Edgar Filing: UNIVERSAL INSURANCE HOLDINGS, INC.

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

________________________________________________________

FORM 10-Q

________________________________________________________

(Mark One)



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

For the quarterly period ended March 31, 2019



☐	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 W. Commercial Blvd., Fort Lauderdale, Florida 33309

(Address of principal executive offices)

(954) 958-1200

(Registrant’s telephone number, including area code)

________________________________________________________

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 period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes x No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	x	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 34,647,850 shares of common stock, par value $0.01 per share, outstanding on April 22, 2019.

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UNIVERSAL INSURANCE HOLDINGS, INC.

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PART I – FINANCIAL INFORMATION
		Page No.
Item 1.	Financial Statements:	4
	Condensed Consolidated Balance Sheets as of March 31, 2019 (unaudited) and December 31, 2018	4
	Condensed Consolidated Statements of Income for the three-month periods ended March 31, 2019 and 2018 (unaudited)	5
	Condensed Consolidated Statements of Comprehensive Income for the three-month periods ended March 31, 2019 and 2018 (unaudited)	5
	Condensed Consolidated Statements of Stockholders’ Equity for the three-month periods ended March 31, 2019 and 2018 (unaudited)	6
	Condensed Consolidated Statements of Cash Flows for the three-month periods ended March 31, 2019 and 2018 (unaudited)	8
	Notes to Condensed Consolidated Financial Statements (unaudited)	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3.	Quantitative and Qualitative Disclosure about Market Risk	37
Item 4.	Controls and Procedures	38
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	38
Item 1A.	Risk Factors	39
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	39
Item 6.	Exhibits	40
Signatures		41

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To The Board of Directors and Stockholders of

Universal Insurance Holdings, Inc. and Subsidiaries

Fort Lauderdale, Florida

We have reviewed the accompanying condensed consolidated balance sheet of Universal Insurance Holdings, Inc. and its wholly-owned subsidiaries (the “Company”) as of March 31, 2019 and the related condensed consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for the three-month periods ended March 31, 2019 and 2018. These interim financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the accompanying interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Universal Insurance Holdings, Inc. and Subsidiaries as of December 31, 2018 and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for the year then ended (not presented herein) and we expressed an unqualified audit opinion on those consolidated financial statements in our report dated March 1, 2019. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2018, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ Plante & Moran, PLLC

Chicago, Illinois

April 26, 2019

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PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

(in thousands, except per share data)



	As of
	March 31, 2019			December 31, 2018
	(unaudited)
ASSETS
Available-for-sale debt securities, at fair value (amortized cost: $834,817 and $831,127)	$	840,028		$	820,438
Equity securities, at fair value (amortized cost: $58,137 and $86,271)	53,175			63,277
Investment real estate, net	25,070			24,439
Total invested assets	918,273			908,154

Cash and cash equivalents	185,061			166,428
Restricted cash and cash equivalents	2,635			2,635
Prepaid reinsurance premiums	57,100			142,750
Reinsurance recoverable	323,294			418,603
Premium receivable, net	58,346			59,858
Property and equipment, net	40,102			34,991
Deferred policy acquisition costs	83,284			84,686
Income taxes recoverable	—			11,159
Deferred income tax asset, net	14,417			14,586
Other assets	15,357			14,540
Total assets	$	1,697,869		$	1,858,390
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Unpaid losses and loss adjustment expenses	$	366,356		$	472,829
Unearned premiums	595,536			601,679
Advance premium	44,545			26,222
Accounts payable	2,692			3,059
Book overdraft	43,305			102,843
Reinsurance payable, net	48,171			93,306
Income taxes payable	6,183			—
Other liabilities and accrued expenses	41,002			45,422
Long-term debt	11,029			11,397
Total liabilities	1,158,819			1,356,757

Commitments and Contingencies (Note 12)

STOCKHOLDERS’ EQUITY:
Cumulative convertible preferred stock, $.01 par value	—			—
Authorized shares - 1,000
Issued shares - 10 and 10
Outstanding shares - 10 and 10
Minimum liquidation preference, $9.99 and $9.99 per share
Common stock, $.01 par value	467			465
Authorized shares - 55,000
Issued shares - 46,674 and 46,514
Outstanding shares - 34,622 and 34,783
Treasury shares, at cost - 12,052 and 11,731	(140,516		)	(130,399		)
Additional paid-in capital	87,328			86,353
Accumulated other comprehensive income (loss), net of taxes	3,974			(8,010		)
Retained earnings	587,797			553,224
Total stockholders’ equity	539,050			501,633
Total liabilities and stockholders’ equity	$	1,697,869		$	1,858,390

The accompanying notes to condensed consolidated financial statements are an integral part of these statements.

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UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited)

(in thousands, except per share data)



	Three Months Ended March 31,
	2019			2018
PREMIUMS EARNED AND OTHER REVENUES
Direct premiums written	$	289,234		$	269,984
Change in unearned premium	6,143			(7,723		)
Direct premium earned	295,377			262,261
Ceded premium earned	(85,650		)	(79,684		)
Premiums earned, net	209,727			182,577
Net investment income	8,142			4,785
Net realized gains (losses) on sale of securities	(11,525		)	(2,641		)
Net change in unrealized gains (losses) of equity securities	18,032			(5,109		)
Commission revenue	5,505			5,271
Policy fees	5,021			4,775
Other revenue	1,684			1,842
Total premiums earned and other revenues	236,586			191,500
OPERATING COSTS AND EXPENSES
Losses and loss adjustment expenses	113,094			75,926
General and administrative expenses	69,748			63,875
Total operating costs and expenses	182,842			139,801
INCOME BEFORE INCOME TAXES	53,744			51,699
Income tax expense	13,596			11,644
NET INCOME	$	40,148		$	40,055
Basic earnings per common share	$	1.16		$	1.15
Weighted average common shares outstanding - Basic	34,741			34,839
Diluted earnings per common share	$	1.14		$	1.12
Weighted average common shares outstanding - Diluted	35,206			35,660
Cash dividend declared per common share	$	0.16		$	0.14

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)



	Three Months Ended March 31,
	2019		2018
Net income	$	40,148	$	40,055
Other comprehensive income (loss), net of taxes	11,984		(4,050		)
Comprehensive income	$	52,132	$	36,005

The accompanying notes to condensed consolidated financial statements are an integral part of these statements.

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UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018 (unaudited)

(in thousands)



	Treasury Shares			Common Shares Issued		Preferred Shares Issued	Common Stock Amount			Preferred Stock Amount		Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Shares, at Cost			Total Stockholders’ Equity
Balance, December 31, 2018	(11,731	)		46,514		10	$	465		$	—	$	86,353		$	553,224		$	(8,010	)	$	(130,399	)	$	501,633
Vesting of performance share units	(56	)	⁽¹⁾	148		—	2			—		(2		)	—			—			(2,069		)	(2,069		)
Grants and vesting of restricted stock	(5	)	⁽¹⁾	25		—	—			—		—			—			—			(166		)	(166		)
Stock option exercises	(36	)	⁽¹⁾	84		—	1			—		1,438			—			—			(1,367		)	72
Retirement of treasury shares	97			(97	)	—	(1		)	—		(3,601		)	—			—			3,602			—
Purchases of treasury stock	(321	)		—		—	—			—		—			—			—			(10,117		)	(10,117		)
Share-based compensation	—			—		—	—			—		3,140			—			—			—			3,140
Net income	—			—		—	—			—		—			40,148			—			—			40,148
Change in net unrealized gains (losses)⁽²⁾	—			—		—	—			—		—			—			11,984			—			11,984
Declaration of dividends ($0.16 per common share and $0.25 per preferred share)	—			—		—	—			—		—			(5,575		)	—			—			(5,575		)
Balance, March 31, 2019	(12,052	)		46,674		10	$	467		$	—	$	87,328		$	587,797		$	3,974		$	(140,516	)	$	539,050

The accompanying notes to condensed consolidated financial statements are an integral part of these statements.

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UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (continued)

(in thousands)



	Treasury Shares			Common Shares Issued		Preferred Shares Issued	Common Stock Amount			Preferred Stock Amount		Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Shares, at Cost			Total Stockholders’ Equity
Balance, December 31, 2017	(11,043	)		45,778		10	$	458		$	—	$	86,186		$	464,748		$	(6,281	)	$	(105,123	)	$	439,988
Cumulative effect of change in accounting principle (ASU 2016-02)	—			—		—	—			—		—			(3,601		)	3,601			—			—
Balance January 1, 2018	(11,043	)		45,778		10	458			—		86,186			461,147			(2,680		)	(105,123		)	439,988
Vesting of performance share units	(43	)	⁽¹⁾	127		—	1			—		(1		)	—			—			(1,273		)	(1,273		)
Grants and vesting of restricted stock	—			50		—	—			—		—			—			—			—			—
Stock option exercises	(568	)	⁽¹⁾	804		—	8			—		15,195			—			—			(18,723		)	(3,520		)
Retirement of treasury shares	611			(611	)	—	(6		)	—		(19,990		)	—			—			19,996			—
Purchases of treasury stock	(93	)		—		—	—			—		—			—			—			(2,746		)	(2,746		)
Share-based compensation	—			—		—	—			—		2,904			—			—			—			2,904
Net income	—			—		—	—			—		—			40,055			—			—			40,055
Change in net unrealized gains (losses) ⁽²⁾	—			—		—	—			—		—			—			(4,050		)	—			(4,050		)
Reclassification of income taxes upon adoption of ASU 2018-02	—			—		—	—			—		—			582			(582		)	—			—
Balance, Declaration of dividends ($0.14 per common share and $0.25 per preferred share)	—			—		—	—			—		—			(4,906		)	—			—			(4,906		)
Balance, March 31, 2018	(11,136	)		46,148		10	$	461		$	—	$	84,294		$	496,878		$	(7,312	)	$	(107,869	)	$	466,452

(1) All shares acquired represent shares tendered to cover the strike price for options and tax withholdings on the intrinsic value of options exercised or performance share units or restricted stock vested. These shares have been cancelled by the Company.

(2) Represents change in fair value of available-for-sale investments, net of income tax provision of $3,916 thousand for the three months ended March 31, 2019 and a change in fair value of available-for-sale investments, net of income tax benefit of $1,219 thousand for the three months ended March 31, 2018.

The accompanying notes to condensed consolidated financial statements are an integral part of these statements.

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UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(in thousands)



	Three Months Ended March 31,
	2019			2018
Cash flows from operating activities:
Net cash provided by (used in) operating activities	$	31,451		$	52,326
Cash flows from investing activities:
Proceeds from sale of property and equipment	8			12
Purchases of property and equipment	(6,368		)	(1,314		)
Purchases of equity securities	(697		)	(9,857		)
Purchases of available-for-sale debt securities	(55,102		)	(121,996		)
Purchases of investment real estate, net	(734		)	(1,034		)
Proceeds from sales of equity securities	17,161			1,045
Proceeds from sales of available-for-sale debt securities	14,550			99,464
Maturities of available-for-sale debt securities	36,635			25,363
Net cash provided by (used in) investing activities	5,453			(8,317		)
Cash flows from financing activities:
Preferred stock dividend	(3		)	(3		)
Common stock dividend	(5,620		)	(4,912		)
Issuance of common stock for stock option exercises	239			—
Purchase of treasury stock	(10,117		)	(2,746		)
Payments related to tax withholding for share-based compensation	(2,402		)	(4,793		)
Repayment of debt	(368		)	(368		)
Net cash provided by (used in) financing activities	(18,271		)	(12,822		)
Cash and cash equivalents, and restricted cash and cash equivalents:
Net increase (decrease) during the period	18,633			31,187
Balance, beginning of period	169,063			216,121
Balance, end of period	$	187,696		$	247,308

The following table summarizes our cash and cash equivalents and restricted cash and cash equivalents within the Condensed Consolidated Balance Sheets (in thousands):



	March 31, 2019		December 31, 2018
Cash and cash equivalents	$	185,061	$	166,428
Restricted cash and cash equivalents (1)	2,635		2,635
Total cash and cash equivalents and restricted cash and cash equivalents	$	187,696	$	169,063


(1)	See “—Note 5 (Insurance Operations),” for a discussion of the nature of the restrictions for restricted cash and cash equivalents.

The accompanying notes to condensed consolidated financial statements are an integral part of these statements.

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UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. Nature of Operations and Basis of Presentation

Nature of Operations

Universal Insurance Holdings, Inc. together with its wholly-owned subsidiaries, (“the Company”) is a Delaware corporation incorporated in 1990. The Company is a vertically integrated insurance holding company performing all aspects of insurance underwriting, distribution and claims. Through its wholly-owned insurance company subsidiaries, Universal Property & Casualty Insurance Company (“UPCIC”) and American Platinum Property and Casualty Insurance Company (“APPCIC”, and together with UPCIC, the “Insurance Entities”), the Company is principally engaged in the property and casualty insurance business offered primarily through its network of independent agents. Risk from catastrophic losses is managed through the use of reinsurance agreements. The Company’s primary product is residential homeowners’ insurance currently offered in 18 states as of March 31, 2019, including Florida, which comprises the vast majority of the Company’s in-force policies. See “—Note 5 (Insurance Operations)” for more information regarding the Company’s insurance operations.

The Company generates revenues primarily from the collection of premiums and invests funds in excess of those retained for claims-paying obligations and insurance operations. Other significant sources of revenue include brokerage commissions collected from reinsurers on certain reinsurance programs placed by the Insurance Entities, policy fees collected from policyholders by our wholly-owned managing general agent subsidiary and payment plan fees charged to policyholders who choose to pay their premiums in installments. Our wholly-owned adjusting company receives claims-handling fees from the Insurance Entities. The Insurance Entities are reimbursed for these fees on claims that are subject to recovery under the Insurance Entities’ respective reinsurance programs. These fees, after expenses, are recorded in the Condensed Consolidated Financial Statements as an adjustment to losses and loss adjustment expense.

Basis of Presentation

The Company has prepared the accompanying unaudited Condensed Consolidated Financial Statements (“Financial Statements”) in accordance with the rules and regulations of the United States Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, the Financial Statements do not include all of the information and footnotes required by United States Generally Accepted Accounting Principles (“U.S. GAAP”) for annual financial statements. Therefore, the Financial Statements should be read in conjunction with the audited Consolidated Financial Statements contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018, filed with the SEC on March 1, 2019. The condensed consolidated balance sheet at December 31, 2018 was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation have been included in the Financial Statements. The results for interim periods do not necessarily indicate the results that may be expected for any other interim period or for the full year.

To conform to the current period presentation, certain amounts in the prior periods’ condensed consolidated financial statements and notes have been reclassified. Such reclassifications were of an immaterial amount and had no effect on net income or stockholders’ equity.

The Financial Statements include the accounts of the Company and its wholly-owned subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation.

Management must make estimates and assumptions that affect amounts reported in the Company’s Financial Statements and in disclosures of contingent assets and liabilities. Actual results could differ from those estimates.

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2. Significant Accounting Policies

The Company reported Significant Accounting Policies in its Annual Report on Form 10-K for the year ended December 31, 2018. There are no new or revised disclosures or disclosures required on a quarterly basis.

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3. Investments

Securities Available for Sale

The following table provides the amortized cost and fair value of debt securities available for sale as of the dates presented (in thousands):



	March 31, 2019
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Debt Securities:
U.S. government obligations and agencies	$	65,888	$	408	$	(654	)	$	65,642
Corporate bonds	422,426		6,650		(1,643		)	427,433
Mortgage-backed and asset-backed securities	330,925		3,585		(2,743		)	331,767
Municipal bonds	3,403		25		(8		)	3,420
Redeemable preferred stock	12,175		255		(664		)	11,766
Total	$	834,817	$	10,923	$	(5,712	)	$	840,028



	December 31, 2018
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Debt Securities:
U.S. government obligations and agencies	$	67,435	$	241	$	(1,039	)	$	66,637
Corporate bonds	434,887		714		(6,736		)	428,865
Mortgage-backed and asset-backed securities	312,840		912		(4,155		)	309,597
Municipal bonds	3,405		—		(43		)	3,362
Redeemable preferred stock	12,560		55		(638		)	11,977
Total	$	831,127	$	1,922	$	(12,611	)	$	820,438

The following table provides the credit quality of available-for-sale debt securities with contractual maturities as of the dates presented (dollars in thousands):



	March 31, 2019				December 31, 2018
Equivalent S&P Credit Ratings	Fair Value		% of Total Fair Value		Fair Value		% of Total Fair Value
AAA	$	408,487	48.6	%	$	388,672	47.4	%
AA	100,592		12.0	%	100,791		12.3	%
A	207,422		24.7	%	214,503		26.1	%
BBB	119,525		14.2	%	112,613		13.7	%
BB and Below	505		0.1	%	494		0.1	%
No Rating Available	3,497		0.4	%	3,365		0.4	%
Total	$	840,028	100.0	%	$	820,438	100.0	%

The table above includes credit quality ratings by Standard and Poor’s Rating Services, Inc. (“S&P”), Moody’s Investors Service, Inc. and Fitch Ratings, Inc. The Company has presented the highest rating of the three rating agencies for each investment position.

The following table summarizes the amortized cost and fair value of mortgage-backed and asset-backed securities as of the dates presented (in thousands):

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	March 31, 2019				December 31, 2018
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Mortgage-backed Securities:
Agency	$	152,861	$	151,214	$	139,418	$	136,291
Non-agency	71,863		74,084		61,689		61,933
Asset-backed Securities:
Auto loan receivables	49,808		49,917		53,449		53,341
Credit card receivables	27,750		27,809		29,594		29,366
Other receivables	28,643		28,743		28,690		28,666
Total	$	330,925	$	331,767	$	312,840	$	309,597

The following table summarizes the fair value and gross unrealized losses on available-for-sale debt securities, aggregated by major investment category and length of time that individual securities have been in a continuous unrealized loss position as of the dates presented (in thousands):



	March 31, 2019
	Less Than 12 Months						12 Months or Longer
	Number of Issues	Fair Value		Unrealized Losses			Number of Issues	Fair Value		Unrealized Losses
Debt Securities:
U.S. government obligations and agencies	1	$	1,300	$	(3	)	9	$	46,124	$	(651	)
Corporate bonds	24	11,810		(39		)	190	154,760		(1,604		)
Mortgage-backed and asset-backed securities	13	13,011		(43		)	101	141,496		(2,700		)
Municipal bonds	1	272		(8		)	—	—		—
Redeemable preferred stock	28	2,893		(562		)	9	1,783		(102		)
Total	67	$	29,286	$	(655	)	309	$	344,163	$	(5,057	)



	December 31, 2018
	Less Than 12 Months						12 Months or Longer
	Number of Issues	Fair Value		Unrealized Losses			Number of Issues	Fair Value		Unrealized Losses
Debt Securities:
U.S. government obligations and agencies	—	$	—	$	—		13	$	56,531	$	(1,039	)
Corporate bonds	228	210,152		(3,318		)	160	131,225		(3,418		)
Mortgage-backed and asset-backed securities	36	57,487		(196		)	103	148,436		(3,959		)
Municipal bonds	6	3,362		(43		)	—	—		—
Redeemable preferred stock	61	8,092		(506		)	5	1,034		(132		)
Total	331	$	279,093	$	(4,063	)	281	$	337,226	$	(8,548	)

Evaluating Investments for Other Than Temporary Impairment

As of March 31, 2019, the Company held available-for-sale debt securities that were in an unrealized loss position as presented in the table above. For available-for-sale debt securities with significant declines in value, the Company performs quarterly fundamental credit analysis on a security-by-security basis, which includes consideration of credit quality and credit ratings, review of relevant industry analyst reports and other available market data. For available-for-sale debt securities, the Company considers whether it has the intent and ability to hold the available-for-sale debt securities for a period of time sufficient to recover its cost basis. Where the Company lacks the intent and ability to hold to recovery, or believes the recovery period is extended, the security’s decline in fair value is considered other than temporary and is recorded in earnings. Based on our analysis, our fixed income portfolio is of high quality and we believe that we will recover the amortized cost basis of our available-for-sale debt securities. We continually monitor the credit quality of our investments in available-for-sale debt securities to assess if it is probable that we will receive our contractual or estimated cash flows in the form of principal and interest. Additionally, the Company considers management’s intent and ability to hold the available-for-sale debt securities until recovery and its credit analysis of the individual issuers of the securities. Based on this process and analysis, management has no reason to believe the unrealized losses of the available-for-sale debt securities as of March 31, 2019 are other than temporary.

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The following table presents the amortized cost and fair value of investments with maturities as of the date presented (in thousands):



	March 31, 2019
	Amortized Cost		Fair Value
Due in one year or less	$	102,098	$	101,753
Due after one year through five years	402,877		403,320
Due after five years through ten years	319,707		325,217
Due after ten years	8,940		8,507
Perpetual maturity securities	1,195		1,231
Total	$	834,817	$	840,028

All securities, except those with perpetual maturities, were categorized in the table above utilizing years to effective maturity. Effective maturity takes into consideration all forms of potential prepayment, such as call features or prepayment schedules, that shorten the lifespan of contractual maturity dates.

The following table provides certain information related to available-for-sale debt securities and equity securities during the periods presented (in thousands):



	Three Months Ended March 31,
	2019			2018
Proceeds from sales and maturities (fair value):
Available-for-sale debt securities	$	51,185		$	124,827
Equity securities	$	17,161		$	1,045
Gross realized gains on sale of securities:
Available-for-sale debt securities	$	187		$	307
Equity securities	$	165		$	124
Gross realized losses on sale of securities:
Available-for-sale debt securities	$	(42	)	$	(3,072	)
Equity securities	$	(11,835	)	$	—

The following table presents the components of net investment income, comprised primarily of interest and dividends, for the periods presented (in thousands):



	Three Months Ended March 31,
	2019			2018
Available-for-sale debt securities	$	6,151		$	3,700
Equity securities	1,042			583
Available-for-sale short-term investments	—			89
Cash and cash equivalents	1,300			858
Other (1)	259			196
Total investment income	8,752			5,426
Less: Investment expenses (2)	(610		)	(641		)
Net investment income	$	8,142		$	4,785


(1)	Includes interest earned on restricted cash and cash equivalents. Also includes investment income earned on real estate investments.


(2)	Includes custodial fees, investment accounting and advisory fees, and expenses associated with real estate investments.

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Equity Securities

The following table provides the unrealized gains and losses related to equity securities for the periods presented (in thousands):



	Three Months Ended March 31,
	2019		2018
Unrealized gains and (losses) recognized during the reporting period on equity securities still held at the reporting period	$	2,400	$	(5,109	)

Investment Real Estate

Investment real estate consisted of the following as of the dates presented (in thousands):



	March 31, 2019			December 31, 2018
Income Producing:
Investment real estate	$	14,628		$	14,619
Less: Accumulated depreciation	(973		)	(870		)
	13,655			13,749
Non-Income Producing:
Investment real estate	11,415			10,690
Investment real estate, net	$	25,070		$	24,439

Depreciation expense related to investment real estate for the periods presented (in thousands):



	Three Months Ended March 31,
	2019		2018
Depreciation expense on investment real estate	$	103	$	103

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4. Reinsurance

The Company seeks to reduce its risk of loss by reinsuring certain levels of risk in various areas of exposure with other insurance enterprises or reinsurers, generally as of the beginning of the hurricane season on June 1st of each year. The Company’s current reinsurance programs consist of catastrophe excess of loss reinsurance, subject to the terms and conditions of the applicable agreements. The Company is responsible for certain retained loss amounts before reinsurance attaches and insured losses related to catastrophes and other events that exceed coverage provided by the reinsurance programs. The Company remains responsible for the settlement of insured losses irrespective of whether any of the reinsurers fail to make payments otherwise due.

Amounts recoverable from reinsurers are estimated in a manner consistent with the terms of the reinsurance contracts. Reinsurance premiums, losses and loss adjustment expenses (“LAE”) are accounted for on a basis consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts.

To reduce credit risk for amounts due from reinsurers, the Insurance Entities seek to do business with financially sound reinsurance companies and regularly evaluate the financial strength of all reinsurers used.

The following table presents ratings from rating agencies and the unsecured amounts due from the reinsurers whose aggregate balances exceeded 3% of the Company’s stockholders’ equity as of the dates presented (in thousands):

Ratings as of March 31, 2019

Due from as of

Reinsurer

AM Best

Company

Standard

and Poor’s

Rating

Services, Inc.

Moody’s

Investors Service, Inc.

March 31, 2019

December 31, 2018

Allianz Risk Transfer

A+

Aa3

109,183

139,565

Florida Hurricane Catastrophe Fund (1)

n/a

107,537

165,022

Renaissance Reinsurance Ltd

A+

26,299

39,459

Chubb Tempest Reinsurance Ltd

n/a

—

16,208

Total (2)

243,019

360,254


(1)	No rating is available, because the fund is not rated.


(2)	Amounts represent prepaid reinsurance premiums, reinsurance receivables and net recoverables for paid and unpaid losses, including incurred but not reported reserves, and loss adjustment expenses.

The Company’s reinsurance arrangements had the following effect on certain items in the Condensed Consolidated Statements of Income for the periods presented (in thousands):



	Three Months Ended March 31,
	2019								2018
	Premiums Written		Premiums Earned			Losses and Loss Adjustment Expenses			Premiums Written		Premiums Earned			Losses and Loss Adjustment Expenses
Direct	$	289,234	$	295,377		$	115,742		$	269,984	$	262,261		$	76,639
Ceded	—		(85,650		)	(2,648		)	—		(79,684		)	(713		)
Net	$	289,234	$	209,727		$	113,094		$	269,984	$	182,577		$	75,926

The following prepaid reinsurance premiums and reinsurance recoverable and receivable are reflected in the Condensed Consolidated Balance Sheets as of the dates presented (in thousands):



	March 31, 2019		December 31, 2018
Prepaid reinsurance premiums	$	57,100	$	142,750
Reinsurance recoverable on paid losses and LAE	$	54,223	$	25,238
Reinsurance recoverable on unpaid losses and LAE	269,071		393,365
Reinsurance recoverable and receivable	$	323,294	$	418,603

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5. Insurance Operations

Deferred Policy Acquisition Costs

The Company defers certain costs relating to written premium, called Deferred Policy Acquisition Costs (“DPAC”). DPAC is amortized over the effective period of the related insurance policies.

The following table presents the beginning and ending balances and the changes in DPAC for the periods presented (in thousands):



	Three Months Ended March 31,
	2019			2018
DPAC, beginning of period	$	84,686		$	73,059
Capitalized Costs	41,520			41,939
Amortization of DPAC	(42,922		)	(36,991		)
DPAC, end of year	$	83,284		$	78,007

Regulatory Requirements and Restrictions

The Insurance Entities are subject to regulations and standards of the Florida Office of Insurance Regulation (“FLOIR”). UPCIC also is subject to regulations and standards of regulatory authorities in other states where it is licensed, although as a Florida-domiciled insurer, its principal regulatory authority is the FLOIR. These standards require the Insurance Entities to maintain specified levels of statutory capital and restrict the timing and amount of dividends and other distributions that may be paid by the Insurance Entities to the parent company. Except in the case of extraordinary dividends, these standards generally permit dividends to be paid from statutory unassigned surplus of the regulated subsidiary and are limited based on the regulated subsidiary’s level of statutory net income and statutory capital and surplus. The maximum dividend that may be paid by UPCIC and APPCIC to their immediate parent company, Protection Solutions, Inc. (“PSI”, formerly known as Universal Insurance Holding Company of Florida), without prior regulatory approval is limited by the provisions of the Florida Insurance Code. These dividends are referred to as “ordinary dividends.” However, if the dividend, together with other dividends paid within the preceding twelve months exceeds this statutory limit or is paid from sources other than earned surplus, the entire dividend is generally considered an “extraordinary dividend” and must receive prior regulatory approval.

In accordance with Florida Insurance Code, and based on the calculations performed by the Company as of December 31, 2018, UPCIC has the capacity to pay ordinary dividends of $14.0 million during 2019. APPCIC did not meet the earnings or surplus regulatory requirements as of December 31, 2018 to pay ordinary dividends during 2019. For the three months ended March 31, 2019, no dividends were paid from UPCIC or APPCIC to PSI.

The Florida Insurance Code requires insurance companies to maintain capitalization equivalent to the greater of ten percent of the insurer’s total liabilities but not less than $10.0 million. The following table presents the amount of capital and surplus calculated in accordance with statutory accounting principles, which differ from U.S. GAAP, and an amount representing ten percent of total liabilities for both UPCIC and APPCIC as of the dates presented (in thousands):



	March 31, 2019		December 31, 2018
Ten percent of total liabilities
UPCIC	$	89,300	$	90,610
APPCIC	$	491	$	489
Statutory capital and surplus
UPCIC	$