UNIVERSAL INSURANCE HOLDINGS, INC. - Quarter Report: 2018 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2018

☐	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 ☒ 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 ☒ 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	☒	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 ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 34,938,872 shares of common stock, par value $0.01 per share, outstanding on October 29, 2018.

UNIVERSAL INSURANCE HOLDINGS, INC.

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

		Page No.

Item 1.	Financial Statements:	4

	Condensed Consolidated Balance Sheets as of September 30, 2018 (unaudited) and December 31, 2017	4

	Condensed Consolidated Statements of Income for the three and nine-month periods ended September 30, 2018 and 2017 (unaudited)	5

	Condensed Consolidated Statements of Comprehensive Income for the three and nine-month periods ended September 30, 2018 and 2017 (unaudited)	5

	Condensed Consolidated Statements of Cash Flows for the nine-month periods ended September 30, 2018 and 2017 (unaudited)	6

	Notes to Condensed Consolidated Financial Statements (unaudited)	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27

Item 3.	Quantitative and Qualitative Disclosure about Market Risk	48

Item 4.	Controls and Procedures	49

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	49

Item 1A.	Risk Factors	50

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	50

Item 6.	Exhibits	50

Signatures		51

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 September 30, 2018 and the related condensed consolidated statements of income and comprehensive income for the three-month and nine-month periods ended September 30, 2018 and 2017 and the related condensed consolidated statement of cash flows for the nine-month periods ended September 30, 2018 and 2017. 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, 2017 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 February 23, 2018. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2017, 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

October 31, 2018

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
	September 30,			December 31,
	2018			2017
	(unaudited)
ASSETS
Available-for-sale debt securities	$	760,408		$	639,334
Available-for-sale short-term investments		—			10,000
Equity securities		69,108			62,215
Investment real estate, net		23,720			18,474
Total invested assets		853,236			730,023

Cash and cash equivalents		252,289			213,486
Restricted cash and cash equivalents		2,635			2,635
Prepaid reinsurance premiums		228,408			132,806
Reinsurance recoverable		158,603			182,405
Reinsurance receivable, net		961			—
Premium receivable, net		66,017			56,500
Property and equipment, net		35,632			32,866
Deferred policy acquisition costs		90,643			73,059
Income taxes recoverable		5,174			9,472
Deferred income tax asset, net		7,948			9,286
Other assets		21,723			12,461
Total assets	$	1,723,269		$	1,454,999
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Unpaid losses and loss adjustment expenses	$	158,667		$	248,425
Unearned premiums		629,693			532,444
Advance premium		32,839			26,216
Accounts payable		2,809			2,866
Book overdraft		30,334			36,715
Reinsurance payable, net		261,133			110,381
Other liabilities and accrued expenses		65,005			45,096
Long-term debt		11,765			12,868
Total liabilities		1,192,245			1,015,011

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		463			458
Authorized shares - 55,000
Issued shares - 46,318 and 45,778
Outstanding shares - 34,933 and 34,735
Treasury shares, at cost - 11,385 and 11,043		(116,239	)		(105,123	)
Additional paid-in capital		88,231			86,186
Accumulated other comprehensive income (loss), net of taxes		(9,898	)		(6,281	)
Retained earnings		568,467			464,748
Total stockholders' equity		531,024			439,988
Total liabilities and stockholders' equity	$	1,723,269		$	1,454,999

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

UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited)

(in thousands, except per share data)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2018			2017			2018			2017
PREMIUMS EARNED AND OTHER REVENUES
Direct premiums written	$	309,176		$	274,744		$	921,941		$	816,350
Change in unearned premium		(20,772	)		(19,935	)		(97,249	)		(80,543	)
Direct premium earned		288,404			254,809			824,692			735,807
Ceded premium earned		(99,466	)		(80,292	)		(260,905	)		(230,722	)
Premiums earned, net		188,938			174,517			563,787			505,085
Net investment income (expense)		6,642			3,085			17,213			9,012
Net realized gains (losses) on sale of securities		403			803			(2,093	)		2,450
Net change in unrealized gains (losses) of equity securities		(2,473	)		—			(9,103	)		—
Commission revenue		5,658			5,304			16,638			14,546
Policy fees		5,204			4,861			15,743			14,594
Other revenue		1,783			1,673			5,258			4,917
Total premiums earned and other revenues		206,155			190,243			607,443			550,604
OPERATING COSTS AND EXPENSES
Losses and loss adjustment expenses		85,947			116,375			251,715			267,129
General and administrative expenses		69,041			57,269			191,614			171,582
Total operating costs and expenses		154,988			173,644			443,329			438,711
INCOME BEFORE INCOME TAXES		51,167			16,599			164,114			111,893
Income tax expense		13,787			6,635			40,595			41,354
NET INCOME	$	37,380		$	9,964		$	123,519		$	70,539
Basic earnings per common share	$	1.07		$	0.29		$	3.54		$	2.02
Weighted average common shares outstanding - Basic		34,861			34,686			34,870			34,927
Diluted earnings per common share	$	1.04		$	0.28		$	3.45		$	1.96
Weighted average common shares outstanding - Diluted		35,919			35,615			35,754			35,917
Cash dividend declared per common share	$	0.16		$	0.14		$	0.44		$	0.42

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2018			2017		2018			2017
Net income	$	37,380		$	9,964	$	123,519		$	70,539
Other comprehensive income (loss), net of taxes		(737	)		251		(6,636	)		4,201
Comprehensive income	$	36,643		$	10,215	$	116,883		$	74,740

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

UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(in thousands)


	Nine Months Ended September 30,
	2018			2017
Cash flows from operating activities:
Net cash provided by (used in) operating activities	$	224,454		$	286,195
Cash flows from investing activities:
Proceeds from sale of property and equipment		30			17
Purchases of property and equipment		(6,141	)		(3,655	)
Purchases of equity securities		(23,568	)		(47,070	)
Purchases of available-for-sale debt securities		(349,617	)		(114,593	)
Purchases of investment real estate, net		(5,553	)		(5,023	)
Proceeds from sales of equity securities		8,285			75,027
Proceeds from sales of available-for-sale debt securities		132,801			19,643
Maturities of available-for-sale debt securities		83,188			75,770
Maturities of available-for-sale short-term investments		10,000			5,000
Net cash provided by (used in) investing activities		(150,575	)		5,116
Cash flows from financing activities:
Preferred stock dividend		(8	)		(8	)
Common stock dividend		(15,400	)		(9,803	)
Issuance of common stock for stock option exercises		102			—
Purchase of treasury stock		(11,116	)		(17,884	)
Payments related to tax withholding for share-based compensation		(7,551	)		(1,367	)
Repayment of debt		(1,103	)		(1,803	)
Net cash provided by (used in) financing activities		(35,076	)		(30,865	)
Cash and cash equivalents, and restricted cash and cash equivalents:
Net increase (decrease) during the period		38,803			260,446
Balance, beginning of period		216,121			108,365
Balance, end of period	$	254,924		$	368,811

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


	September 30, 2018		December 31, 2017
Cash and cash equivalents	$	252,289	$	213,486
Restricted cash and cash equivalents (1)		2,635		2,635
Total cash and cash equivalents and restricted cash and cash equivalents	$	254,924	$	216,121

(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.

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. (“UVE”) is a Delaware corporation incorporated in 1990. UVE with its wholly-owned subsidiaries (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”), together referred to as 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 seventeen states as of September 30, 2018, 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, 2017, filed with the SEC on February 23, 2018. The condensed consolidated balance sheet at December 31, 2017, 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’ 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 UVE 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.

2. Significant Accounting Policies

The Company reported Significant Accounting Policies in its Annual Report on Form 10-K for the year ended December 31, 2017. The following are new or revised disclosures or disclosures required on a quarterly basis.

Recently Adopted Accounting Pronouncements

In January 2016, the Financial Accounting Standards Board (“FASB”) revised U.S. GAAP with the issuance of Accounting Standards Update (“ASU”) 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities to improve the recognition and measurement of financial instruments. The new ASU requires certain investments in equity securities to be measured at fair value with changes in fair value reported in earnings and requires changes in instrument-specific credit risk for financial liabilities recorded at fair value under the fair value option to be reported in Other Comprehensive Income (“OCI”). The Company adopted this ASU effective January 1, 2018 using the modified retrospective transition method and recorded a cumulative effect adjustment of $3.6 million to the Condensed Consolidated Balance Sheets to reclassify unrealized losses on investments in equity securities to retained earnings from accumulated other comprehensive income (“AOCI”). The adoption of this ASU also resulted in the recognition of the change in unrealized gains and losses for equity security investments as a separate component in the Condensed Consolidated Statements of Income during the three and nine months ended September 30, 2018.

In August 2016, the FASB revised U.S. GAAP with the issuance of ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments intended to reduce diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The new ASU applies to: (1) debt prepayment or debt extinguishment costs, (2) settlement of zero-coupon debt instruments, (3) contingent consideration payments made after business combination, (4) proceeds from the settlement of insurance claims, (5) proceeds from the settlement of corporate-owned life insurance policies, (6) distributions received from equity method investments, (7) beneficial interests in securitization transactions, and (8) separately identifiable cash flows and application of the predominance principle. Historically, the items outlined above have not been applicable to the Company. The Company adopted this ASU effective January 1, 2018 and the adoption did not have an impact on our Condensed Consolidated Statements of Cash Flows.

In November 2016, the FASB revised U.S. GAAP, Statement of Cash Flows (Topic 230): Restricted Cash with the issuance of the ASU 2016-18, to reduce diversity in the classification and presentation of changes in restricted cash in the statement of cash flows. The new ASU requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. The Company is required to reconcile such total to amounts on the Condensed Consolidated Balance Sheets and disclose the nature of the restrictions. The Company adopted this ASU effective January 1, 2018, which only resulted in a change in the presentation of the Condensed Consolidated Statements of Cash Flows.

In February 2018, the FASB revised U.S. GAAP, Comprehensive Income (Topic 220), with the issuance of ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income in response to the enactment of the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) on December 22, 2017. The new ASU permits a company to reclassify the disproportionate income tax effects of the Tax Act on items within AOCI to retained earnings and requires certain new disclosures. The Company adopted this guidance effective January 1, 2018 and made an election to reclassify the income tax effects of the Tax Act from AOCI to retained earnings. Retained earnings were reduced by approximately $0.6 million due to this reclassification. The reclassification represents the effect of the change in the U.S. federal corporate income tax rate on the gross deferred tax amounts and related valuation allowances at the date of enactment of the Tax Act related to items remaining in AOCI. The Company follows an aggregate portfolio approach and considers that it had two portfolios, an available for sale debt equity portfolio and an available for sale equity portfolio, the disproportionate tax effects relating to the available for sale equity portfolio were included in the transition adjustment when adopting ASU 2016-01.

3. Investments

Securities Available for Sale

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

	September 30, 2018
			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses			Fair Value
Debt Securities:
U.S. government obligations and agencies	$	67,442	$	15	$	(1,459	)	$	65,998
Corporate bonds		415,600		532		(6,165	)		409,967
Mortgage-backed and asset-backed securities		275,128		23		(5,923	)		269,228
Municipal bonds		3,401		—		(123	)		3,278
Redeemable preferred stock		11,922		206		(191	)		11,937
Total	$	773,493	$	776	$	(13,861	)	$	760,408

	December 31, 2017
			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses			Fair Value
Debt Securities:
U.S. government obligations and agencies	$	60,481	$	—	$	(877	)	$	59,604
Corporate bonds		228,336		476		(1,308	)		227,504
Mortgage-backed and asset-backed securities		221,956		19		(2,523	)		219,452
Municipal bonds		120,883		599		(1,187	)		120,295
Redeemable preferred stock		12,059		485		(65	)		12,479
Short-term investments		10,000		—		—			10,000
Total	$	653,715	$	1,579	$	(5,960	)	$	649,334

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

	September 30, 2018					December 31, 2017 (1)
			% of Total					% of Total
Average Credit Ratings	Fair Value		Fair Value			Fair Value		Fair Value
AAA	$	344,801		45.3	%	$	317,313		48.9	%
AA		92,411		12.2	%		129,573		20.0	%
A		216,074		28.4	%		146,749		22.6	%
BBB		103,427		13.6	%		51,020		7.8	%
BB+ and Below		117		0.0	%		1,569		0.2	%
No Rating Available		3,578		0.5	%		3,110		0.5	%
Total	$	760,408		100.0	%	$	649,334		100.0	%

(1)

The credit ratings in the table above have been reclassified from the prior periods’ consolidated financial statements to conform to the current periods’ presentation.

The table above includes credit quality ratings by Standard and Poor’s Rating Services, Inc., 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):


	September 30, 2018				December 31, 2017
	Amortized				Amortized
	Cost		Fair Value		Cost		Fair Value
Mortgage-backed Securities:
Agency	$	152,068	$	148,472	$	118,014	$	116,014
Non-agency		44,509		44,005		17,676		17,488
Asset-backed Securities:
Auto loan receivables		28,983		28,649		35,105		34,962
Credit card receivables		23,836		23,665		38,844		38,719
Other receivables		25,732		24,437		12,317		12,269
Total	$	275,128	$	269,228	$	221,956	$	219,452

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 (dollars in thousands):

	September 30, 2018
	Less Than 12 Months							12 Months or Longer
	Number of				Unrealized			Number of				Unrealized
	Issues		Fair Value		Losses			Issues		Fair Value		Losses
Debt Securities:
U.S. government obligations and agencies		5	$	15,734	$	(313	)		11	$	40,389	$	(1,146	)
Corporate bonds		413		316,750		(4,599	)		66		51,245		(1,566	)
Mortgage-backed and asset-backed securities		86		135,530		(1,643	)		98		109,884		(4,280	)
Municipal bonds		6		3,278		(123	)		—		—		—
Redeemable preferred stock		98		4,739		(154	)		1		408		(37	)
Total		608	$	476,031	$	(6,832	)		176	$	201,926	$	(7,029	)

	December 31, 2017
	Less Than 12 Months							12 Months or Longer
	Number of				Unrealized			Number of				Unrealized
	Issues		Fair Value		Losses			Issues		Fair Value		Losses
Debt Securities:
U.S. government obligations and agencies		7	$	35,464	$	(301	)		9	$	24,140	$	(576	)
Corporate bonds		159		142,208		(792	)		39		29,796		(516	)
Mortgage-backed and asset-backed securities		83		137,481		(955	)		37		70,218		(1,568	)
Municipal bonds		36		28,265		(246	)		30		48,370		(941	)
Redeemable preferred stock		21		2,464		(65	)		—		—		—
Total		306	$	345,882	$	(2,359	)		115	$	172,524	$	(3,601	)

Evaluating Investments for Other Than Temporary Impairment (“OTTI”)

As of September 30, 2018, 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 September 30, 2018 are other than temporary.

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

	September 30, 2018
	Amortized Cost		Fair Value
Due in one year or less	$	65,340	$	65,054
Due after one year through five years		246,639		242,313
Due after five years through ten years		158,771		156,385
Due after ten years		15,693		15,491
Mortgage-backed and asset-backed securities		275,128		269,228
Perpetual maturity securities		11,922		11,937
Total	$	773,493	$	760,408

Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay with or without penalty.

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						Nine Months Ended
	September 30,						September 30,
	2018			2017			2018			2017
Proceeds from sales and maturities (fair value):
Available-for-sale debt securities	$	32,287		$	49,762		$	225,989		$	100,413
Equity securities	$	4,158		$	18,056		$	8,285		$	75,027
Gross realized gains on sale of securities:
Available-for-sale debt securities	$	1		$	302		$	318		$	330
Equity securities	$	413		$	547		$	714		$	2,332
Gross realized losses on sale of securities:
Available-for-sale debt securities	$	(11	)	$	(19	)	$	(3,125	)	$	(59	)
Equity securities	$	—		$	(27	)	$	—		$	(153	)

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						Nine Months Ended
	September 30,						September 30,
	2018			2017			2018			2017
Available-for-sale debt securities	$	4,595		$	2,977		$	12,390		$	8,893
Equity securities		722			348			2,016			1,068
Available-for-sale short-term investments		—			—			145			22
Other (1)		2,106			319			4,765			651
Total investment income		7,423			3,644			19,316			10,634
Less: Investment expenses (2)		(781	)		(559	)		(2,103	)		(1,622	)
Net investment (expense) income	$	6,642		$	3,085		$	17,213		$	9,012

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

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

Equity Securities

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

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2018			2017			2018			2017
Net gains and (losses) recognized during the period on equity securities	$	(2,060	)	$	520		$	(8,389	)	$	2,179
Less: Net (gains) and losses recognized during the period on equity securities sold during the period		(413	)		(520	)		(714	)		(2,179	)
Unrealized gains and (losses) recognized during the reporting period on equity securities still held at the reporting period	$	(2,473	)	$	—		$	(9,103	)	$	—

Investment Real Estate

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

	September 30, 2018			December 31, 2017
Income Producing:
Investment real estate (1)	$	14,619		$	6,918
Less: Accumulated depreciation		(767	)		(460	)
		13,852			6,458
Non-Income Producing:
Properties under development (1)		9,868			12,016
Investment real estate, net	$	23,720		$	18,474

(1) During the nine months ended September 30, 2018, the Company transferred $7.4 million from properties under development to investment real estate.

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2018		2017		2018		2017
Depreciation expense on investment real estate	$	103	$	45	$	307	$	134

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 due exceeded 3% of the Company’s stockholders’ equity as of the dates presented (in thousands):

	Ratings as of September 30, 2018			Due from as of
		Standard
		and Poor's	Moody's
	AM Best	Rating	Investors	December 31,
Reinsurer	Company	Services, Inc.	Service, Inc.	2017
Allianz Risk Transfer	A+	AA	Aa3	$	105,573
Florida Hurricane Catastrophe Fund (1)	n/a	n/a	n/a		52,054
Renaissance Reinsurance Ltd	A+	A+	A1		22,545
Total (2)				$	180,172

(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, loss adjustment expenses, and offsetting reinsurance payables.

There were no amounts due from the reinsurers whose aggregate balance exceeded 3% of the Company’s stockholders’ equity as of September 30, 2018.

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 September 30,
	2018									2017
							Losses and Loss									Losses and Loss
	Premiums			Premiums			Adjustment			Premiums			Premiums			Adjustment
	Written			Earned			Expenses			Written			Earned			Expenses
Direct	$	309,176		$	288,404		$	270,158		$	274,744		$	254,809		$	531,268
Ceded		(17,256	)		(99,466	)		(184,211	)		(7,303	)		(80,292	)		(414,893	)
Net	$	291,920		$	188,938		$	85,947		$	267,441		$	174,517		$	116,375

	Nine Months Ended September 30,
	2018									2017
							Losses and Loss									Losses and Loss
	Premiums			Premiums			Adjustment			Premiums			Premiums			Adjustment
	Written			Earned			Expenses			Written			Earned			Expenses
Direct	$	921,941		$	824,692		$	593,419		$	816,350		$	735,807		$	687,707
Ceded		(356,507	)		(260,905	)		(341,704	)		(318,827	)		(230,722	)		(420,578	)
Net	$	565,434		$	563,787		$	251,715		$	497,523		$	505,085		$	267,129

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):

	September 30,		December 31,
	2018		2017
Prepaid reinsurance premiums	$	228,408	$	132,806
Reinsurance recoverable on paid losses and LAE	$	27,037	$	—
Reinsurance recoverable on unpaid losses and LAE		131,566		182,405
Reinsurance receivable, net		961		—
Reinsurance recoverable and receivable	$	159,564	$	182,405

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						Nine Months Ended
	September 30,						September 30,
	2018			2017			2018			2017
DPAC, beginning of period	$	88,756		$	73,591		$	73,059		$	64,912
Capitalized Costs		44,389			36,999			136,758			110,653
Amortization of DPAC		(42,502	)		(34,656	)		(119,174	)		(99,631	)
DPAC, end of period	$	90,643		$	75,934		$	90,643		$	75,934

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, Universal Insurance Holding Company of Florida (“UVECF”), 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, 2017, UPCIC has the capacity to pay ordinary dividends of $36.2 million during 2018. APPCIC does not currently meet the earnings or surplus regulatory requirements to pay ordinary dividends during 2018. For the nine months ended September 30, 2018, no dividends were paid from UPCIC or APPCIC to UVECF.

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):

	September 30,		December 31,
	2018		2017
Ten percent of total liabilities
UPCIC	$	88,901	$	72,633
APPCIC	$	538	$	572
Statutory capital and surplus
UPCIC	$	343,302	$	307,686
APPCIC	$	16,045	$	16,633

As of the dates in the table above, both UPCIC and APPCIC exceeded the minimum statutory capitalization requirement. UPCIC also met the capitalization requirements of the other states in which it is licensed as of September 30, 2018. UPCIC and APPCIC are also required to adhere to prescribed premium-to-capital surplus ratios and have met those requirements at such dates.

The following table summarizes combined net income (loss) for UPCIC and APPCIC determined in accordance with statutory accounting practices for the periods presented (in thousands):

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2018		2017			2018		2017
Combined net income (loss)	$	5,468	$	(9,662	)	$	49,190	$	33,532

The Insurance Entities are required by various state laws and regulations to maintain certain assets in depository accounts. The following table represents assets held by insurance regulators as of the dates presented (in thousands):

	September 30,		December 31,
	2018		2017
Restricted cash and cash equivalents	$	2,635	$	2,635
Investments	$	3,914	$	3,910

6. Liability for Unpaid Losses and Loss Adjustment Expenses

Set forth in the following table is the change in liability for unpaid losses and LAE for the periods presented (in thousands):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2018			2017			2018			2017
Balance at beginning of period	$	151,916		$	22,645		$	248,425		$	58,494
Less: Reinsurance recoverable (net of payable offsets)		(96,733	)		(1,393	)		(182,405	)		(106	)
Net balance at beginning of period		55,183			21,252			66,020			58,388
Incurred (recovered) related to:
Current year		85,986			116,262			249,488			265,811
Prior years		(39	)		113			2,227			1,318
Total incurred		85,947			116,375			251,715			267,129
Paid related to:
Current year		72,034			93,969			140,013			179,000
Prior years		38,372			15,912			146,998			118,771
Total paid		110,406			109,881			287,011			297,771
Net balance at end of period		30,724			27,746			30,724			27,746
Plus: Reinsurance recoverable (net of payable offsets)		127,943			412,697			127,943			412,697
Balance at end of period	$	158,667		$	440,443		$	158,667		$	440,443

During the third quarter of 2018, the Company recorded prior year adverse development to increase its estimate of ultimate losses for the third quarter 2017 storm, Hurricane Irma, to $754.0 million from $446.7 million recorded as of 2017 year-end. The prior year adverse development of $311.7 million in direct losses resulted in net losses of $2.2 million after the benefit of reinsurance recoveries, including those related to Hurricane Irma. The increase in the ultimate loss and LAE from Hurricane Irma was the result of a continuation of new reported claims and litigation costs associated with the aggressive nature of plaintiff attorneys on claims in Florida.

The nine months ended September 30, 2017 included prior year loss reserve development of $6.9 million on a direct basis ($1.3 million on a net basis), primarily reflecting strengthening of reserves for the fourth quarter 2016 storm, Hurricane Matthew.

7. Long-Term Debt

Long-term debt consists of the following as of the dates presented (in thousands):

	September 30,		December 31,
	2018		2017
Surplus note	$	11,765	$	12,868

In 2006, UPCIC entered into a $25.0 million surplus note with the State Board of Administration of Florida (the “SBA”) under Florida’s Insurance Capital Build-Up Incentive Program (the “ICBUI”). The surplus note has a twenty-year term and accrues interest, adjusted quarterly based on the 10-year Constant Maturity Treasury Index.

UPCIC was in compliance with the terms of the surplus note as of September 30, 2018.

8. Stockholders’ Equity

Common Stock

The following table summarizes the activity relating to shares of the Company’s common stock during the nine months ended September 30, 2018 (in thousands):

	Issued			Treasury			Outstanding
	Shares			Shares			Shares
Balance, as of December 31, 2017		45,778			(11,043	)		34,735
Shares repurchased		—			(342	)		(342	)
Vesting of performance share units		127			—			127
Stock option exercises		1,325			—			1,325
Restricted stock grants		50			—			50
Shares acquired through cashless exercise (1)		—			(962	)		(962	)
Shares cancelled		(962	)		962			—
Balance, as of September 30, 2018		46,318			(11,385	)		34,933

(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 vested. These shares have been cancelled by the Company.

In September 2017, UVE’s Board of Directors authorized a share repurchase program under which UVE may repurchase in the open market in compliance with Exchange Act Rule 10b-18, up to $20 million of the Company’s outstanding shares of common stock through December 31, 2018. During the nine months ended September 30, 2018, UVE repurchased 342,749 shares, at an aggregate price of approximately $11.1 million, pursuant to such repurchase program.

Dividends

The following table summarizes the dividends declared and paid by the Company:

	Dividend	Shareholders	Dividend	Cash Dividend
2018	Declared Date	Record Date	Payable Date	Per Share Amount
First Quarter	January 22, 2018	February 28, 2018	March 12, 2018	$	0.14
Second Quarter	April 12, 2018	April 27, 2018	May 4, 2018	$	0.14
Third Quarter	May 29, 2018	July 2, 2018	July 16, 2018	$	0.16

9. Income Taxes

During the three months ended September 30, 2018 and 2017, the Company recorded approximately $13.8 million and $6.6 million of income tax expense, respectively. The effective tax rate (“ETR”) for the three months ended September 30, 2018 was 26.9% compared to a 40.0% ETR for the same period in 2017.

During the nine months ended September 30, 2018 and 2017, the Company recorded approximately $40.6 million and $41.4 million of income tax expense, respectively. The ETR for the nine months ended September 30, 2018 was 24.7% compared to a 37.0% ETR for the same period in 2017.

In arriving at these rates, the Company considers a variety of factors including the forecasted full year pre-tax results, the U.S. federal tax rate, expected non-deductible expenses, and estimated state income taxes. The Company’s final ETR for the full year will be dependent on the level of pre-tax income, discrete items, the apportionment of taxable income among state tax jurisdictions and the extent of non-deductible expenses in relation to pre-tax income.

Income tax expense for the three months ended September 30, 2018 included a net debit for discrete items of $0.2 million driven by an income tax accrual adjustment of $0.9 million relating to return to provision true ups for federal and state jurisdictions, offset by excess tax benefits of $0.7 million resulting from stock-based compensation awards that were exercised during the third quarter in 2018, which thereby increased the current quarter’s ETR by 0.4 percent. Income tax expense for the three months ended September 30, 2017 included a net credit for discrete items of $0.2 million relating to prior year return to provision true ups for federal and state jurisdictions.

Income tax expense for the nine months ended September 30, 2018 included a net credit of $2.0 million driven by the excess tax benefits of $3.3 million resulting from stock-based compensation awards that vested and/or were exercised during that period, offset by an income tax accrual adjustment of $0.9 million relating to return to provision true ups for federal and state jurisdictions and other miscellaneous items of $0.4 million, which thereby decreased the year-to-date ETR by 1.3 percentage points. The prior year’s discrete items for the nine months ended September 30, 2017 were $0.8 million for excess tax benefits resulting from stock-based compensation awards that vested and/or were exercised during that period, and a credit to income tax expense of $1.2 million resulting from anticipated recoveries of income taxes paid for the 2014-2015 tax years.

The Company’s income tax provision reflects an estimated annual ETR of 26.0% for 2018, calculated before the impact of discrete items. The statutory tax rate consists of a federal income tax rate of 21% and a state income tax rate, net of federal benefit, of 3.7%.

The Company files its tax returns as prescribed by the tax laws of the jurisdictions in which it operates. As of September 30, 2018, the Company’s 2015 through 2017 tax years are still subject to examination by the Internal Revenue Service (“IRS”) and various tax years remain open to examination in certain state jurisdictions. In February 2018, the Company received notification from the IRS with respect to an examination of the 2015 tax return. During the third quarter in 2018, the IRS completed its examination of the Company for the 2015 tax year and issued a final Revenue Agent Report with no adjustments.

10. Earnings Per Share

Basic earnings per share (“EPS”) is computed based on the weighted average number of common shares outstanding for the period, excluding any dilutive common share equivalents. Diluted EPS reflects the potential dilution resulting from the exercises of stock options, vesting of restricted stock, vesting of performance share units, and conversion of preferred stock.

The following table reconciles the numerator (i.e., income) and denominator (i.e., shares) of the basic and diluted earnings per share computations for the periods presented (in thousands, except per share data):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2018			2017			2018			2017
Numerator for EPS:
Net income	$	37,380		$	9,964		$	123,519		$	70,539
Less: Preferred stock dividends		(3	)		(3	)		(8	)		(8	)
Income available to common stockholders	$	37,377		$	9,961		$	123,511		$	70,531
Denominator for EPS:
Weighted average common shares outstanding		34,861			34,686			34,870			34,927
Plus: Assumed conversion of share-based compensation (1)		1,033			904			859			965
Assumed conversion of preferred stock		25			25			25			25
Weighted average diluted common shares outstanding		35,919			35,615			35,754			35,917
Basic earnings per common share	$	1.07		$	0.29		$	3.54		$	2.02
Diluted earnings per common share	$	1.04		$	0.28		$	3.45		$	1.96

(1)	Represents the dilutive effect of unvested restricted stock, unvested performance share units and unexercised stock options.

11. Other Comprehensive Income (Loss)

The following table provides the components of other comprehensive income (loss) on a pre-tax and after-tax basis for the periods presented (in thousands):

	Three Months Ended September 30,
	2018									2017
	Pre-tax			Tax			After-tax			Pre-tax			Tax			After-tax
Net changes related to available-for-sale securities:
Unrealized holding gains (losses) arising during the period	$	(989	)	$	(244	)	$	(745	)	$	1,207		$	461		$	746
Less: Reclassification adjustment for (gains) losses realized in net income		10			2			8			(803	)		(308	)		(495	)
Other comprehensive income (loss)		(979	)		(242	)		(737	)		404			153			251
Reclassification adjustments to retained earnings (1)		—			—			—			—			—			—
Change in accumulated other comprehensive income (loss)	$	(979	)	$	(242	)	$	(737	)	$	404		$	153		$	251

	Nine Months Ended September 30,
	2018									2017
	Pre-tax			Tax			After-tax			Pre-tax			Tax			After-tax
Net changes related to available-for-sale securities:
Unrealized holding gains (losses) arising during the period	$	(11,511	)	$	(2,751	)	$	(8,760	)	$	9,248		$	3,535		$	5,713
Less: Reclassification adjustment for (gains) losses realized in net income		2,807			683			2,124			(2,450	)		(938	)		(1,512	)
Other comprehensive income (loss)		(8,704	)		(2,068	)		(6,636	)		6,798			2,597			4,201
Reclassification adjustments to retained earnings (1)		5,830			2,811			3,019			—			—			—
Change in accumulated other comprehensive income (loss)	$	(2,874	)	$	743		$	(3,617	)	$	6,798		$	2,597		$	4,201

(1)

This amount represents reclassifications to retained earnings associated with the disproportional income tax effects of the Tax Act on items within AOCI and unrealized losses in AOCI relating to Available for Sale equity security investments. See “—Note 2 (Significant Accounting Policies — Recently Adopted Accounting Pronouncements)” for more information.

The following table provides the reclassifications adjustment for gains (losses) out of accumulated other comprehensive income for the periods presented (in thousands):


	Amount Reclassified from Accumulated
	Other Comprehensive Income (Loss)
Details about Accumulated Other Comprehensive	Three Months Ended September 30,						Nine Months Ended September 30,						Affected Line Item in the Statement
Income (Loss) Components	2018			2017			2018			2017			Where Net Income is Presented
Unrealized gains (losses) on available-for-sale debt securities
	$	(10	)	$	803		$	(2,807	)	$	2,450		Net realized gains (losses) sale of securities
		2			(308	)		683			(938	)	Income taxes
Total reclassification for the period	$	(8	)	$	495		$	(2,124	)	$	1,512		Net of tax

12. Commitments and Contingencies

Obligations under Multi-Year Reinsurance Contracts

We purchase reinsurance coverage to protect our capital and to limit our losses when major events occur. Our reinsurance commitments run from June 1 of the current year to May 31 of the following year. Certain of our reinsurance agreements are for periods longer than one year. Amounts payable for coverage during the current June 1^st to May 31^st contract period are recorded as “Reinsurance Payable” in the financial statements. Multi-year contract commitments for future years will be recorded at the commencement of the coverage period. Amounts payable for future reinsurance contract years that the Company is obligated to pay are: (1) $82.3 million in 2019 and (2) $33.9 million in 2020.

Litigation

Lawsuits are filed against the Company from time to time. Many of these lawsuits involve claims under policies that we underwrite and reserve for as an insurer. We are also involved in various other legal proceedings and litigation unrelated to claims under our policies that arise in the ordinary course of business operations. Management believes that any liabilities that may arise as a result of these legal matters will not have a material adverse effect on our financial condition or results of operations. The Company contests liability and/or the amount of damages as appropriate in each pending matter.

In accordance with applicable accounting guidance, the Company establishes an accrued liability for legal matters when those matters present loss contingencies that are both probable and estimable.

Legal proceedings are subject to many uncertain factors that generally cannot be predicted with assurance, and the Company may be exposed to losses in excess of any amounts accrued. The Company currently estimates that the reasonably possible losses for legal proceedings, whether in excess of a related accrued liability or where there is no accrued liability, and for which the Company is able to estimate a possible loss, are immaterial. This represents management’s estimate of possible loss with respect to these matters and is based on currently available information. These estimates of possible loss do not represent our maximum loss exposure, and actual results may vary significantly from current estimates.

13. Fair Value Measurements

U.S. GAAP defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. U.S. GAAP describes three approaches to measuring the fair value of assets and liabilities: the market approach, the income approach and the cost approach. Each approach includes multiple valuation techniques. U.S. GAAP does not prescribe which valuation technique should be used when measuring fair value, but does establish a fair value hierarchy that prioritizes the inputs used in applying the various techniques. Inputs broadly refer to the assumptions that market participants use to make pricing decisions, including assumptions about risk. Level 1 inputs are given the highest priority in the hierarchy while Level 3 inputs are given the lowest priority. Assets and liabilities carried at fair value are classified in one of the following three categories based on the nature of the inputs to the valuation technique used:

•

Level 1 — Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities in active markets as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.

•	Level 2 — Observable market-based inputs or unobservable inputs that are corroborated by market data.

•	Level 3 — Unobservable inputs that are not corroborated by market data. These inputs reflect management’s best estimate of fair value using its own assumptions about the assumptions a market participant would use in pricing the asset or liability.

Summary of significant valuation techniques for assets measured at fair value on a recurring basis

Level 1

Common stock: Comprise actively traded, exchange-listed U.S. and international equity securities. Valuation is based on unadjusted quoted prices for identical assets in active markets that the Company can access.

Mutual funds: Comprise actively traded funds. Valuation is based on daily quoted net asset values for identical assets in active markets that the Company can access.

Level 2

U.S. government obligations and agencies: Comprise U.S. Treasury Bills or Notes or U.S. Treasury Inflation Protected Securities. The primary inputs to the valuation include quoted prices for identical assets in inactive markets or similar assets in active or inactive markets, contractual cash flows, benchmark yields and credit spreads.

Corporate bonds: Comprise investment-grade fixed income securities. The primary inputs to the valuation include quoted prices for identical assets in inactive markets or similar assets in active or inactive markets, contractual cash flows, benchmark yields and credit spreads.

Mortgage-backed and asset-backed securities: Comprise securities that are collateralized by mortgage obligations and other assets. The primary inputs to the valuation include quoted prices for identical assets in inactive markets or similar assets in active or inactive markets, contractual cash flows, benchmark yields, collateral performance and credit spreads.

Municipal bonds: Comprise fixed income securities issued by a state, municipality or county. The primary inputs to the valuation include quoted prices for identical assets in inactive markets or similar assets in active or inactive markets, contractual cash flows, benchmark yields and credit spreads.

Redeemable preferred stock: Comprise preferred stock securities that are redeemable. The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active.

Short-term investments: Comprise investment securities subject to re-measurement with original maturities within one year but more than three months. The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active.

As required by U.S. GAAP, assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the placement of the asset or liability within the fair value hierarchy levels.

The following tables set forth by level within the fair value hierarchy the Company’s assets measured at fair value on a recurring basis as of the dates presented (in thousands):

	Fair Value Measurements
	September 30, 2018
	Level 1		Level 2		Level 3		Total
Available-For-Sale Debt Securities:
Fixed Maturities:
U.S. government obligations and agencies	$	—	$	65,998	$	—	$	65,998
Corporate bonds		—		409,967		—		409,967
Mortgage-backed and asset-backed securities		—		269,228		—		269,228
Municipal bonds		—		3,278		—		3,278
Redeemable preferred stock		—		11,937		—		11,937
Equity Securities:
Common stock		20,575		—		—		20,575
Mutual funds		48,533		—		—		48,533
Total assets accounted for at fair value	$	69,108	$	760,408	$	—	$	829,516

	Fair Value Measurements
	December 31, 2017
	Level 1		Level 2		Level 3		Total
Available-For-Sale Debt Securities:
Fixed Maturities:
U.S. government obligations and agencies	$	—	$	59,604	$	—	$	59,604
Corporate bonds		—		227,504		—		227,504
Mortgage-backed and asset-backed securities		—		219,452		—		219,452
Municipal bonds		—		120,295		—		120,295
Redeemable preferred stock		—		12,479		—		12,479
Equity Securities:
Common stock		18,811		—		—		18,811
Mutual funds		43,404		—		—		43,404
Available-for-sale short-term investments		—		10,000		—		10,000
Total assets accounted for at fair value	$	62,215	$	649,334	$	—	$	711,549

The Company utilizes third-party independent pricing services that provide a price quote for each available-for-sale debt security, equity security and available-for-sale short-term investment. Management reviews the methodology used by the pricing services. If management believes that the price used by the pricing service does not reflect an orderly transaction between participants, management will use an alternative valuation methodology. There were no adjustments made by the Company to the prices obtained from the independent pricing source for any available-for-sale debt securities, equity securities or available-for-sale short-term investments included in the tables above.

The following table summarizes the carrying value and estimated fair values of the Company’s financial instruments not carried at fair value as of the dates presented (in thousands):

	September 30, 2018				December 31, 2017
			(Level 3)				(Level 3)
			Estimated Fair				Estimated Fair
	Carrying Value		Value		Carrying Value		Value
Liabilities (debt):
Surplus note	$	11,765	$	10,501	$	12,868	$	11,630

Level 3

Long-term debt: The fair value of the surplus note was determined by management from the expected cash flows discounted using the interest rate quoted by the holder. The SBA is the holder of the surplus note and the quoted interest rate is below prevailing rates quoted by private lending institutions. However, as the Company’s use of funds from the surplus note is limited by the terms of the agreement, the Company has determined the interest rate quoted by the SBA to be appropriate for purposes of establishing the fair value of the note.

14. Subsequent Events

The Company performed an evaluation of subsequent events through the date the Financial Statements were issued and determined there were no recognized or unrecognized subsequent events that would require an adjustment or additional disclosure in the Financial Statements as of September 30, 2018.

Hurricane Michael initially made landfall as a strong Category 4 hurricane along the Florida Panhandle on October 10, 2018, primarily impacting Florida, Georgia, and several other Southeastern U.S. states. The storm is expected to produce gross losses and loss adjustment expenses of $300-350 million for the Company, resulting in anticipated total net pre-tax losses and loss adjustment expenses of $35 million. However, to the extent the Company experiences any additional reinsurance recoveries from its supplemental Non-Florida reinsurance program, those recoveries could serve to partially reduce this $35 million retention.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Unless the context otherwise requires, all references to “we,” “us,” “our,” and “Company” refer to Universal Insurance Holdings, Inc. and its wholly-owned subsidiaries. You should read the following discussion together with our unaudited condensed consolidated financial statements (“Financial Statements”) and the related notes thereto included in Part I, Item 1 “Financial Statements”, and our audited condensed consolidated financial statements and the related notes thereto included in Part II, Item 8 in our Annual Report on Form 10-K for the year ended December 31, 2017. Operating results for any one quarter are not necessarily indicative of results to be expected for any other quarter or for the year.

Forward-Looking Statements

In addition to historical information, the following discussion may contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act. Forward-looking statements are based on various factors and assumptions that include known and unknown risks and uncertainties, some of which are beyond our control and cannot be predicted or quantified. Certain statements made in this report reflect management’s expectations regarding future events, and the words “expect,” “estimate,” “anticipate,” “believe,” “intend,” “project,” “plan” and similar expressions and variations thereof, speak only as of the date the statement was made and are intended to identify forward-looking statements. Such statements may include, but not be limited to, projections of revenues, income or loss, expenses, plans, as well as assumptions relating to the foregoing. Future results could differ materially from those in the following discussion and those described in forward-looking statements as a result of the risks set forth below which are a summary of those set forth in our Annual Report on Form 10-K for the year ended December 31, 2017.

Risks Relating to our Business

•

As a property and casualty insurer, we may face significant losses from catastrophes and severe weather events,

•

Actual claims incurred may exceed current reserves established for claims and may adversely affect our operating results and financial condition,

•

Our success depends in part on our ability to accurately and adequately price the risks we underwrite,

•

Unanticipated increases in the severity or frequency of claims may adversely affect our profitability and financial condition,

•

The failure of the risk mitigation strategies we utilize could have a material adverse effect on our financial condition or results of operations,

•

Because we rely on independent insurance agents, the loss of these independent agent relationships and the business they control or our ability to attract new independent agents could have an adverse impact on our business,

•

The inherent uncertainty of models and our reliance on such models as a tool to evaluate risk may have an adverse effect on our financial results,

•

Reinsurance may be unavailable in the future at current levels and prices, which may limit our ability to write new business or to adequately mitigate our exposure to loss,

•

Reinsurance subjects us to the credit risk of our reinsurers, which could have a material adverse effect on our operating results and financial condition,

•

Our financial condition and operating results and the financial condition and operating results of our Insurance Entities (as defined below) may be adversely affected by the cyclical nature of the property and casualty 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,

•

Changing climate conditions may adversely affect our financial condition, profitability or cash flows,

•

We have entered and, in the future, may enter new markets, but there can be no assurance that our diversification and growth strategy will be effective,

•

Loss of key executives or our inability to otherwise attract and retain talent could affect our operations,

•

We could be adversely affected if our controls designed to ensure compliance with guidelines, policies and legal regulatory standards are not effective,

•

The failure of our claims department to effectively manage claims could adversely affect our insurance business, financial results and capital requirements,

•

Litigation or regulatory actions could have a material adverse impact on us,

•

Our future results are dependent in part on our ability to successfully operate in a highly competitive insurance industry,

•

A downgrade in our Financial Stability Rating^® may have an adverse effect on our competitive position, the marketability of our product offerings, and our liquidity, operating results and financial condition,

•

Breaches of our information systems or denial of service on our website could have an adverse impact on our business and reputation,

•

We may not be able to effectively implement or adapt to changes in technology, and

•

Lack of effectiveness of exclusions and other loss limitation methods in the insurance policies we write could have a material adverse effect on our financial condition or our results of operations.

Risks Relating to Investments

•

We are subject to market risk, which could adversely affect investment income, and

•

Our overall financial performance is dependent in part on the returns on our investment portfolio, which could have a material adverse effect on our financial condition or results of operations or cause such results to be volatile.

Risks Relating to the Insurance Industry

•

We are subject to extensive regulation and potential further restrictive regulation may increase our operating costs and limit our growth and profitability,

•

UVE is a holding company and, consequently, its cash flow is dependent on dividends and other permissible payments from its subsidiaries,

•

Regulations limiting rate changes and requiring us to participate in loss sharing or assessments may decrease our profitability,

•

The amount of statutory capital and surplus that each of the Insurance Entities has and the amount of statutory capital and surplus it must hold can vary and are sensitive to a number of factors outside of our control, including market conditions and the regulatory environment and rules, and

•

Our Insurance Entities are subject to examination and actions by state insurance departments.

Risks Relating to Debt Obligations

•

Adverse capital and credit market conditions may significantly affect our ability to meet liquidity needs or our ability to obtain credit on acceptable terms.

Risks Relating to Ownership of Our Common Stock

•

The price of our common stock may fluctuate significantly, and you could lose all or part of your investment,

•

Any issuance of preferred stock could make it difficult for another company to acquire us or could otherwise adversely affect holders of our common stock, which could depress the price of our common stock, and

•

Future sales of our common stock may depress our stock price.

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand the results of operations and financial condition of Universal Insurance Holdings, Inc. and its wholly-owned consolidated subsidiaries. MD&A is provided as a supplement to, and should be read in conjunction with, our financial statements and accompanying notes in Item 1 above.

Overview

Universal Insurance Holdings, Inc. (“UVE,” and together with its wholly-owned subsidiaries, “we,” “our,” “us,” or “the Company”) is the largest personal residential insurance company in Florida as measured by direct premiums written in-force, with approximately 10.5% market share as of June 30, 2018, according to the most recent data reported by the Florida Office of Insurance Regulation (“FLOIR”). We perform substantially all aspects of insurance underwriting, policy issuance, general administration and claims processing and settlement internally through our vertically integrated operations. Our wholly-owned licensed insurance subsidiaries, Universal Property & Casualty Insurance Company (“UPCIC”) and American Platinum Property and Casualty Insurance Company (“APPCIC” and together with UPCIC, the “Insurance Entities”), currently write personal residential insurance policies, predominantly in Florida with $789.5 million in direct premiums written for the nine months ended September 30, 2018. UPCIC also writes residential homeowners insurance policies in Alabama, Delaware, Georgia, Hawaii, Indiana, Maryland, Massachusetts, Michigan, Minnesota, New Hampshire, New Jersey, New York, North Carolina, Pennsylvania, South Carolina, and Virginia with $132.4 million in direct premiums written for the nine months ended September 30, 2018. UPCIC is also licensed to issue policies in Illinois, Iowa, and West Virginia. APPCIC also is currently writing Fire, Commercial Multi-Peril, and Other Liability policies in Florida. 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 and soft markets.

We generate revenues primarily from the collection of premiums. The nature of our business tends to be seasonal, reflecting consumer behaviors in connection with the Florida residential real estate market and the hurricane season. The amount of direct premiums written tends to increase just prior to the second quarter of our fiscal year and tends to decrease approaching the fourth quarter. Other sources of revenue include: commissions paid by our reinsurers to our reinsurance intermediary subsidiary, Blue Atlantic Reinsurance Corporation (“BARC”), on reinsurance it places for the Insurance Entities; policy fees collected from policyholders by our managing general agent subsidiary, Universal Risk Advisors and financing fees charged to policyholders who choose to defer premium payments. In addition, our subsidiary, Universal Adjusting Corporation (“UAC”) receives fees from the Insurance Entities for claims-handling services. 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 expenses (“LAE”). We also generate income by investing our assets.

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 9,300 licensed independent agents. Our goals are to profitably grow our business, invest in our vertically integrated structure, expand our independent agent network, and return value to shareholders. Some of our key strategies include increasing our policies in force in Florida through continued profitable and organic growth; expanding into other states to diversify our revenue and risk; optimizing our reinsurance program; and continuing to provide high quality service to our policyholders and reinsurers through our vertically integrated structure. We believe each of these strategies has contributed to an increase in earnings and earnings per share as well as an improvement in our overall financial condition. See “—Results of Operations” below for a discussion of our results for the three and nine months ended September 30, 2018 compared to the same periods in 2017.

Our overall organic growth strategy emphasizes taking prudent measures to increase our footprint, grow our policy count and improve the quality of our business rather than merely increasing our market share. Our focus on long-term capital strength and organic growth allows us to be selective in the risks we accept. Our goal is to write risks that are priced adequately and meet our underwriting standards. We believe that our strategy of organically expanding our premium growth through our independent agent distribution network and through our unique direct-to-consumer online platform called Universal Direct^SM (which enables homeowners to directly purchase, pay for and bind homeowners policies online without the need to directly interface with any intermediaries), streamlining claims management and balancing appropriate pricing with disciplined underwriting standards will maximize our profitable growth. We also intend to continue our expansion outside of Florida in markets that allow us to write profitable business and to diversify our revenue and risk. Upon entering new markets, we leverage our existing independent agent network to generate new local relationships and business, and we take the time to learn about each new market and any of its unique risks in order to carefully develop our own policy forms, rates and informed underwriting standards. Our expansion efforts differ from many of our competitors that have grown in recent years primarily through assumption of policies from Citizens Property Insurance Corporation, Florida’s statutory residual property insurance market, and through mergers and acquisitions.

As a result of our organic growth strategy and initiatives, we have seen increases in policy count and insured value in all states for over three years. The percentage of our total insured value for states outside of Florida increased from 24.9% as of September 30, 2017 to 30.4% as of September 30, 2018. The following table provides direct premiums written for Florida and other states for the three and nine months ended September 30, 2018 and 2017 (dollars in thousands):

	For the Three Months Ended
	September 30, 2018					September 30, 2017					Growth year over year
State	Direct Premiums Written		%			Direct Premiums Written		%			$		%
Florida	$	260,024		84.1	%	$	238,309		86.7	%	$	21,715		9.1	%
Other states		49,152		15.9	%		36,435		13.3	%		12,717		34.9	%
Total	$	309,176		100.0	%	$	274,744		100.0	%	$	34,432		12.5	%

	For the Nine Months Ended
	September 30, 2018					September 30, 2017					Growth year over year
State	Direct Premiums Written		%			Direct Premiums Written		%			$		%
Florida	$	789,539		85.6	%	$	718,177		88.0	%	$	71,362		9.9	%
Other states		132,402		14.4	%		98,173		12.0	%		34,229		34.9	%
Total	$	921,941		100.0	%	$	816,350		100.0	%	$	105,591		12.9	%

Third-Quarter 2018 Highlights (comparisons are to the third quarter 2017 unless otherwise specified)

•

Direct premiums written overall grew by $34.4 million, or 12.5%, to $309.2 million compared to growth of $32.9 million and $274.7 million of written premium.

•

In Florida, direct premiums written grew by $21.7 million, or 9.1%, and in our Other States, direct premiums written grew by $12.7 million, or 34.9%.

•

Net earned premiums grew by $14.4 million, or 8.3%, to $188.9 million.

•

Total revenues increased by $15.9 million, or 8.4%, to $206.2 million.

•

Loss ratio was 45.5% as compared to 66.7%

•

Diluted earnings per share increased by $0.76 to $1.04.

•

Less financial impact from storms’ activity this quarter when compared to Hurricane Irma, which occurred in the third quarter in 2017.

•

Claims settlement fees reimbursed to the Insurance Entities by reinsurers related to the Insurance Entities’ costs of handling Hurricane Irma claims resulted in a $16.7 million net benefit, thereby reducing losses and LAE expense for the quarter.

•

Primarily as a result of the Tax Cuts and Jobs Act of 2017 (“Tax Act”), our effective tax rate decreased from 40.0% in 2017 to 26.9% in 2018.

•

Paid dividends of $0.16 per share in the third quarter in 2018, which is up $0.02, or 14.3%, from the $0.14 per share quarterly dividend that the Company previously paid in the first and second quarters in 2018.

UPCIC’s 2018-2019 Reinsurance Program

Third-Party Reinsurance

Our annual reinsurance program, which is segmented into layers of coverage, as is industry practice, protects us against excess property catastrophe losses. Our 2018-2019 reinsurance program includes the mandatory coverage required by law to be placed with the Florida Hurricane Catastrophe Fund (“FHCF”), in which we have elected to participate at 90%, the highest level, and also includes private reinsurance below, alongside and above the FHCF layer. In placing our 2018-2019 reinsurance program, we obtained multiple years of coverage for an additional portion of the program. We believe this multi-year arrangement will allow us to capitalize on favorable pricing and contract terms and conditions and allow us to mitigate uncertainty with respect to the price of future reinsurance coverage, one of our largest costs.

The total cost of UPCIC’s private catastrophe reinsurance program for all states as described below, effective June 1, 2018 through May 31, 2019, is $175.30 million. In addition, UPCIC has purchased reinstatement premium protection as described below, the cost of which is $14.97 million. The largest private participants in UPCIC’s reinsurance program include leading reinsurance companies and providers such as Nephila Capital, Everest Re, RenaissanceRe, Chubb Tempest Re and Lloyd’s of London syndicates.

UPCIC’s Retention

UPCIC has a net retention of $35 million per catastrophe event for losses incurred, in all states, up to a first event loss of $3.13 billion. UPCIC also purchases a separate underlying catastrophe program to further reduce its retention for all losses occurring in any state other than Florida (the “Other States Reinsurance Program”). UPCIC retains only $5 million under its Other States Reinsurance Program in the first event, $3 million in the second event and only $1 million under its Other States Reinsurance Program for the third through fifth events. These retention amounts are gross of any potential tax benefit we would receive in paying such losses.

First Layer

Immediately above UPCIC’s net retention, we have reinsurance coverage from third-party reinsurers for up to four separate catastrophic events, for all states. Specifically, we have purchased reinsurance coverage for the first and third catastrophic events, and each such coverage allows for one reinstatement upon the payment of reinstatement premiums, which would cover the second and fourth catastrophic events. This coverage has been obtained from four contracts as follows:

•

59% of $76 million in excess of $35 million provides coverage for the 2018-2019 period;

•

20% of $55 million in excess of $35 million provides coverage on a multi-year basis through May 31, 2021;

•

21% of $55 million in excess of $35 million provides coverage for the 2018-2019 period; and

•

100% of $76 million in excess of $35 million and in excess of $152 million otherwise recoverable (from the first and second events) provides the third and fourth event coverage for the 2018-2019 period.

For the first three contracts above, to the extent that all of our coverage or a portion thereof is exhausted in a catastrophic event and reinstatement premium is due, we have purchased reinstatement premium protection to pay the required premium necessary for the reinstatement of these coverages. All of these contracts extend coverage to all states.

Second Layer

Above the first layers, for losses exceeding $90 million and $111 million, we have purchased a second layer of coverage for losses up to $445 million – in other words, for the next $355 or $334 million of losses. This coverage has been obtained from three contracts as follows:

•

58% of $355 million in excess of $90 million provides coverage on a multi-year basis through May 31, 2020;

•

19.5% of $334 million in excess of $111 million provides coverage on a multi-year basis through May 31, 2021; and

•

22.5% of $334 million in excess of $111 million provides coverage for the 2018-2019 period.

In these layers, to the extent that all of our coverage or a portion thereof is exhausted in a catastrophic event and reinstatement premium is due, we have purchased reinstatement premium protection to pay the required premium necessary for the reinstatement of these coverages. All of these contracts extend coverage to all states.

Third Layer

Above the first and second layers, we have purchased a third layer of coverage for losses up to $529 million – in other words, for the next $84 million of losses. This coverage was obtained from two contracts as follows:

•

65% of $84 million in excess of $445 million provides coverage on a multi-year basis through May 31, 2021; and

•

35% of $84 million in excess of $445 million provides coverage for the 2018-2019 period.

In these layers, to the extent that all of our coverage or a portion thereof is exhausted in a catastrophic event and reinstatement premium is due, we have purchased reinstatement premium protection to pay the required premium necessary for the reinstatement of these coverages. Both of these contracts extend coverage to all states.

Fourth Layer

Above the first, second and third layers, we have purchased a fourth layer of coverage for losses up to $635 million – in other words, for the next $106 million of losses. This coverage was obtained from two contracts as follows:

•

65% of $106 million in excess of $529 million provides coverage for the 2018-2019 period; and

•

35% of $106 million in excess of $529 million provides coverage for the 2018-2019 period.

In these layers, to the extent that all of our coverage or a portion thereof is exhausted in a catastrophic event and reinstatement premium is due, we have purchased reinstatement premium protection to pay the required premium necessary for the reinstatement of these coverages. Both of these contracts extend coverage to all states.

Fifth Layer

Above the first, second, third and fourth layers, we have purchased a fifth layer of coverage for losses up to $680 million – in other words, for the next $45 million of losses. This coverage was obtained from two contracts as follows:

•

65% of $45 million in excess of $635 million provides coverage on a multi-year basis through May 31, 2021; and

•

35% of $45 million in excess of $635 million provides coverage for the 2018-2019 period.

In these layers, to the extent that all of our coverage or a portion thereof is exhausted in a catastrophic event and reinstatement premium is due, we have purchased reinstatement premium protection to pay the required premium necessary for the reinstatement of these coverages. Both of these contracts extend coverage to all states.

Sixth and Seventh Layers

In the sixth and seventh layers, we have purchased reinsurance for $218 million of coverage in excess of $680 million in losses incurred by us (net of the FHCF layer), and $140 million of coverage in excess of $898 million (net of the FHCF layer), respectively, for a total of $1.0 billion of coverage (net of the FHCF layer) by third-party reinsurers. In these layers, to the extent that all of our coverage or a portion thereof is exhausted in a catastrophic event and reinstatement premium is due, we have purchased reinstatement premium protection to pay the required premium necessary for the reinstatement of these coverages. Both of these contracts extend coverage to all states.

UPCIC structures its reinsurance coverage into layers and utilizes a cascading feature such that the second, third, fourth, fifth, sixth and seventh reinsurance layers all attach at $111 million. Any layers above the $111 million attachment point are excess of loss over the immediately preceding layer. If the aggregate limit of the preceding layer is exhausted, the next layer cascades down in its place for future events. This means that, unless losses exhaust the top layer of our coverage, we are exposed to only $35 million in losses, pre-tax, per catastrophe for each of the first four events. In addition to tax benefits that could reduce our ultimate loss, we anticipate that certain fees paid to our subsidiary service providers by our Insurance Entities and, indirectly, our reinsurers, would also increase during an active hurricane season.

Other States Reinsurance Program

The total cost of UPCIC’s private catastrophe reinsurance program for other states as described below, effective June 1, 2018 through May 31, 2019, is $9.74 million. In addition, UPCIC has purchased reinstatement premium protection as described below, the cost of which is $2.25 million.

Effective June 1, 2018 through June 1, 2019, under an excess catastrophe contract specifically covering risks located outside the state of Florida and intended to further reduce UPCIC’s $35 million net retention, as noted above, UPCIC has obtained catastrophe coverage of $30 million in excess of $5 million covering certain loss occurrences, including hurricanes, in states outside of Florida. This catastrophe coverage has a second full limit available with additional premium calculated pro rata as to amount and 100% as to time, as applicable. For this catastrophe coverage, which is placed in three layers, to the extent that all of our coverage or a portion thereof is exhausted in a catastrophic event and reinstatement premium is due, we have purchased reinstatement premium protection to pay the required premium necessary for the reinstatement of this coverage. All catastrophe layers are placed with a cascading feature so that all capacity could be made available in excess of $5 million under certain loss scenarios. Further, UPCIC purchased subsequent catastrophe event excess of loss reinsurance specifically covering risks outside of Florida to cover certain levels of loss through five catastrophe events including hurricanes. Specifically, UPCIC obtained catastrophe coverage that covers 100% of $4,000,000 excess of $1,000,000 in excess of $6,000,000 otherwise recoverable. This coverage has two and a half free reinstatements and a total of $14,000,000 of coverage available to UPCIC.

In certain circumstances involving a first catastrophic event impacting both Florida and other states, UPCIC’s retention could result in pre-tax net liability as low as $5,000,000 – the $35 million net retention under the all states reinsurance program could be offset by as much as $30 million in coverage under the Other States Reinsurance Program – or 1.5% of UPCIC’s statutory policyholders’ surplus as of September 30, 2018.

FHCF

UPCIC’s third-party reinsurance program supplements the FHCF coverage we are required to purchase every year. The limit and retention of the FHCF coverage we receive each year is subject to upward or downward adjustment based on, among other things, submitted exposures to the FHCF by all participants. As of September 30, 2018, we estimate our FHCF coverage includes a maximum provisional limit of 90% of $2.33 billion, or $2.1 billion, in excess of $727 million. The estimated premium that UPCIC plans to cede to the FHCF for the 2018 hurricane season is $136.8 million.

Coverage purchased from third-party reinsurers, as described above, adjusts to provide coverage for certain losses not otherwise covered by the FHCF. The FHCF coverage cannot be reinstated once exhausted, but it does provide coverage for multiple events. The FHCF coverage extends only to losses to our Florida portfolio due to a land falling hurricane.

The third-party reinsurance we purchase for UPCIC is therefore net of FHCF recovery. When our FHCF and third-party reinsurance coverages are taken together, UPCIC has reinsurance coverage of up to $3.13 billion for the first event, as illustrated by the graphic below. Should a catastrophic event occur, we would retain up to $35 million pre-tax for each catastrophic event, and would also be responsible for any additional losses that exceed our top layer of coverage.

All States 1st Event

Non-Florida 1st Event

APPCIC’s 2018-2019 Reinsurance Program

Third-Party Reinsurance

The total cost of APPCIC’s private catastrophe and multiple line excess reinsurance program, effective June 1, 2018 through May 31, 2019, is $2.27 million. In addition, APPCIC has purchased reinstatement premium protection as described below, the cost of which is $103,950. The largest private participants in APPCIC’s reinsurance program include leading reinsurance companies such as Everest Re, Chubb Tempest Re, Hiscox, Hannover Ruck, and Lloyd’s of London syndicates.

APPCIC’s Retention

APPCIC has a net retention of $2 million for all losses per catastrophe event for losses incurred up to a first event loss of $36.65 million. This retention amount is gross of any potential tax benefit we would receive in paying such losses.

First Layer

Immediately above APPCIC’s net retention we have $4.2 million of reinsurance coverage from third-party reinsurers. Specifically, we have purchased reinsurance coverage for the first event, and such coverage allows for one reinstatement upon the payment of reinstatement premiums, which would cover the second and potentially more catastrophic events. We have purchased reinstatement premium protection to pay the required premium necessary for the initial reinstatement of this coverage for a second catastrophic event.

Second, Third and Fourth Layers

In the second, third and fourth layers, we have purchased reinsurance for $2.0 million of coverage in excess of $6.2 million in losses incurred by us (net of the FHCF layer), $5 million of coverage in excess of $8.2 million in losses incurred by us (net of the FHCF layer), and $5 million of coverage in excess of $13.2 million in losses incurred by us (net of the FHCF layer), respectively.

APPCIC structures its reinsurance coverage into layers and utilizes a cascading feature such that the second, third and fourth reinsurance layers all attach at $2 million. Any layers above the $2 million attachment point are excess of loss over the immediately preceding layer. If the aggregate limit of the preceding layer is exhausted, the next layer cascades down in its place for future events. This means that, unless losses exhaust the top layer of our coverage, we are only exposed to $2 million in losses, pre-tax, per catastrophe for each of the first two events. In addition to tax benefits that could reduce our ultimate loss, we anticipate that certain fees paid to our subsidiary service providers by our Insurance Entities and, indirectly, our reinsurers would also increase during an active hurricane season.

FHCF

APPCIC’s third-party reinsurance program is used to supplement the FHCF reinsurance we are required to purchase every year. The limit and retention of the FHCF coverage we receive each year is subject to upward or downward adjustment based on, among other things, submitted exposures to the FHCF by all participants. As of September 30, 2018, we estimate our FHCF coverage includes a maximum provisional limit of 90% of $20.5 million, or $18.5 million, in excess of $6.4 million. The estimated premium that APPCIC plans to cede to the FHCF for the 2018 hurricane season is $1.25 million. Factoring in our estimated coverage under the FHCF, we purchase coverage alongside our FHCF coverage from third-party reinsurers as described above, which adjusts to provide coverage for certain losses not otherwise covered by the FHCF. The FHCF coverage cannot be reinstated once exhausted, but it does provide coverage for multiple events. The FHCF coverage extends only to losses to our portfolio impacted by a land falling hurricane.

The third-party reinsurance we purchase for APPCIC is therefore net of FHCF recovery. When our FHCF and third-party reinsurance coverages are taken together, APPCIC has reinsurance coverage of up to $36.65 million, as illustrated by the graphic below. Should a catastrophic event occur, we would retain $2 million pre-tax for each catastrophic event, and would also be responsible for any additional losses that exceed our top layer of coverage.

APPCIC 1st Event

* Layer cascades to $2M

Multiple Line Excess of Loss

APPCIC also purchases extensive multiple line excess per risk reinsurance with various reinsurers due to the high valued risks it insures in both the personal residential and commercial multiple peril lines of business. Under this multiple line excess per risk contract, APPCIC has coverage of $8.5 million in excess of $500 thousand ultimate net loss for each risk and each property loss, and $1 million in excess of $0.3 million for each casualty loss. A $19.5 million aggregate limit applies to the term of the contract for property related losses and a $2.0 million aggregate limit applies to the term of the contract for casualty-related losses. This contract also contains a profit sharing feature available to APPCIC if the contract meets specific performance measures.

Results of Operations — Three Months Ended September 30, 2018 Compared to Three Months Ended September 30, 2017

Net income was $37.4 million for the three months ended September 30, 2018, an increase of $27.4 million, or 275.2%, compared to $10.0 million for the three months ended September 30, 2017. This quarter is comparatively better due to continued growth and underwriting profits, a lesser impact from catastrophic storms, and a reduced effective tax rate. Our results for the three months ended September 30, 2017 include the impact of Hurricane Irma. Diluted earnings per common share increased by $0.76 to $1.04 for the three months ended September 30, 2018, compared to $0.28 per share for the three months ended September 30, 2017, reflecting the increase in net income offset by a slight increase in our weighted average diluted common shares outstanding.

A detailed discussion of our results of operations follows the table below (in thousands, except per share data).

	Three Months Ended
	September 30,						Change
	2018			2017			$			%
PREMIUMS EARNED AND OTHER REVENUES
Direct premiums written	$	309,176		$	274,744		$	34,432			12.5	%
Change in unearned premium		(20,772	)		(19,935	)		(837	)		4.2	%
Direct premium earned		288,404			254,809			33,595			13.2	%
Ceded premium earned		(99,466	)		(80,292	)		(19,174	)		23.9	%
Premiums earned, net		188,938			174,517			14,421			8.3	%
Net investment income (expense)		6,642			3,085			3,557			115.3	%
Net realized gains (losses) on sale of securities		403			803			(400	)	NM
Net change in unrealized gains (losses) of equity securities		(2,473	)		—			(2,473	)	NM
Commission revenue		5,658			5,304			354			6.7	%
Policy fees		5,204			4,861			343			7.1	%
Other revenue		1,783			1,673			110			6.6	%
Total premiums earned and other revenues		206,155			190,243			15,912			8.4	%
OPERATING COSTS AND EXPENSES
Losses and loss adjustment expenses		85,947			116,375			(30,428	)		-26.1	%
General and administrative expenses		69,041			57,269			11,772			20.6	%
Total operating costs and expenses		154,988			173,644			(18,656	)		-10.7	%
INCOME BEFORE INCOME TAXES		51,167			16,599			34,568			208.3	%
Income tax expense		13,787			6,635			7,152			107.8	%
NET INCOME	$	37,380		$	9,964		$	27,416			275.2	%
Other comprehensive income (loss), net of taxes		(737	)		251			(988	)	NM
COMPREHENSIVE INCOME	$	36,643		$	10,215		$	26,428			258.7	%
DILUTED EARNINGS PER SHARE DATA:
Diluted earnings per common share	$	1.04		$	0.28		$	0.76			271.4	%
Weighted average diluted common shares outstanding		35,919			35,615			304			0.9	%

NM – Not Meaningful

Direct premiums written increased by $34.4 million, or 12.5%, for the quarter ended September 30, 2018, driven by growth within our Florida business of $21.7 million, or 9.1%, as compared to the same period of the prior year, and growth in our Other States business of $12.7 million, or 34.9%, as compared to the same period of the prior year. Florida growth was driven by growth in policy count as well as the impact of an average statewide rate increase of 3.4%, which was approved in early December and effective for new business beginning on December 7, 2017 and for renewal business beginning on January 26, 2018. Geographic expansion efforts in our Other States business continued to add to overall premium levels, and we are now actively writing policies in 16 states other than our home state of Florida.

Direct premium earned increased by $33.6 million, or 13.2%, for the quarter ended September 30, 2018, reflecting the earning of premiums written over the past 12 months and changes in rates and policy count during that time.

Ceded premium earned increased by $19.2 million, or 23.9%, for the quarter ended September 30, 2018. The increase was the result of: (1) a general increase in costs for the Company’s 2018/2019 reinsurance program fueled by growth, compared to the expiring program; (2) additional ceded premium earned of $1.3 million was recorded during the period for the FHCF coverage; and (3) $13.5 million of fully earned reinstatement premiums relating to increases in the Company’s estimated losses associated with Hurricane Irma. Ceded premium earned as a percent of direct premiums earned was 34.5% for the three months ended September 30, 2018 compared to 31.5% for the three months ended September 30, 2017.

Premiums earned, net of ceded premium earned, grew by 8.3%, or $14.4 million, to $188.9 million for the three months ended September 30, 2018, reflecting the increase in direct premium and ceded premium earned discussed above.

Net investment income was $6.6 million for the three months ended September 30, 2018, compared to $3.1 million for the same period in 2017, an increase of $3.5 million, or 115.3%. The increase is the result of several factors including the growth in cash and invested assets compared to the prior year and an increase in yields from a shift in asset mix and rising interest rates. Total invested assets were $853.2 million, with an average fixed income credit rating of A+ during the three months ended September 30, 2018

compared to $651.6 million with an average fixed income credit rating of AA- for the same period in 2017. Cash and cash equivalents were $252.3 million at September 30, 2018 compared to $213.5 million at year end, an increase of 18.2%. Cash and cash equivalents are invested short term until needed to settle payments to reinsurers, loss and LAE payments and operating cash needs.

The third quarter of 2018 included an unrealized loss of $2.5 million, resulting from a decline in value of our equity securities portfolio during the period. We highlight that this line item was added during the quarter ended March 31, 2018 as a result of the adoption of new accounting guidance for equity securities. See “Item 1—Note 2 (Significant Accounting Policies—Recently Adopted Accounting Pronouncements)” for more information. The comparable change in unrealized gains (losses) within our equity portfolio for the prior period in 2017 was $0.1 million of pretax losses, which was not included in net income in the prior period in 2017 but was included in other comprehensive income (loss), which is presented net of taxes.

Commission revenue is comprised principally of brokerage commissions we earn from reinsurers on reinsurance placed for the Insurance Entities. For the three months ended September 30, 2018, commission revenue was $5.7 million, compared to $5.3 million for the three months ended September 30, 2017. The increase in commission revenue of $0.4 million, or 6.7%, for the three months ended September 30, 2018 compared to the three months ended September 30, 2017 was from commissions earned on increased ceded premiums in connection with the Company’s June 1, 2018 renewal of its 2018/2019 Reinsurance Program.

Policy fees for the three months ended September 30, 2018, were $5.2 million compared to $4.9 million for the same period in 2017. The increase of $0.3 million, or 7.1%, was the result of an increase in the number of new and renewal policies written during the three months ended September 30, 2018 compared to the same period in 2017.

Other revenue represents revenue from policy installment fees, premium financing and other miscellaneous income, was $1.8 million for the three months ended September 30, 2018 compared to $1.7 million for the same period in 2017.

Losses and LAE, net of reinsurance, was $85.9 million for the three months ended September 30, 2018, compared to $116.4 million during the same period in 2017 as follows (dollars in thousands):

	Three Months Ended September 30, 2018
	Direct		Loss Ratio			Ceded		Loss Ratio			Net			Loss Ratio
Premiums earned	$	288,404				$	99,466				$	188,938

Loss and loss adjustment expenses:
Weather events*	$	41,858		14.5	%	$	34,358		34.5	%	$	7,500			4.0	%
Prior year adverse/(favorable) reserve development		149,633		51.9	%		149,672		150.5	%		(39	)		0.0	%
All other losses and loss adjustment expenses		78,667		27.3	%		181		0.2	%		78,486			41.5	%
Total losses and loss adjustment expenses	$	270,158		93.7	%	$	184,211		185.2	%	$	85,947			45.5	%

	Three Months Ended September 30, 2017
	Direct			Loss Ratio			Ceded			Loss Ratio			Net		Loss Ratio
Premiums earned	$	254,809					$	80,292					$	174,517

Loss and loss adjustment expenses:
Weather events*	$	452,000			177.4	%	$	415,000			516.8	%	$	37,000		21.2	%
Prior year adverse/(favorable) reserve development		(67	)		0.0	%		(180	)		-0.2	%		113		0.1	%
All other losses and loss adjustment expenses		79,335			31.1	%		73			0.1	%		79,262		45.4	%
Total losses and loss adjustment expenses	$	531,268			208.5	%	$	414,893			516.7	%	$	116,375		66.7	%

*Includes only weather events beyond those expected.

See “Item 1—Note 6 (Liability for Unpaid Losses and Loss Adjustment Expenses)” for change in liability for unpaid losses and LAE.

For the quarter ended September 30, 2018, we experienced $41.9 million of significant weather events, including Hurricane Florence, a $35.0 million direct loss event that was a Category 1 storm making landfall near Wrightsville Beach, North Carolina on September 12, 2018, and to a lesser extent, Tropical Storm Gordon and other weather events occurring in the quarter. The Company’s reinsurance program limited losses from Hurricane Florence to $5.0 million net. This compares to weather losses in 2017 of $452.0 million direct and $37.0 million net related to Hurricane Irma.

During the third quarter of 2018, the Company recorded prior year adverse development to increase its estimate of ultimate losses on Hurricane Irma to $754.0 million, from $603.5 million recorded as of the second quarter in 2018. The prior year adverse development of $149.6 million in direct losses recorded this quarter was principally from Hurricane Irma and resulted in a net retention benefit of $39 thousand after cessions and adjustments to the Company’s reinsurers. The increase in the ultimate loss and LAE related to Hurricane Irma was the result of a continuation of new reported claims and litigation costs associated with the aggressive nature of plaintiff attorneys on claims in Florida.

All other net losses and LAE were $78.5 million for the three months ended September 30, 2018, compared to $79.3 million during the same period in 2017. The Company’s service subsidiaries generated fees during the quarter for settling claims ceded to reinsurers, principally related to Hurricane Irma. During the third quarter ended September 30, 2018, the Company generated a $16.7 million net benefit from claim settlement fees, which was recorded in the condensed consolidated financial statements as a reduction to losses and LAE. This had a favorable effect on our underlying loss and LAE ratio of approximately 5.8 percentage points on a direct basis (or 8.8 percentage points on a net basis). The Company’s underlying loss and LAE ratio reflects an increased level of severe weather activity in recent years, continued geographic expansion into states outside of Florida where non-catastrophe loss ratios are generally higher than in Florida, as well as claims trends in Florida, including the growth in claim costs and challenges faced when policyholders assign their policy benefits to third parties, including the increased litigation costs arising from these claims.

General and administrative expenses were $69.0 million for the three months ended September 30, 2018, compared to $57.3 million during the same period in 2017 as follows (dollars in thousands):

	Three Months Ended
	September 30,										Change
	2018					2017					$		%
	$		Ratio			$		Ratio
Premiums earned, net	$	188,938				$	174,517				$	14,421		8.3	%
General and administrative expenses:
Policy acquisition costs		42,745		22.6	%		35,304		20.2	%		7,441		21.1	%
Other operating costs		26,207		13.9	%		21,885		12.5	%		4,322		19.7	%
Interest expense		89		—			80		—			9		11.3	%
Total general and administrative expenses (1)	$	69,041		36.5	%	$	57,269		32.8	%	$	11,772		20.6	%

(1)

Total general and administrative expense ratio does not include interest expense.

The increase in general and administrative expenses of $11.8 million was primarily the result of modest increases in both policy acquisition costs and other operating costs, which increased by $7.4 million and $4.3 million, respectively, as compared to the same period of the prior year. Our underlying policy acquisition costs continued to be driven by increased premium volume and continued geographic expansion into states that typically have higher commission rates as compared to Florida. Our other operating costs increased by $4.3 million compared to the same period of the prior year, which was primarily driven by an increase of $4.1 million in performance bonuses and stock option grants. The comparative increase in performance bonuses was due to lower pretax income in the third quarter of 2017 due to Hurricane Irma.

The expense ratio was impacted by the costs noted above and the ratio was further increased due to an increase in fully earned reinstatement premiums that reduced premiums earned, net (the denominator in the ratio) this quarter. As a result of the above items, the expense ratio increased to 36.5% for the three months ended September 30, 2018 compared to 32.8% for the same period in 2017.

Income tax expense increased by $7.2 million, or 107.8%, for the three months ended September 30, 2018, when compared with the three months ended September 30, 2017. Our effective tax rate decreased to 26.9% for the three months ended September 30, 2018, as compared to 40.0% for the three months ended September 30, 2017. The increase in income tax expense of $7.2 million is primarily the result of an increase in net income of $27.4 million offset by a reduction in the federal tax rate due to the enactment of the Tax Act. See “Item 1—Note 9 (Income Taxes)” for an explanation of the change in our effective tax rates.

Other comprehensive loss, net of taxes for the three months ended September 30, 2018 was $0.7 million compared to other comprehensive income of $0.3 million for the same period in 2017. See “Item 1—Note 11 (Other Comprehensive Income (Loss))” for additional information about the amounts comprising other comprehensive income and loss for these periods.

Results of Operations — Nine Months Ended September 30, 2018 Compared to Nine Months Ended September 30, 2017

Net income was $123.5 million for the nine months ended September 30, 2018, an increase of $53.0 million, or 75.1%, compared to $70.5 million for the nine months ended September 30, 2017. The nine months ended September 30, 2018 is comparatively better due to continued growth and underwriting profits, a lesser impact from catastrophic storms, and a reduced effective tax rate. Our results for the nine months ended September 30, 2017 include the impact of Hurricane Irma. Diluted earnings per common share increased by $1.49 to $3.45 for the nine months ended September 30, 2018, compared to $1.96 per share for the nine months ended September 30, 2017, reflecting the increase in net income and a slight reduction in our weighted average diluted common shares outstanding. A detailed discussion of our results of operations follows the table below (in thousands, except per share data).

	Nine Months Ended
	September 30,						Change
	2018			2017			$			%
PREMIUMS EARNED AND OTHER REVENUES
Direct premiums written	$	921,941		$	816,350		$	105,591			12.9	%
Change in unearned premium		(97,249	)		(80,543	)		(16,706	)		20.7	%
Direct premium earned		824,692			735,807			88,885			12.1	%
Ceded premium earned		(260,905	)		(230,722	)		(30,183	)		13.1	%
Premiums earned, net		563,787			505,085			58,702			11.6	%
Net investment income (expense)		17,213			9,012			8,201			91.0	%
Net realized gains (losses) on sale of securities		(2,093	)		2,450			(4,543	)	NM
Net change in unrealized gains (losses) of equity securities		(9,103	)		—			(9,103	)	NM
Commission revenue		16,638			14,546			2,092			14.4	%
Policy fees		15,743			14,594			1,149			7.9	%
Other revenue		5,258			4,917			341			6.9	%
Total premiums earned and other revenues		607,443			550,604			56,839			10.3	%
OPERATING COSTS AND EXPENSES
Losses and loss adjustment expenses		251,715			267,129			(15,414	)		-5.8	%
General and administrative expenses		191,614			171,582			20,032			11.7	%
Total operating costs and expenses		443,329			438,711			4,618			1.1	%
INCOME BEFORE INCOME TAXES		164,114			111,893			52,221			46.7	%
Income tax expense		40,595			41,354			(759	)		-1.8	%
NET INCOME	$	123,519		$	70,539		$	52,980			75.1	%
Other comprehensive income (loss), net of taxes		(6,636	)		4,201			(10,837	)	NM
COMPREHENSIVE INCOME	$	116,883		$	74,740		$	42,143			56.4	%
DILUTED EARNINGS PER SHARE DATA:
Diluted earnings per common share	$	3.45		$	1.96		$	1.49			76.0	%
Weighted average diluted common shares outstanding		35,754			35,917			(163	)		-0.5	%

NM – Not Meaningful

Direct premiums written increased by $105.6 million, or 12.9%, for the nine months ended September 30, 2018, driven by growth within our Florida business of $71.4 million, or 9.9%, as compared to the same period of the prior year, and growth in our Other States business of $34.2 million, or 34.9%, as compared to the same period of the prior year. Florida growth was driven by growth in policy count as well as the impact of an average statewide rate increase of 3.4%, which was approved in early December and effective for new business beginning on December 7, 2017 and for renewal business beginning on January 26, 2018. Geographic expansion efforts in our Other States business continued to add to overall premium levels, and we are now actively writing policies in 16 states other than our home state of Florida. We commenced operations and wrote our first policy in New Hampshire in early April 2018.

Direct premium earned increased by $88.9 million, or 12.1%, for the nine months ended September 30, 2018, reflecting the earning of premiums written over the past 12 months and changes in rates and policy count during that time.

Ceded premium earned increased by $30.2 million, or 13.1%, for the nine months ended September 30, 2018. The increase was the result of: (1) a general increase in costs for the Company’s 2018/2019 reinsurance program fueled by growth, compared to the expiring program; (2) additional ceded premium earned of $1.3 million recorded during the period for the FHCF coverage; and (3) $13.5 million of fully earned reinstatement premiums relating to increases in the Company’s estimated losses associated with third quarter 2017 storm, Hurricane Irma. Ceded premium earned as a percent of direct premiums earned was 31.6% for the nine months ended September 30, 2018 compared to 31.4% for the nine months ended September 30, 2017.

Premiums earned, net of ceded premium earned, grew by 11.6%, or $58.7 million, to $563.8 million for the nine months ended September 30, 2018, reflecting the increase in direct premium and ceded premium earned discussed above.

Net investment income was $17.2 million for the nine months ended September 30, 2018, compared to $9.0 million for the same nine months ended in 2017, an increase of $8.2 million, or 91.0%. The increase is the result of several factors including the growth in cash and invested assets compared to the prior year and an increase in yields from a shift in asset mix and rising interest rates. Total invested assets were $853.2 million, with an average fixed income credit rating of A+ during the nine months ended September 30, 2018 compared to $651.6 million with an average fixed credit rating of AA- for the same period in 2017. Cash and cash equivalents were $252.3 million at September 30, 2018 compared to $213.5 million at year end, an increase of 18.2%. Cash and cash equivalents are invested short term until needed to settle payments to reinsurers, loss and LAE payments and operating cash needs.

We sell securities from our investment portfolio from time to time when opportunities arise or when circumstances could result in greater losses or lower yields if held. We sold debt securities available for sale and equity securities during the nine months ended September 30, 2018, generating net realized losses of $2.1 million compared to net realized gains of $2.5 million for the nine months ended September 30, 2017. The investment securities sold during the nine months ended September 30, 2018 were comprised primarily of municipal securities, which were liquidated in light of their diminished after-tax returns following the enactment of the Tax Act.

The first nine months of 2018 included an unrealized loss of $9.1 million, resulting from a decline in value of our equity securities portfolio during that period. We highlight that this line item was added during the nine months ended September 30, 2018, as a result of the adoption of new accounting guidance for equity securities. See “Item 1—Note 2 (Significant Accounting Policies—Recently Adopted Accounting Pronouncements)” for more information. The comparable change in unrealized gains (losses) within our equity portfolio for the prior period in 2017 was $1.1 million of pretax gains, which was not included in net income in the prior period in 2017 but was included in other comprehensive income (loss), which is presented net of taxes.

Commission revenue is comprised principally of brokerage commissions we earn from reinsurers on reinsurance placed for the Insurance Entities. For the nine months ended September 30, 2018, commission revenue was $16.6 million, compared to $14.5 million for the nine months ended September 30, 2017. The increase in commission revenue of $2.1 million, or 14.4%, for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017, was primarily the result of an increase of $1.4 million of commissions received by BARC relating to increased reinstatement premiums. Commission revenue also increased due to increased ceded premiums in connection with the Company’s June 1, 2018 renewal of its 2018/2019 Reinsurance Program.

Policy fees for the nine months ended September 30, 2018, were $15.7 million compared to $14.6 million for the same period in 2017. The increase of $1.1 million, or 7.9%, was the result of an increase in the number of new and renewal policies written during the nine months ended September 30, 2018 compared to the same period in 2017.

Other revenue represents revenue from policy installment fees, premium financing and other miscellaneous income, was $5.3 million for the nine months ended September 30, 2018 compared to $4.9 million for the same period in 2017.

Losses and LAE, net of reinsurance were $251.7 million for the nine months ended September 30, 2018, compared to $267.2 million during the same period in 2017 as follows (dollars in thousands):

	Nine Months Ended September 30, 2018
	Direct		Loss Ratio			Ceded			Loss Ratio			Net		Loss Ratio
Premiums earned	$	824,692				$	260,905					$	563,787

Loss and loss adjustment expenses:
Weather events*	$	46,858		5.7	%	$	34,358			13.2	%	$	12,500		2.2	%
Prior year adverse/(favorable) reserve development		311,683		37.8	%		309,456			118.6	%		2,227		0.4	%
All other losses and loss adjustment expenses		234,878		28.5	%		(2,110	)		(0.8	%)		236,988		42.0	%
Total losses and loss adjustment expenses	$	593,419		72.0	%	$	341,704			131.0	%	$	251,715		44.6	%

	Nine Months Ended September 30, 2017
	Direct		Loss Ratio			Ceded		Loss Ratio			Net		Loss Ratio
Premiums earned	$	735,807				$	230,722				$	505,085

Loss and loss adjustment expenses:
Weather events*	$	461,000		62.7	%	$	415,000		179.9	%	$	46,000		9.1	%
Prior year adverse/(favorable) reserve development		6,896		0.9	%		5,578		2.4	%		1,318		0.3	%
All other losses and loss adjustment expenses		219,811		29.9	%		—		—			219,811		43.5	%
Total losses and loss adjustment expenses	$	687,707		93.5	%	$	420,578		182.3	%	$	267,129		52.9	%

* Includes only weather events beyond those expected.

See “Item 1—Note 6 (Liability for Unpaid Losses and Loss Adjustment Expenses)” for change in liability for unpaid losses and LAE.

For the nine months ended September 30, 2018, we experienced $46.9 million of significant weather events, including Hurricane Florence, a $35.0 million direct loss event, and to a lesser extent, Tropical Storm Gordon, the eruption of the Kilauea volcano in Hawaii, and several other meaningful weather related events that occurred in 2018. The Company’s reinsurance program limited 2018 weather event net losses to $12.5 million for the nine months ended September 30, 2018. This compares to $461.0 million direct loss and $46.0 million net loss related to weather events in the nine months ended September 30, 2017, which include Hurricane Irma.

During the nine months ended September 30, 2018, the Company recorded prior year adverse development to increase its estimate of ultimate losses on Hurricane Irma to $754.0 million from $446.7 million recorded as of 2017 year-end. The prior year adverse development of $311.7 million in direct losses results in net losses of $2.2 million after the benefit of reinsurance recoveries. The increase in the ultimate loss and LAE related to Hurricane Irma was the result of a continuation of new reported claims and litigation costs associated with the aggressive nature of plaintiff attorneys on claims in Florida.

The nine months ended September 30, 2017 included prior period loss reserve development of $6.9 million on a direct basis ($1.3 million on a net basis), also primarily reflecting strengthening of reserves for the fourth quarter 2016 storm, Hurricane Matthew.

All other net losses and LAE were $237.0 million for the nine months ended September 30, 2018, compared to $219.8 million during the same period in 2017. The Company’s service subsidiaries generated additional fees during the nine months ended September 30, 2018 for claims ceded to reinsurers principally related to Hurricane Irma. During the nine months ended September 30, 2018, the Company generated a $35.5 million net benefit from claim settlement fees which was recorded in the condensed consolidated financial statements as a reduction to losses and LAE in 2018. This had a favorable effect on our underlying loss and LAE ratio of approximately 4.3 percentage points on a direct basis (or 6.3 percentage points on a net basis). The Company’s underlying loss and LAE ratio reflects an increased level of severe weather activity in recent years, continued geographic expansion into states outside of Florida where non-catastrophe loss ratios are generally higher than in Florida, as well as the marketplace dynamics inside of Florida including challenges faced when policyholders assign their policy benefits to third parties including the increased litigation costs arising from these claims.

General and administrative expenses were $191.6 million for the nine months ended September 30, 2018, compared to $171.6 million during the same period in 2017 as follows (dollars in thousands):

	Nine Months Ended
	September 30,										Change
	2018					2017					$			%
	$		Ratio			$		Ratio
Premiums earned, net	$	563,787				$	505,085				$	58,702			11.6	%
General and administrative expenses:
Policy acquisition costs		114,333		20.3	%		100,754		19.9	%		13,579			13.5	%
Other operating costs		77,023		13.7	%		70,559		14.0	%		6,464			9.2	%
Interest expense		258		—			269		—			(11	)		(4.1	%)
Total general and administrative expenses (1)	$	191,614		33.9	%	$	171,582		33.9	%	$	20,032			11.7	%

(1)

Total general and administrative expense ratio does not include interest expense.

The increase in general and administrative expenses of $20.0 million was primarily the result of increases in policy acquisition costs of $13.6 million, which were driven by increased premium volume and continued geographic expansion into states that have higher typical commission rates compared to our home state of Florida, and to a lesser extent due to an increase in other operating costs of $6.4 million. General and administrative expenses for the nine months ended September 30, 2018 included a $6.5 million benefit (included within policy acquisition costs) related to a settlement of prior year premium tax audits with the Florida Department of Revenue, which reduced the expense ratio by 1.2 percentage points. Our other operating costs increased by $6.4 million compared to the same period of the prior year, which was primarily driven by an increase of $5.7 million in performance bonuses and stock option grants. The comparative increase in performance bonuses was due to lower pretax income in the third quarter of 2017 due to Hurricane Irma.

The expense ratio was impacted by the costs noted above and the ratio was further increased due to an increase in fully earned reinstatement premiums reducing premiums earned, net (the denominator in the ratio) during the nine months ended September 30, 2018. Overall, the expense ratio (general and administrative expenses as a percentage of net earned premiums) benefited from economies of scale as general and administrative expenses did not increase at the same rate as revenues. As a result of the above items, the expense ratio for each of the nine months ended September 30, 2018 and for the same period in 2017 was 33.9%.

Income tax expense decreased by $0.8 million, or 1.8%, for the nine months ended September 30, 2018, when compared with the nine months ended September 30, 2017. Our effective tax rate decreased to 24.7% for the nine months ended September 30, 2018, as compared to 37.0% for the nine months ended September 30, 2017. The decrease in both income tax expense and our effective tax rate is primarily the result of the enactment of the Tax Act. See “Item 1—Note 9 (Income Taxes)” for an explanation of the change in our effective tax rates.

Other comprehensive loss, net of taxes for the nine months ended September 30, 2018 was $6.6 million compared to other comprehensive income of $4.2 million for the same period in 2017. See “Item 1—Note 11 (Other Comprehensive Income (Loss))” for additional information about the amounts comprising other comprehensive income and loss for these periods.

Analysis of Financial Condition—As of September 30, 2018 Compared to December 31, 2017

We believe that cash flows generated from operations will be sufficient to meet our working capital requirements for at least the next twelve months. Our policy is to invest amounts considered to be in excess of current working capital requirements.

The following table summarizes, by type, the carrying values of investments as of the dates presented (in thousands):

	As of
	September 30,		December 31,
Type of Investment	2018		2017
Available-for-sale debt securities	$	760,408	$	639,334
Available-for-sale short-term investments		—		10,000
Equity securities		69,108		62,215
Investment real estate, net		23,720		18,474
Total	$	853,236	$	730,023

See “Item 1—Condensed Consolidated Statements of Cash Flows” for explanations of changes in investments.

Prepaid reinsurance premiums represent the portion of unearned ceded written premiums that will be earned pro-rata over the coverage period of our reinsurance program, which runs from June 1 to May 31 of the following year. The increase of $95.6 million to $228.4 million as of September 30, 2018 was due primarily to ceded written premium for the reinsurance costs relating to our 2018-2019 catastrophe reinsurance program beginning June 1, 2018, less amortization of those costs recorded during the period.

Reinsurance recoverable represents the estimated amounts of paid and unpaid losses, loss adjustment expenses and expenses that are recoverable from reinsurers. The decrease of $23.8 million to $158.6 million as of September 30, 2018 was due to the settlement of amounts due from reinsurers. The largest settled balances during the year related to claims ceded to reinsurers relating to Hurricane Irma and to a lesser extent Hurricane Matthew.

Premiums receivable, net represents amounts receivable from policyholders. The increase in premiums receivable, net of $9.5 million to $66.0 million as of September 30, 2018 relates to both the growth in and seasonality of the Company’s business.

Deferred income taxes represent temporary differences between the tax basis of assets and liabilities and their amount recorded in the financial statements, which will result in taxable or deductible amounts in the future. During the nine months ended September 30, 2018, deferred income tax asset, net decreased by $1.3 million to $7.9 million, primarily due to an increase in deferred policy acquisition costs offset by the recording of a deferred tax asset for unrealized losses on investments.

Deferred policy acquisition costs increased by $17.6 million to $90.6 million as of September 30, 2018, which is in line with the underlying premium growth and the seasonality of the Company’s business. See “Item 1—Note 5 (Insurance Operations)” for a roll-forward in the balance of our deferred policy acquisition costs.

Income taxes recoverable, which represents estimated tax payments less estimated tax obligations to taxing authorities, was $5.2 million as of September 30, 2018 compared to $9.5 million as of December 31, 2017. The decrease of $4.3 million represents the net effect of payments versus estimated liabilities as the Company settles its tax obligations during the year.

Other assets increased by $9.3 million to $21.7 million as of September 30, 2018, which was primarily attributable to receivables relating to sales of our securities from our investment portfolio that settled after September 30, 2018.

See “Item 1—Note 6 (Liability for Unpaid Losses and Loss Adjustment Expenses)” for a roll-forward in the balance of our unpaid losses and loss adjustment expenses. Unpaid losses and loss adjustment expenses decreased by $89.8 million to $158.7 million as of September 30, 2018. The reduction in unpaid losses and loss adjustment expenses was principally due to the settlement of Hurricane Irma claims and other claims that were unpaid as of December 31, 2017. Also, during the third quarter of 2018, the Company increased its estimate for Hurricane Irma claims by $150.5 million, recorded $35 million for Hurricane Florence and $2.5 million for Tropical Storm Gordon, which increased reserves. Overall reserves decreased by $89.8 million as claim settlements exceeded new emerging claims. Unpaid losses and loss adjustment expenses are net of estimated subrogation recoveries. The Company is continuing its initiatives to expedite claims payments, including the ability of our mobile claims teams to rapidly settle certain claims, which we refer to as “Fast Track,” and pursuing the anticipated benefits from subrogation collections.

Unearned premiums represent the portion of direct premiums written that will be earned pro rata in the future. The increase of $97.2 million to $629.7 million as of September 30, 2018 reflects both organic growth and the seasonality of our business as described under “—Overview”.

Advance premium represents premium payments made by policyholders ahead of the effective date of the policies. The increase of $6.6 million to $32.8 million as of September 30, 2018 reflects both organic growth and the seasonality of our business as described under “—Overview”.

Book overdrafts represent outstanding checks or drafts in excess of cash on deposit with banking institutions and are examined to determine if a legal right of offset exists for accounts within the same banking institution at each balance sheet date. The Company maintains a short-term cash investment sweep to maximize investment returns on cash balances. Due to sweep activities, certain outstanding items are recorded as book overdrafts, which totaled $30.3 million as of September 30, 2018 compared to $36.7 million as of December 31, 2017. The decrease of $6.4 million is the result of higher cash balances available for offset as of September 30, 2018 and to a lesser amount fewer outstanding items as of September 30, 2018 compared to December 31, 2017 as Hurricane Irma claims are settled.

Reinsurance payable, net, principally represents the unpaid ceded written premiums owed to reinsurers in connection with the renewal of the Company’s 2018-2019 catastrophe reinsurance program on June 1, 2018, and to a lesser extent unpaid reinstatement premiums and cash advances received from reinsurers. The balance increased by $150.8 million to $261.1 million as of September 30, 2018 as a result of the above items. Ceded premiums for the 2018-2019 catastrophe reinsurance program are paid in installments over the June 1 to May 31 policy term.

Other liabilities and accrued expenses increased by $19.9 million to $65.0 million as of September 30, 2018, primarily driven by an increase in other liabilities due to timing of payments and payables relating to purchases of securities for our investment portfolio that settled after September 30, 2018.

Capital resources, net increased by $89.9 million and includes increases in stockholders’ equity of $91.0 million, offset by reduction in long-term debt of $1.1 million. The increases in stockholders’ equity was principally the result of $123.5 million of 2018 net income and $2.0 million of stock-based compensation transactions, offset by $11.1 million in treasury stock purchases, $15.4 million in dividends to shareholders and an $8.0 million increase of unrealized losses on our available-for-sale debt securities, net of tax.

The reduction in long-term debt was the result of principal payments on debt during 2018. See “—Liquidity and Capital Resources” and “Item 1—Note 8 (Stockholders’ Equity)” for explanation of changes in treasury stock.

Liquidity and Capital Resources

Liquidity

Liquidity is a measure of a company’s ability to generate sufficient cash flows to meet its short and long-term obligations. Funds generated from operations have been sufficient to meet our liquidity requirements and we expect that, in the future, funds from operations will continue to meet such requirements.

The balance of cash and cash equivalents as of September 30, 2018 was $252.3 million compared to $213.5 million at December 31, 2017. See “Item 1—Condensed Consolidated Statements of Cash Flows” for a reconciliation of the balance of cash and cash equivalents between September 30, 2018 and December 31, 2017. The increase in cash and cash equivalents was driven by cash flows generated from operating activities in excess of those used for investing and financing activities. The Company maintains a short-term investment cash sweep to maximize investment returns on cash balances. Due to the sweep activities, certain outstanding items were recorded as “Book Overdraft” in the condensed consolidated financial statements. Cash and cash equivalents balances are available to settle book overdrafts, pay reinsurance premiums, pay expenses and pay claims. Reinsurance premiums are paid in installments during the reinsurance policy period, which runs from June 1^st to May 31^st of the following year. The FHCF is paid in three installments on August 1^st, October 1^st, and December 1^st, and Third-Party Reinsurance is paid in four installments on July 1^st, October 1^st, January 1^st and April 1^st, resulting in significant payments at those times. See “Item 1—–Note 12 (Commitments and Contingencies)” and “Contractual Obligations” for more information.

The balance of restricted cash and cash equivalents as of September 30, 2018 and December 31, 2017 includes cash equivalents on deposit with regulatory agencies in the various states in which our Insurance Entities do business.

Liquidity for UVE and its non-insurance subsidiaries is required to cover the payment of general operating expenses, dividends to shareholders (if and when authorized and declared by our Board of Directors), payment for the possible repurchase of our common stock (if and when authorized by our Board of Directors), payment of income taxes, and interest and principal payments on outstanding debt obligations, if any. The declaration and payment of future dividends by UVE to its shareholders, and any future repurchases of UVE common stock, will be at the discretion of our Board of Directors and will depend upon many factors, including our operating results, financial condition, debt covenants and any regulatory constraints. Principal sources of liquidity for UVE and its non-insurance subsidiaries include revenues generated from fees paid by the Insurance Entities to affiliated companies for policy administration, inspections and claims adjusting services. Additional sources of liquidity include brokerage commissions earned on reinsurance contracts and policy fees. UVE also maintains certain other investments, which are a source of ongoing interest and dividend income and would generate funds upon sale. As discussed in “Item 1—Note 5 (Insurance Operations),” there are limitations on the dividends the Insurance Entities may pay to their immediate parent company, Universal Insurance Holding Company of Florida (“UVECF”).

The maximum amount of dividends that can be paid by Florida insurance companies without prior approval of the Commissioner of the FLOIR is subject to restrictions as referenced in “Item 1—–Note 5 (Insurance Operations).” During the nine months ended September 30, 2018, the Insurance Entities did not pay dividends to UVECF. During 2017 UPCIC paid a $30 million dividend to UVECF.

Liquidity for the Insurance Entities is primarily required to cover payments for reinsurance premiums, claims payments including potential payments of catastrophe losses (offset by recovery of any reimbursement amounts under our reinsurance agreements), fees paid to affiliates for managing general agency services, inspections and claims adjusting services, agent commissions, premiums and income taxes, regulatory assessments, general operating expenses, and interest and principal payments on debt obligations. The principal source of liquidity for the Insurance Entities consists of the revenue generated from the collection of net premiums, interest and dividend income from the investment portfolio, the collection of reinsurance recoverable, and financing fees.

Our insurance operations provide liquidity as premiums are generally received months or even years before losses are paid under the policies written. In the event of catastrophic events, many of the Company’s reinsurance agreements provide for “cash advance” whereby reinsurers advance or prepay amounts to the Company, thereby providing liquidity, which the Company utilizes in the claim settlement process. In addition, the Insurance Entities maintain substantial investments in highly liquid, marketable securities, which would generate funds upon sale.

The Insurance Entities are responsible for losses related to catastrophic events in excess of coverage provided by the Insurance Entities’ reinsurance programs or retentions before the Company’s reinsurance protection commences. Also, the Insurance Entities are responsible for all other losses that otherwise may not be covered by the reinsurance programs and any amounts arising in the event of a reinsurer default. Losses or a reinsurer default may have a material adverse effect on either of the Insurance Entities or our business, financial condition, results of operations and liquidity.

Capital Resources

Capital resources provide protection for policyholders, furnish the financial strength to support the business of underwriting insurance risks, and facilitate continued business growth. The following table provides our stockholders’ equity, total long-term debt, total capital resources, debt-to-equity total capital ratio and debt-to-equity ratio for the periods presented (dollars in thousands):

	As of
	September 30,			December 31,
	2018			2017
Stockholders' equity	$	531,024		$	439,988
Total long-term debt		11,765			12,868
Total capital resources	$	542,789		$	452,856

Debt-to-total capital ratio		2.2	%		2.8	%
Debt-to-equity ratio		2.2	%		2.9	%

As described in our Annual Report on Form 10-K for the year ended December 31, 2017, UPCIC entered into a surplus note with the State Board of Administration of Florida under Florida’s Insurance Capital Build-Up Incentive Program on November 9, 2006. The surplus note has a twenty-year term, with quarterly payments of principal and interest that accrue per the terms of the note agreement. At September 30, 2018, UPCIC was in compliance with the terms of the surplus note. Total adjusted capital surplus, which includes the surplus note, was in excess of regulatory requirements for both UPCIC and APPCIC.

On September 5, 2017, our Board of Directors authorized the repurchase of up to $20 million of the Company’s outstanding common stock through December 31, 2018. The Company may repurchase shares from time to time at its discretion, based on ongoing assessments of the capital needs of the Company, the market price of its common stock and general market conditions. The Company will fund the share repurchase program with cash from operations.

During the nine months ended September 30, 2018, we repurchased an aggregate of 342,749 shares of UVE’s common stock in the open market at an aggregate cost of $11.1 million. Also, see “Part II, Item 2—Unregistered Sales of Equity Securities and Use of Proceeds” for share repurchase activity during the three months ended September 30, 2018.

Cash Dividends

The following table summarizes the dividends declared by the Company:

	Dividend	Shareholders	Dividend	Cash Dividend
2018	Declared Date	Record Date	Payable Date	Per Share Amount
First Quarter	January 22, 2018	February 28, 2018	March 12, 2018	$	0.14
Second Quarter	April 12, 2018	April 27, 2018	May 4, 2018	$	0.14
Third Quarter	May 29, 2018	July 2, 2018	July 16, 2018	$	0.16

Contractual Obligations

The following table represents our contractual obligations for which cash flows are fixed or determinable as of September 30, 2018 (in thousands):

			Less than						Over
	Total		1 year		1-3 years		3-5 years		5 years
Reinsurance payable and multi-year commitments (1)	$	377,409	$	261,133	$	116,276	$	—	$	—
Unpaid losses and LAE, direct (2)		155,667		80,920		45,855		24,911		3,981
Long-term debt		13,143		1,346		5,148		3,223		3,426
Total contractual obligations	$	546,219	$	343,399	$	167,279	$	28,134	$	7,407

(1)	The 1-3 years amount represents the payment of reinsurance premiums payable under multi-year commitments. See “Item 1—–Note 12 (Commitments and Contingencies).”

(2)

There are generally no notional or stated amounts related to unpaid losses and LAE. Both the amounts and timing of future loss and LAE payments are estimates and subject to the inherent variability of legal and market conditions affecting the obligations and make the timing of cash outflows uncertain. The ultimate amount and timing of unpaid losses and LAE could differ materially from the amounts in the table above. Further, the unpaid losses and LAE do not represent all the obligations that will arise under the contracts, but rather only the estimated liability incurred through September 30, 2018.

Critical Accounting Policies and Estimates

Other than as disclosed in “Item 1—Note 2 (Significant Accounting Policies),” there have been no material changes during the period covered by this Quarterly Report on Form 10-Q to Critical Accounting Policies and Estimates previously disclosed in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2017.

Recent Accounting Pronouncements Not Yet Adopted

In June 2016, the Financial Accounting Standards Board (“FASB”) revised U.S. GAAP with the issuance of Accounting Standards Update (“ASU”) 2016-13, Financial Instruments -Credit Losses (Topic 326) that introduces a new process for recognizing credit losses on financial instruments based on an estimate of current expected credit losses. The new ASU will apply to: (1) loans, accounts receivable, trade receivables, and other financial assets measured at amortized cost, (2) loan commitments and certain other off-balance sheet credit exposures, (3) debt securities and other financial assets measured at fair value through other comprehensive income, and (4) beneficial interests in securitized financial assets. The ASU changes the current practice of recording a permanent write down, (other than temporary impairment), for probable credit losses, which is more restrictive than the new ASU requirement that would estimate credit losses, then recorded through a temporary allowance account that can be re-measured as estimated credit losses change. The ASU further limited estimated credit losses relating to available for sale securities to the amount which fair value is below amortized cost. The ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. We are currently evaluating the impact that this standard will have on our consolidated financial statements.

In March 2017, FASB revised U.S. GAAP with the issuance of ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs to amend the amortization period for certain purchased callable debt securities held at a premium. Current U.S. GAAP excludes certain callable debt securities from consideration of early repayment of principal even if the holder is certain that the call will be exercised. The new ASU shortens the amortization period of certain purchased callable debt securities to the earliest call date. The ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. Under the current U.S. GAAP, you could consider the call dates and estimate if you had a large number of similar securities and you were basing your judgment on actual experience. Our service provider (who processes the accounting for our investment transactions) has many similar securities on their system and can make that type of determination. As a result, we currently account for the amortization under the proposed ASU and there will be no impact to our results of operations, financial condition or liquidity.

In August 2018, the FASB revised U.S. GAAP with the issuance of ASU 2018-13, Fair Value Measurement (Topic 820) – Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The ASU removes, modifies and adds certain disclosure requirements associated with fair value measurements. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. The removed and modified disclosures will be adopted on a retrospective basis and the new disclosures will be adopted on a prospective basis. We are currently evaluating our timeline for the adoption of this ASU, which only affects the presentation of certain disclosures and is not expected to impact our results of operations, financial position or liquidity.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Market risk is the potential for economic losses due to adverse changes in fair value of available-for-sale debt securities, available-for-sale short-term investments and equity securities (“Financial Instruments”) and investment real estate. We carry all of our Financial Instruments at market value and investment real estate at net book value in our statement of financial condition. Our investment portfolio as of September 30, 2018 is comprised of available-for-sale debt securities and equities securities, which expose us to changes in interest rates and equity prices.

The primary objectives of the investment portfolio are the preservation of capital and providing adequate liquidity for potential claims payments and other cash needs. The portfolio’s secondary investment objective is to provide a total rate of return with an emphasis on investment income. None of our investments in risk-sensitive Financial Instruments were entered into for trading purposes.

See “Item 1—Note 3 (Investments)” for more information about our Financial Instruments.

Interest Rate Risk

Interest rate risk is the sensitivity of a fixed-rate Financial Instrument to changes in interest rates. Generally, when interest rates rise, the fair value of our fixed-rate Financial Instruments declines.

The following table provides information about our fixed income Financial Instruments, which are sensitive to changes in interest rates. The table presents cash flows of principal amounts and related weighted average interest rates by expected maturity dates for Financial Instruments available for sale as of the dates presented (in thousands):

	September 30, 2018
	Amortized Cost																								Fair Value
	2018			2019			2020			2021			2022			Thereafter			Other (1)			Total			Total
Fixed income Financial Instruments	$	8,090		$	83,887		$	60,167		$	73,682		$	21,508		$	239,109		$	287,050		$	773,493		$	760,408
Weighted average interest rate		2.47	%		1.84	%		2.08	%		2.24	%		2.55	%		3.61	%		3.34	%		3.03	%		3.03	%

	December 31, 2017
	Amortized Cost																								Fair Value
	2018			2019			2020			2021			2022			Thereafter			Other (1)			Total			Total
Fixed income Financial Instruments	$	51,846		$	85,309		$	61,215		$	60,968		$	27,832		$	132,530		$	234,015		$	653,715		$	649,334
Weighted average interest rate		1.87	%		1.82	%		2.18	%		2.16	%		2.76	%		4.02	%		3.08	%		2.83	%		2.83	%

(1)	Comprised of mortgage-backed and asset-backed securities which have multiple maturity dates, and perpetual maturity securities, and are presented separately for the purposes of this table.

The tables above represent average contract rates that differ from the book yield of the available-for-sale debt securities. The fixed income Financial Instruments in our available for sale portfolio are comprised of United States government and agency securities, corporate bonds, municipal bonds, redeemable preferred stock, mortgage-backed and asset-backed securities and certificates of deposit. Duration is a measure of interest rate sensitivity expressed as a number of years. The weighted average duration of the fixed income Financial Instruments in our available for sale portfolio at September 30, 2018 was 3.1 years.

To a lesser extent, we also have exposure to interest on our debt obligation which is in the form of a surplus note. The surplus note accrues interest at an adjustable rate based on the 10-year Constant Maturity Treasury rate.

Equity Price Risk

Equity price risk is the potential for loss in fair value of Financial Instruments in common stock and mutual funds from adverse changes in the prices of those Financial Instruments.

The following table provides information about the Financial Instruments in our investment portfolio subject to price risk as of the dates presented (in thousands):

	September 30, 2018					December 31, 2017
	Fair Value		Percent			Fair Value		Percent
Equity Securities:
Common stock	$	20,575		29.8	%	$	18,811		30.2	%
Mutual funds		48,533		70.2	%		43,404		69.8	%
Total equity securities	$	69,108		100.0	%	$	62,215		100.0	%

A hypothetical decrease of 20% in the market prices of each of the equity securities held at September 30, 2018 and December 31, 2017 would have resulted in a decrease of $13.8 million and $12.4 million, respectively, in the fair value of those securities.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company carried out an evaluation under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 as of the end of the period covered by this report. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that disclosure controls and procedures were effective as of September 30, 2018, to ensure that information required to be disclosed by the Company in its reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There was no change in the Company’s internal controls over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

In accordance with applicable accounting guidance, the Company establishes an accrued liability for legal matters when those matters present loss contingencies that are both probable and estimable.

Item 1A. Risk Factors

There have been no material changes during the period covered by this Quarterly Report on Form 10-Q to the risk factors previously disclosed in Part I, Item 1A, “Risk Factors,” included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

We may repurchase shares from time to time at our discretion, based on ongoing assessments of our capital needs, the market price of our common stock and general market conditions. The Company will fund the share repurchase program with cash from operations.

In September 2017, our Board of Directors approved a share repurchase program authorizing us to purchase up to $20 million of our outstanding common stock in the open market in compliance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended, through December 31, 2018.

Since September 2017, we repurchased 350,941 shares of our common stock pursuant to this program at an aggregate cost of approximately $11.3 million. During the three months ended September 30, 2018, no shares of our common stock were repurchased pursuant to this authorization. As of September 30, 2018, there were 178,888 shares available for repurchase under this program. The number of shares available for repurchase was calculated using a closing price at September 28, 2018 of $48.55 per share.

Item 6. Exhibits

Exhibit No.		Exhibit

15.1		Accountants’ Acknowledgment

31.1		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32		Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS-XBRL		Instance Document

101.SCH-XBRL		Taxonomy Extension Schema Document

101.CAL-XBRL		Taxonomy Extension Calculation Linkbase Document

101.DEF-XBRL		Taxonomy Extension Definition Linkbase Document

101.LAB-XBRL		Taxonomy Extension Label Linkbase Document

101.PRE-XBRL		Taxonomy Extension Presentation Linkbase Document

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

					UNIVERSAL INSURANCE HOLDINGS, INC.

Date: October 31, 2018					/s/ Sean P. Downes
					Sean P. Downes, Chief Executive Officer and Principal Executive Officer

Date: October 31, 2018					/s/ Frank C. Wilcox
					Frank C. Wilcox, Chief Financial Officer and Principal Accounting Officer