity to significantly expand the size of our personal residential homeowners insurance business both inside and outside of Florida by pursuing organic growth and have demonstrated our ability to do so over the past 10 years.

All residential insurance companies that write business in Florida, including us, are required to obtain a form of reinsurance through the Florida Hurricane Catastrophe Fund (the “FHCF”), a state-sponsored entity that provides a layer of reinsurance protection at a price that is typically lower than what would otherwise be available in the general market. The purpose of the FHCF is to protect and advance the state’s interest in maintaining insurance capacity in Florida by providing reimbursements to insurers for a portion of their catastrophe hurricane losses. The FHCF provides limited capacity, which may be adjusted by statute from time to time.

Other States

While we are concentrated in Florida, part of our strategy is to continue our expansion outside of Florida primarily to take advantage of opportunities to write profitable business as well as to diversify our revenue and risk. We are targeting states with underserved homeowners insurance markets where we believe there is price adequacy for our products and where policyholders would benefit from our market knowledge and integrated service model. We write homeowners policies in Delaware, Georgia, Hawaii, Indiana, Maryland, Massachusetts, Minnesota, North Carolina, Pennsylvania and South Carolina, and are also licensed to issue policies in Alabama, Michigan, New Hampshire, Virginia and West Virginia. We look to expand to markets that have opportunities for reasoned, profitable growth and that allow us to position ourselves to take advantage of market dislocation opportunities similar to what we capitalized on in Florida following the 2004 and 2005 hurricane seasons.

COMPETITION

The market for personal residential homeowners insurance is highly competitive. In our primary market, Florida, there are approximately 127 licensed insurance companies that write in-force homeowners policies. See “Item 1A—Risk Factors—Risks Relating to Our Business—Our future results are dependent in part on our ability to successfully operate in a highly competitive insurance industry.”

The table below shows policy count, direct written premium in-force, total insured value and market share (excluding mobile homeowners and farmowners) for the top 20 personal residential homeowners insurance companies by direct written premium in Florida as of September 30, 2015, which is the most recent date that the information is publicly available. We compete to varying degrees with all of these companies and others, including large national carriers.  

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Florida Homeowners Insurance Market - Personal Residential - Ranked by Direct Written Premium In-Force*

 

 

 

Policies

 

 

Percentage

 

 

Direct Written

 

 

Percentage

 

 

Total Insured

 

 

Percentage

 

Company Name

 

in-Force

 

 

Distribution

 

 

Premium in-Force

 

 

Distribution

 

 

Value**

 

 

Distribution

 

Citizens Property Insurance Corporation

 

 

493,776

 

 

 

8.8

%

 

$

909,998

 

 

 

10.0

%

 

$

117,082,643

 

 

 

6.7

%

Universal Property & Casualty Insurance Company

 

 

544,681

 

 

 

9.8

%

 

 

817,921

 

 

 

9.0

%

 

 

122,081,570

 

 

 

7.0

%

Heritage Property & Casualty Insurance Company

 

 

234,901

 

 

 

4.2

%

 

 

426,516

 

 

 

4.7

%

 

 

66,378,535

 

 

 

3.8

%

Federated National Insurance Company

 

 

231,828

 

 

 

4.1

%

 

 

416,423

 

 

 

4.6

%

 

 

93,504,340

 

 

 

5.4

%

Homeowners Choice Property & Casualty Insurance Company, Inc.

 

 

163,808

 

 

 

2.9

%

 

 

404,728

 

 

 

4.5

%

 

 

48,795,348

 

 

 

2.8

%

United Property & Casualty Insurance Company

 

 

172,142

 

 

 

3.1

%

 

 

310,188

 

 

 

3.4

%

 

 

66,710,291

 

 

 

3.8

%

Security First Insurance Company

 

 

265,132

 

 

 

4.8

%

 

 

288,618

 

 

 

3.2

%

 

 

71,633,756

 

 

 

4.1

%

United Services Automobile Association

 

 

123,922

 

 

 

2.2

%

 

 

281,569

 

 

 

3.1

%

 

 

48,242,485

 

 

 

2.8

%

People’s Trust Insurance Company

 

 

146,128

 

 

 

2.6

%

 

 

272,212

 

 

 

3.0

%

 

 

40,829,892

 

 

 

2.3

%

Florida Peninsula Insurance Company

 

 

119,370

 

 

 

2.1

%

 

 

267,975

 

 

 

3.0

%

 

 

43,335,902

 

 

 

2.5

%

St. Johns Insurance Company, Inc.

 

 

169,266

 

 

 

3.0

%

 

 

263,100

 

 

 

2.9

%

 

 

67,313,213

 

 

 

3.9

%

Tower Hill Prime Insurance Company

 

 

144,782

 

 

 

2.6

%

 

 

233,453

 

 

 

2.6

%

 

 

56,552,743

 

 

 

3.2

%

American Integrity Insurance Company of Florida

 

 

180,179

 

 

 

3.2

%

 

 

214,272

 

 

 

2.4

%

 

 

59,419,177

 

 

 

3.4

%

First Protective Insurance Company

 

 

75,663

 

 

 

1.4

%

 

 

207,248

 

 

 

2.3

%

 

 

46,312,045

 

 

 

2.7

%

Federal Insurance Company

 

 

32,444

 

 

 

0.6

%

 

 

182,423

 

 

 

2.0

%

 

 

53,058,899

 

 

 

3.0

%

Tower Hill Signature Insurance Company

 

 

93,696

 

 

 

1.7

%

 

 

159,137

 

 

 

1.8

%

 

 

29,030,853

 

 

 

1.7

%

AIG Property Casualty Company

 

 

14,177

 

 

 

0.3

%

 

 

151,703

 

 

 

1.7

%

 

 

42,923,670

 

 

 

2.5

%

Olympus Insurance Company

 

 

85,406

 

 

 

1.5

%

 

 

150,840

 

 

 

1.7

%

 

 

43,264,560

 

 

 

2.5

%

USAA Casualty Insurance Company

 

 

57,770

 

 

 

1.0

%

 

 

138,741

 

 

 

1.5

%

 

 

17,804,626

 

 

 

1.0

%

ASI Preferred Insurance Corp.

 

 

115,159

 

 

 

2.1

%

 

 

137,598

 

 

 

1.5

%

 

 

35,465,861

 

 

 

2.0

%

Total - Top 20 Insurers

 

 

3,464,230

 

 

 

62.0

%

 

 

6,234,663

 

 

 

68.9

%

 

 

1,169,740,409

 

 

 

67.1

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total - All Insurers

 

 

5,585,980

 

 

 

100.0

%

 

 

9,061,894

 

 

 

100.0

%

 

 

1,746,368,362

 

 

 

100.0

%

*

The information displayed in the table above is compiled and published by the FLOIR as of September 30, 2015 based on information filings submitted quarterly by all Florida licensed insurance companies and downloaded from FLOIR’s database as of February 17, 2016. Such information is presented for each individual company and is not consolidated or aggregated. State Farm Florida Insurance Company does not report this type of information to the FLOIR.  Dollar values are in thousands, rounded to the nearest thousand.  

**

Total insured values are for policies in-force that include wind coverage.

We compete primarily on the basis of the strength of our distribution network, high-quality service to our independent agents and policyholders, our reputation and commitment to the Florida market, claims handling ability, product features tailored to our markets and price. Our successful track record in writing homeowners insurance in catastrophe-exposed areas has enabled us to develop sophisticated risk selection and pricing techniques that endeavor to identify desirable risks and accurately reflect the risk of loss while allowing us to be competitive in our target markets. This risk selection and pricing approach allows us to profitably offer competitive products in areas that have a high demand for property insurance yet are underserved by the national carriers. Each of the Insurance Entities is currently rated “A” (“Exceptional”) by Demotech, Inc. (“Demotech”), a rating agency specializing in evaluating the financial stability of insurers.

9


Table of Contents

 

PRODUCTS AND DISTRIBUTION

Products

Our focus and our primary product is personal residential insurance, which accounts for the vast majority of business that we write. Our homeowners insurance products provide policyholders with the ability to receive homeowners, renters, condominium, dwelling, fire, other structures, personal property, personal liability and personal articles coverages. In 2015, we wrote an average of 16,110 new policies per month, an increase of 30% as compared to the prior year, and homeowners policies produced direct written premium of $813.9 million. Homeowners policies accounted for 92.1% of our total direct written premium, with the remaining 7.9% comprised of fire and allied lines coverage.

The nature of our business, with respect to both claims and sales, tends to be seasonal over the course of a year, reflecting consumer behaviors in connection with the Florida residential real estate market and the need to be insured before the start of the hurricane season. The amount of written premium tends to increase just prior to the second quarter of our fiscal year and to decrease approaching the fourth quarter. We also face cyclicality resulting from hard and soft market cycles. See “Item 1A—Risk Factors—Risks Relating to Our Business—Our financial condition and operating results and the financial condition and operating results of our Insurance Entities may be adversely affected by the cyclical nature of the property and casualty insurance business.”

The geographical distribution of our policies in-force, in-force premium and total insured value for Florida by county were as follows as of December 31, 2015 (dollars in thousands, rounded to the nearest thousand):

 

 

 

As of December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

In-Force

 

 

 

 

 

 

Total Insured

 

 

 

 

 

County

 

Count

 

 

%

 

 

Premium

 

 

%

 

 

Value

 

 

%

 

South Florida

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Broward

 

 

71,106

 

 

 

12.9

%

 

$

144,787

 

 

 

17.6

%

 

$

18,936,904

 

 

 

14.8

%

Palm Beach

 

 

66,492

 

 

 

12.1

%

 

 

120,319

 

 

 

14.6

%

 

 

17,238,456

 

 

 

13.5

%

Miami-Dade

 

 

55,546

 

 

 

10.1

%

 

 

114,595

 

 

 

13.9

%

 

 

12,304,747

 

 

 

9.6

%

South Florida exposure

 

 

193,144

 

 

 

35.1

%

 

 

379,701

 

 

 

46.1

%

 

 

48,480,107

 

 

 

37.9

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other significant* Florida counties

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pinellas

 

 

37,501

 

 

 

6.8

%

 

 

44,747

 

 

 

5.4

%

 

 

6,377,811

 

 

 

5.0

%

Lee

 

 

28,079

 

 

 

5.1

%

 

 

29,461

 

 

 

3.6

%

 

 

4,574,457

 

 

 

3.6

%

Collier

 

 

21,539

 

 

 

3.9

%

 

 

29,108

 

 

 

3.5

%

 

 

3,740,666

 

 

 

2.9

%

Hillsborough

 

 

23,882

 

 

 

4.3

%

 

 

32,285

 

 

 

3.9

%

 

 

5,783,408

 

 

 

4.5

%

Polk

 

 

19,655

 

 

 

3.6

%

 

 

26,768

 

 

 

3.3

%

 

 

5,906,345

 

 

 

4.6

%

Escambia

 

 

19,784

 

 

 

3.6

%

 

 

31,643

 

 

 

3.9

%

 

 

5,571,589

 

 

 

4.4

%

Brevard

 

 

19,100

 

 

 

3.5

%

 

 

24,473

 

 

 

3.0

%

 

 

3,837,039

 

 

 

3.0

%

Total other significant* counties

 

 

169,540

 

 

 

30.8

%

 

$

218,485

 

 

 

26.6

%

 

 

35,791,315

 

 

 

28.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In-Force

 

 

 

 

 

 

Total Insured

 

 

 

 

 

Summary for all of Florida

 

Count

 

 

%

 

 

Premium

 

 

%

 

 

Value

 

 

%

 

South Florida exposure

 

 

193,144

 

 

 

35.1

%

 

$

379,701

 

 

 

46.1

%

 

 

48,480,107

 

 

 

37.9

%

Total other significant* counties

 

 

169,540

 

 

 

30.8

%

 

 

218,485

 

 

 

26.6

%

 

 

35,791,315

 

 

 

28.0

%

Other Florida counties

 

 

188,116

 

 

 

34.1

%

 

 

223,445

 

 

 

27.3

%

 

 

43,434,309

 

 

 

34.1

%

Total Florida

 

 

550,800

 

 

 

100.0

%

 

 

821,631

 

 

 

100.0

%

 

$

127,705,731

 

 

 

100.0

%

*

Significant counties defined as in-force premium greater than 2.50% as of December 31, 2015.

10


Table of Contents

 

The geographical distribution of our policies in-force, in-force premium and total insured value across all states were as follows, as of December 31, 2015, 2014 and 2013 (dollars in thousands, rounded to the nearest thousand):

 

 

 

As of December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

In-Force

 

 

 

 

 

 

Total Insured

 

 

 

 

 

State

 

Count

 

 

%

 

 

Premium

 

 

%

 

 

Value

 

 

%

 

Florida

 

 

550,800

 

 

 

88.2

%

 

$

821,631

 

 

 

92.6

%

 

$

127,705,731

 

 

 

84.0

%

North Carolina

 

 

34,084

 

 

 

5.4

%

 

 

25,411

 

 

 

2.9

%

 

 

9,981,069

 

 

 

6.6

%

Georgia

 

 

17,425

 

 

 

2.8

%

 

 

16,013

 

 

 

1.8

%

 

 

5,716,851

 

 

 

3.8

%

South Carolina

 

 

10,479

 

 

 

1.7

%

 

 

11,744

 

 

 

1.3

%

 

 

3,135,568

 

 

 

2.1

%

Massachusetts

 

 

4,720

 

 

 

0.8

%

 

 

6,455

 

 

 

0.7

%

 

 

2,790,054

 

 

 

1.8

%

Indiana

 

 

2,694

 

 

 

0.4

%

 

 

2,146

 

 

 

0.3

%

 

 

851,536

 

 

 

0.6

%

Hawaii

 

 

1,523

 

 

 

0.2

%

 

 

1,547

 

 

 

0.2

%

 

 

680,701

 

 

 

0.4

%

Maryland

 

 

1,278

 

 

 

0.2

%

 

 

1,026

 

 

 

0.1

%

 

 

464,081

 

 

 

0.3

%

Pennsylvania

 

 

1,017

 

 

 

0.2

%

 

 

738

 

 

 

0.1

%

 

 

360,991

 

 

 

0.2

%

Delaware

 

 

396

 

 

 

0.1

%

 

 

407

 

 

 

0.0

%

 

 

181,857

 

 

 

0.1

%

Minnesota

 

 

251

 

 

 

0.0

%

 

 

277

 

 

 

0.0

%

 

 

108,337

 

 

 

0.1

%

Total

 

 

624,667

 

 

 

100.0

%

 

$

887,395

 

 

 

100.0

%

 

 

151,976,776

 

 

 

100.0

%

 

 

 

As of December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

In-Force

 

 

 

 

 

 

Total Insured

 

 

 

 

 

State

 

Count

 

 

%

 

 

Premium

 

 

%

 

 

Value

 

 

%

 

Florida

 

 

506,913

 

 

 

91.1

%

 

$

749,181

 

 

 

94.3

%

 

$

115,248,811

 

 

 

87.9

%

North Carolina

 

 

26,251

 

 

 

4.9

%

 

 

19,871

 

 

 

2.5

%

 

 

7,671,188

 

 

 

5.9

%

Georgia

 

 

10,570

 

 

 

1.9

%

 

 

9,651

 

 

 

1.2

%

 

 

3,331,523

 

 

 

2.6

%

South Carolina

 

 

8,037

 

 

 

1.4

%

 

 

10,204

 

 

 

1.3

%

 

 

2,463,221

 

 

 

1.9

%

Massachusetts

 

 

2,359

 

 

 

0.4

%

 

 

3,311

 

 

 

0.4

%

 

 

1,462,206

 

 

 

1.1

%

Indiana

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hawaii

 

 

1,306

 

 

 

0.2

%

 

 

1,354

 

 

 

0.2

%

 

 

586,845

 

 

 

0.4

%

Maryland

 

 

799

 

 

 

0.1

%

 

 

670

 

 

 

0.1

%

 

 

308,312

 

 

 

0.2

%

Pennsylvania

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Delaware

 

 

113

 

 

 

0.0

%

 

 

112

 

 

 

0.0

%

 

 

51,622

 

 

 

0.0

%

Minnesota

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

556,348

 

 

 

100.0

%

 

$

794,354

 

 

 

100.0

%

 

 

131,123,728

 

 

 

100.0

%

 

 

 

As of December 31, 2013

 

 

 

 

 

 

 

 

 

 

 

In-Force

 

 

 

 

 

 

Total Insured

 

 

 

 

 

State

 

Count

 

 

%

 

 

Premium

 

 

%

 

 

Value

 

 

%

 

Florida

 

 

499,949

 

 

 

93.3

%

 

$

749,321

 

 

 

95.7

%

 

$

110,785,839

 

 

 

90.7

%

North Carolina

 

 

21,723

 

 

 

4.0

%

 

 

17,201

 

 

 

2.2

%

 

 

6,473,414

 

 

 

5.3

%

Georgia

 

 

5,465

 

 

 

1.0

%

 

 

4,737

 

 

 

0.6

%

 

 

1,607,147

 

 

 

1.3

%

South Carolina

 

 

6,251

 

 

 

1.2

%

 

 

8,466

 

 

 

1.1

%

 

 

1,894,527

 

 

 

1.6

%

Massachusetts

 

 

986

 

 

 

0.2

%

 

 

1,411

 

 

 

0.2

%

 

 

632,470

 

 

 

0.5

%

Indiana

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hawaii

 

 

1,184

 

 

 

0.2

%

 

 

1,232

 

 

 

0.2

%

 

 

538,213

 

 

 

0.5

%

Maryland

 

 

430

 

 

 

0.1

%

 

 

348

 

 

 

0.0

%

 

 

159,523

 

 

 

0.1

%

Pennsylvania

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Delaware

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Minnesota

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

535,988

 

 

 

100.0

%

 

$

782,716

 

 

 

100.0

%

 

 

122,091,133

 

 

 

100.0

%

Also see Item 7—Managements Discussion and Analysis of Financial Condition and Results of Operations and “Item 1A—Risk Factors—Risks Relating to Our Business—Because we conduct the substantial majority of our business in Florida, our financial results depend on the regulatory, economic and weather conditions in Florida” for discussion on geographical diversification.

11


Table of Contents

 

Product Pricing

The premiums we charge are based on rates specific to individual risks and locations and are generally subject to regulatory review and approval before they are implemented. We periodically submit our rate revisions to regulators as required by law or as we deem necessary or appropriate for our business. The premiums we charge to policyholders are affected by legislative enactments and administrative rules, including state-mandated programs in Florida requiring residential property insurance companies like us to provide premium discounts when policyholders verify that insured properties have certain construction features or windstorm loss reduction features.

The following table shows UPCIC’s most recently approved rate changes in Florida. All percentage increases and decreases are expressed as statewide averages.

 

 

 

2015 Rate Changes

 

 

2014 Rate Changes

 

 

2013 Rate Changes

 

 

 

 

 

Percentage Increase

 

 

 

 

Percentage Increase