UNIVERSAL INSURANCE: Management report and analysis of the financial situation and operating results (form 10-Q)

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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-Financial Statements and
Supplementary Data" in our Annual Report on Form 10-K for the year ended
December 31, 2020. Operating results for any one quarter are not necessarily
indicative of results to be expected for any other quarter or for the year.

Cautionary Note Regarding Forward-Looking Statements
In addition to historical information, this report may contain "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). The forward-looking statements anticipate results based on our
estimates, assumptions and plans that are subject to uncertainty. These
forward-looking statements may be identified by their use of words like "plans,"
"seeks," "expects," "will," "should," "anticipates," "estimates," "intends,"
"believes," "likely," "targets," and other words with similar meanings. These
statements may address, among other things, our strategy for growth, catastrophe
exposure and other risk management, product development, investment results,
regulatory approvals, market position, expenses, financial results, litigation
and reserves. We believe that these statements are based on reasonable
estimates, assumptions and plans. However, if the estimates, assumptions or
plans underlying the forward-looking statements prove inaccurate or if other
risks or uncertainties arise, actual results could differ materially from those
communicated in these forward-looking statements 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, 2020. We undertake no obligation to update
or revise publicly any forward-looking statements, whether as a result of new
information, future events, or otherwise.
Risks and uncertainties that may affect, or have affected, our financial
condition and operating results include, but are not limited to, the following:
•Unanticipated increases in the severity or frequency of claims, including those
relating to catastrophes, severe weather events and changing climate conditions,
which, in some instances, have exceeded, and in the future may exceed our
reserves established for claims;
•Failure of our risk mitigation strategies, including failure to accurately and
adequately price the risks we underwrite and to include effective exclusions and
other loss limitation methods in our insurance policies;
•Loss of independent insurance agents and inability to attract new independent
agents;
•Reliance on models, which are inherently uncertain, as a tool to evaluate
risks;
•The continued availability of reinsurance at current levels and prices, and our
ability to collect payments due from our reinsurers;
•Changes in industry trends, including changes due to the cyclical nature of the
industry and increased competition;
•Geographic concentration of our business in Florida and the effectiveness of
our growth and diversification strategy in new markets;
•Loss of key personnel and inability to attract and retain talented employees;
•Failure to comply with existing and future guidelines, policies and legal and
regulatory standards;
•The ability of our claims professionals to effectively manage claims;
•Litigation or regulatory actions that could result in significant damages,
fines or penalties;
•A downgrade in our Financial Stability Rating® and its impact on our
competitive position, the marketability of our product offerings, our liquidity
and profitability;
•The impact on our business and reputation of data and security breaches due to
cyber-attacks or our inability to effectively adapt to changes in technology;
•Our dependence on the returns of our investment portfolio, which are subject to
market risk;
•Legal, regulatory or tax changes that increase our operating costs and decrease
our profitability, such as limitations on rate changes or requirements to
participate in loss sharing;
•Our dependence on dividends and permissible payments from our subsidiaries;
•The ability of our Insurance Entities to comply with statutory capital and
surplus minimums and other regulatory and licensing requirements; and
•The ongoing impact of the COVID-19 pandemic on our business and the economy in
general.
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OVERVIEW
We are a vertically integrated holding company offering property and casualty
insurance and value-added insurance services. We develop, market and underwrite
insurance products for consumers predominantly in the personal residential
homeowners line of business and perform substantially all other
insurance-related services for our primary insurance entities, including risk
management, claims management, and distribution. Our primary insurance entities,
Universal Property & Casualty Insurance Company ("UPCIC") and American Platinum
Property and Casualty Insurance Company ("APPCIC" and together with UPCIC, the
"Insurance Entities"), offer insurance products through both our appointed
independent agent network and our online distribution channels across 19 states
(primarily in Florida), with licenses to write insurance in two additional
states. The Insurance Entities seek to produce an underwriting profit (defined
as earned premium minus losses, loss adjustment expense ("LAE"), policy
acquisition costs and other operating costs) over the long term; maintain a
conservative balance sheet to prepare for years in which the Insurance Entities
are not able to achieve an underwriting profit; and generate investment income
on assets.
The following Management's Discussion and Analysis ("MD&A") is intended to
assist in an understanding of our financial condition and results of operations.
This MD&A should be read in conjunction with our Financial Statements and
accompanying Notes appearing elsewhere in this Report (the "Notes"). In
addition, reference should be made to our audited Consolidated Financial
Statements and accompanying Notes to Consolidated Financial Statements and
"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, 2020. Except for the historical information contained herein, the
discussions in this MD&A contain forward-looking statements that involve risks
and uncertainties. Our future results could differ materially from those
discussed herein. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed above under "Cautionary Note
Regarding Forward-Looking Statements."

Trends - Impact of the COVID-19 Pandemic
The global COVID-19 pandemic has had a profound worldwide effect on social
interactions and on the global, national and local economies. Since the first
week of engaging our work from home strategy, nearly all aspects of our business
have been, and continue to be, conducted remotely while striving to maintain the
quality of our service standards. Subsequent to March 2020, we have not seen a
material impact from COVID-19 pandemic on our business, our financial position,
our liquidity, or our ability to service our policyholders and maintain critical
operations. As a provider of services that have been deemed essential under most
directives and guidelines, we are confident in our ability to maintain
consistent operations and believe we can continue to manage with our remote
workforce, with little impact on our business and service levels and our
standards of care for both underwriting and claims. We continue to monitor
local, state and federal guidance and will adjust workforce activities as
appropriate. Although we have not experienced an adverse material impact from
the COVID-19 pandemic, the ultimate impact of the pandemic on our business and
on the economy in general cannot be predicted.
Court systems in key markets in which we operate, including Florida, have been
impacted by the COVID-19 pandemic. This has led to changes in certain court
procedures and, in many cases, to delays in our ability to resolve contested
claims. In our experience, delays in court proceedings can increase the amounts
of judgements, settlements and related costs. In addition, delays in the
judicial system could affect our ability to pursue subrogation actions in a
timely and cost-effective manner. As a result, as the effects of the COVID-19
pandemic evolve, continuing periods of judicial delays and revised procedures
could have an adverse effect on our litigation outcomes.

Our level of direct premiums written during the three months ended March 31,
2021 was strong and outperformed the same period in the prior year. We are
cautiously optimistic in our belief that our customers and agent force will
continue to renew and place business with us, especially our customers in
hurricane-exposed states. In the event there is a slow-down in the production
and/or collection of premiums, we intend to take measures to maintain liquidity
while continuing to protect our capital and policyholders. See "-Liquidity and
Capital Resources."

KEY PERFORMANCE INDICATORS

The Company considers the measures and ratios in the following discussion to be
key performance indicators for its businesses. Management believes that these
indicators are helpful in understanding the underlying trends in the Company's
businesses. Some of these indicators are reported on a quarterly basis and
others on an annual basis.

These indicators may not be comparable to other performance measures used by the
Company's competitors and should only be evaluated together with our condensed
consolidated financial statements and accompanying notes.

Definitions of key performance indicators

Book Value Per Common Share - total stockholders' equity, adjusted for preferred
stock liquidation, divided by the number of common shares outstanding as of a
reporting period. Book value per common share is the excess of assets over
liabilities at a reporting period attributed to each share of stock. Changes in
book value per common share informs shareholders of retained equity in the
Company on a per share basis which may assist in understanding market value
trends for the Company's stock.

Combined Ratio - the combined ratio is a measure of underwriting profitability
for a reporting period and is calculated by dividing total operating costs and
expenses (which is made up of losses and LAE and general and administrative
expenses) by premiums earned, net, which is net of ceded premiums earned.
Changes to the combined ratio over time provide management with an understanding
of costs to operate its business in relation to net premiums it is earning and
the impact of rate, underwriting and other business management actions on
underwriting profitability. A combined ratio below 100 indicates underwriting
profit; a combined ratio above 100 indicates underwriting losses.
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Core Loss Ratio - a common operational metric used in the insurance industry to
describe the ratio of current accident year expected losses and LAE to premiums
earned. Core loss ratio is an important measure identifying profitability trends
of premiums in force. Core losses consists of all other losses and LAE,
excluding weather events beyond those expected and prior years' reserve
development. The financial benefit from the management of claims, including
claim fees ceded to reinsurers, is recorded in the condensed consolidated
financial statements as a reduction to core losses.

Debt ratio – long-term debt divided by equity. This ratio helps management measure the amount of funding leverage in place versus equity and future leverage capacity.

Total debt-to-capital ratio – long-term debt divided by the sum of total equity and long-term debt (often referred to as total capital resources). This ratio helps management measure the amount of funding leverage in place (long-term debt) versus total capital resources and future leverage capacity.

Direct Premiums Written ("DPW") - reflects the total value of policies issued
during a period before considering premiums ceded to reinsurers. Direct premiums
written, comprised of renewal premiums, endorsements and new business, is
initially recorded as unearned premium in the balance sheet which is then earned
pro-rata over the next year or remaining policy term. Direct premiums written
reflects current trends in the Company's sale of property and casualty insurance
products and amounts that will be recognized as earned premiums in the future.

DPW (Florida) – only includes DPW in the state of Florida. This metric allows management to analyze the growth of our core market and is also a measure of corporate concentration risk.

Expense Ratio (Including Policy Acquisition Cost Ratio and Other Operating Cost
Ratio) - calculated as general and administrative expenses as a percentage of
premiums earned, net. General and administrative expenses is comprised of policy
acquisition costs and other operating costs, which includes such items as
underwriting costs, facilities and corporate overhead. The expense ratio,
including the sub-expense ratios of policy acquisition cost ratio and other
operating cost ratio, are indicators to management of the Company's cost
efficiency in acquiring and servicing its business and the impact of expense
items to overall profitability.

Losses and Loss Adjustment Expense Ratio or Loss and LAE Ratio - a measure of
the cost of claims and claim settlement expenses incurred in a reporting period
as a percentage of premiums earned in that same reporting period. Losses and LAE
incurred in a reporting period includes both amounts related to the current
accident year and prior accident years, if any, referred to as development.
Ultimate losses and LAE are based on actuarial estimates with changes in those
estimates recognized in the period the estimates are revised. Losses and LAE
consist of claim costs arising from claims occurring and settling in the current
period, an estimate of claim costs for reported but unpaid claims, an estimate
of unpaid claim costs for incurred-but-not-reported claims and an estimate of
claim settlement expenses associated with reported and unreported claims which
occurred during the reporting period. The loss and LAE ratio can be measured on
a direct basis, which includes losses and LAE divided by direct earned premiums,
or on a net basis, which includes losses and LAE after amounts have been ceded
to reinsurers divided by net earned premiums (i.e., direct premium earned less
ceded premium earned). The net loss and LAE ratio is a measure of underwriting
profitability after giving consideration to the effect of reinsurance. Trends in
the net loss and LAE ratio are an indication to management of current and future
profitability.

Monthly Weighted Average Renewal Retention Rate - measures the monthly average
of policyholders that renew their policies over the period of a calendar year.
This measure allows management to assess customer retention.

Premiums Earned, Net - the pro-rata portion of current and previously written
premiums that the Company recognizes as earned premium during the reporting
period, net of ceded premium earned. Ceded premiums are premiums paid or payable
by the Company for reinsurance protection. Written premiums are considered
earned and are recognized pro-rata over the policy coverage period. Premiums
earned, net is a measure that allows management to identify revenue trends.

Policies in Force - represents the number of active policies with coverage in
effect as of the end of the reporting period. The change in the number of
policies in force is a growth measure and provides management with an indication
of progress toward achieving strategic objectives. Inherent seasonality in our
business makes this measure more useful when comparing each quarter's balance to
the same quarter in prior years.

Premium in Force - is the amount of the annual direct written premiums
previously recorded by the Company for policies which are still active as of the
reporting date. This measure assists management in measuring the level of
insured exposure and progress toward meeting revenue goals for the current year,
and provides an indication of business available for renewal in the next twelve
months. Inherent seasonality in our business makes this measure more useful when
comparing each quarter's balance to the same quarter in prior years.

Return on Average Equity ("ROAE") - calculated by dividing earnings (loss) per
common share by average book value per common share. Average book value per
common share is computed as the sum of book value per common share at the
beginning and the end of a period, divided by two. ROAE is a capital
profitability measure of how effectively management creates profits per common
share.

Total Insured Value - represents the amount of insurance limits available on a
policy for a single loss based on all policies active as of the reporting date.
This measure assists management in measuring the level of insured exposure.

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Unearned Premiums - represents the portion of direct premiums corresponding to
the time period remaining on an insurance policy and available for future
earning by the Company. Trends in unearned premiums generally indicate
expansion, if growing, or contraction, if reducing, which are important
indicators to management. Inherent seasonality in our business makes this
measure more useful when comparing each quarter's balance to the same quarter in
prior years.

Weather events - an estimate of losses and LAE from weather events occurring
during the current accident year that exceed initial estimates of expected
weather events when establishing the core loss ratio for each accident year.
This metric informs management of factors impacting overall current year
profitability.

REINSURANCE

Reinsurance enables our Insurance Entities to limit potential exposures to
catastrophic events. Reinsurance contracts are typically classified as treaty or
facultative contracts. Treaty reinsurance provides coverage for all or a portion
of a specified group or class of risks ceded by the primary insurer, while
facultative reinsurance provides coverage for specific individual risks. Within
each classification, reinsurance can be further classified as quota share or
excess of loss. Quota-share reinsurance is where the primary insurer and the
reinsurer share proportionally or pro-rata in the direct premiums and losses of
the insurer. Excess-of-loss reinsurance indemnifies the direct insurer or
reinsurer for all or a portion of the loss in excess of an agreed upon amount or
retention.
Developing and implementing our reinsurance strategy to adequately protect our
balance sheet and Insurance Entities in the event of one or more catastrophes
while maintaining efficient reinsurance costs has been a key strategic priority
for us. In order to limit the Insurance Entities' potential exposure to
catastrophic events, we purchase significant reinsurance from third-party
reinsurers and the Florida Hurricane Catastrophe Fund ("FHCF"). The Florida
Office of Insurance Regulation ("FLOIR") requires the Insurance Entities, like
all residential property insurance companies doing business in Florida, to have
a certain amount of capital and reinsurance coverage in order to cover losses
upon the occurrence of a single catastrophic event and a series of catastrophic
events occurring in the same hurricane season. The Insurance Entities'
respective 2020-2021 reinsurance programs meet the FLOIR's requirements, which
are based on, among other things, successfully demonstrating cohesive and
comprehensive reinsurance programs that protect the policyholders of our
Insurance Entities as well as satisfying a series of stress test catastrophe
loss scenarios based on past historical events.
We believe the Insurance Entities' retentions under their respective reinsurance
programs are appropriate and structured to protect policyholders. We test the
sufficiency of the reinsurance programs by subjecting the Insurance Entities'
personal residential exposures to statistical testing using a third-party
hurricane model, RMS RiskLink v18.1 (Build 1945). This model combines
simulations of the natural occurrence patterns and characteristics of
hurricanes, tornadoes, earthquakes and other catastrophes with information on
property values, construction types and occupancy classes. The model outputs
provide information concerning the potential for large losses before they occur,
so companies can prepare for their financial impact. Furthermore, as part of our
operational excellence initiatives, we continually look to enable new technology
to refine our data intelligence on catastrophe risk modeling.
Effective June 1, 2020, the Insurance Entities entered into multiple reinsurance
agreements comprising our 2020-2021 reinsurance program.
See "Item 1-Note 4 (Reinsurance)."

UPCIC's 2020-2021 Reinsurance Program
•First event All States retention of $43 million; first event Non-Florida
retention of $15 million.
•All States first event tower extends to $3.36 billion with no co-participation
in any of the layers, no limitations on loss adjustment expenses and no
accelerated deposit premiums.
•Assuming a first event completely exhausts the $3.36 billion tower, the second
event exhaustion point would be $1.343 billion.
•Full reinstatement available for all private market first event catastrophe
layers for guaranteed second event coverage. For all layers purchased between
$90 million and the projected FHCF retention, to the extent that all of our
coverage or a portion thereof is exhausted in a catastrophic event and
reinstatement premium is due, UPCIC has purchased enough reinstatement premium
protection ("RPP") limit to pay the premium necessary for the reinstatement of
these coverages.
•Effective September 1, 2020, UPCIC purchased RPP limit for the layer attaching
at $45 million. Combined with the RPP limit purchased at June 1, 2020, UPCIC has
purchased enough RPP limit to pay for the premium necessary for the
reinstatement of all catastrophe layers between $45 million and the projected
FHCF retention.
•Specific 3rd and 4th event private market catastrophe excess of loss coverage
of $76 million in excess of $35 million provides frequency protection for a
multiple event storm season.
•For the FHCF Reimbursement Contracts effective June 1, 2020, UPCIC has
continued the election of the 90% coverage level. We estimate the total
mandatory FHCF layer will provide approximately $2.008 billion of coverage for
UPCIC, which inures to the benefit of the open market coverage secured from
private reinsurers.
•Secured $197 million of new catastrophe capacity with contractually agreed
limits that extend coverage to include the 2021 and 2022 wind seasons. In total,
UPCIC has $420 million of multi-year capacity with coverage extending to include
the 2021 wind season or beyond.

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In March 2021, UPCIC completed its first catastrophe bond transaction. Effective
March 26, 2021, UPCIC entered into a three-year reinsurance agreement with
Cosaint Re Pte. Ltd., a special purpose reinsurance vehicle incorporated in
Singapore that correspondingly issued notes in a Rule 144A offering to raise
proceeds to collateralize its obligations under this agreement. The reinsurance
agreement provides UPCIC with a single limit of $150M of collateralized
protection for named windstorm events.

Reinsurers

The table below provides the A.M. Best and S&P financial strength ratings for
each of the largest third-party reinsurers in UPCIC's 2020-2021 reinsurance
program:


Reinsurer                                    A.M. Best      S&P
Allianz Risk Transfer                           A+          AA-
Arch Reinsurance Limited                        A+          A+
Chubb Tempest Reinsurance Ltd.                  A++         AA
Munich Re                                       A+          AA-
Renaissance Re                                  A+          A+
Various Lloyd's of London Syndicates             A          A+

Florida Hurricane Disaster Fund (1) N / A / A

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

APPCIC's 2020-2021 Reinsurance Program
•First event All States retention of $3 million.
•All States first event tower of $43.6 million with no co-participation in any
of the layers, no limitation on loss adjustment expenses and no accelerated
deposit premiums.
•Full reinstatement available for all private market first event catastrophe
layers for guaranteed second event coverage. For the layer purchased between $3
million and the projected FHCF retention, to the extent that all coverage or a
portion thereof is exhausted in a catastrophic event and reinstatement premium
is due, APPCIC purchased enough RPP limit to pay the premium necessary for the
reinstatement of this coverage.
•APPCIC also purchases extensive multiple line excess per risk reinsurance with
various reinsurers due to the high-value 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
$0.5 million 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 million aggregate limit applies to the term of the contract for
casualty-related losses. This contract also contains a profit-sharing feature if
specific performance measures are met.
•For the FHCF Reimbursement Contracts effective June 1, 2020, APPCIC has
continued the election of the 90% coverage level. The total mandatory FHCF layer
is estimated to provide approximately $22.5 million of coverage for APPCIC,
which inures to the benefit of the open market coverage secured from private
reinsurers.

Reinsurers

The table below provides the A.M. Best and S&P financial strength ratings for
each of the largest third-party reinsurers in APPCIC's 2020-2021 reinsurance
program:


Reinsurer                                    A.M. Best      S&P
Chubb Tempest Reinsurance Ltd.                  A++         AA
Lancashire Insurance Company Limited             A          A-
Various Lloyd's of London Syndicates             A          A+

Florida Hurricane Disaster Fund (1) N / A / A


(1)No rating is available, because the fund is not rated.
The total cost of the 2020-2021 reinsurance programs for UPCIC and APPCIC is
projected to be $499.8 million, representing approximately 34.0% of estimated
direct premium earned for the 12-month treaty period.
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RESULTS OF OPERATIONS AND ANALYSIS OF FINANCIAL CONDITION
Financial and Business Highlights
First quarter of fiscal 2021 results of operations comparisons are
to first quarter of fiscal 2020 (unless otherwise specified).
•Direct premiums written overall grew by $30.8 million, or 9.2%, to $365.3
million.
•Policies in force at March 31, 2021 were 976,250 compared to 984,830 at
December 31, 2020, a decline of 0.9% from year end.
•In Florida, direct premiums written grew by $28.5 million, or 10.2%, and in our
other states, direct premiums written grew by $2.3 million, or 4.0%.
•Premiums earned, net, grew by $22.5 million, or 10.2%, to $243.3 million.
•FLOIR approved an overall 7.0% rate increase in December 2020 for UPCIC on
Florida personal residential homeowners line of business, effective December
2020 for new business and March 2021 for renewals.
•Net investment income was $3.0 million compared to $6.8 million in the first
quarter of 2020.
•Total revenues increased by $27.5 million, or 11.7%, to $262.8 million.
•Net loss and LAE ratio was 59.2% as compared to 61.2%.
•Diluted earnings per common share ("EPS") increased by $0.23, or 37.7%, to
$0.84 compared to $0.61.
•Weighted average diluted common shares outstanding were lower by 4.4% to 31.3
million shares compared to 32.7 million shares.
•Book value per share increased by $0.13, or 0.9%, to $14.56 at March 31, 2021
from $14.43 at December 31, 2020.
•Declared and paid dividends of $5.0 million, or $0.16 per common share, in the
first quarter of 2021.
•Contributed $77 million of capital to UPCIC during the first quarter of 2021 to
support insurance operations.




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Results of Operations - Three Months Ended March 31, 2021 Compared to Three
Months Ended March 31, 2020
Net income was $26.4 million for the three months ended March 31, 2021, compared
to net income of $20.1 million for the same period in 2020. Weighted average
diluted common shares outstanding for the three months ended March 31, 2021 were
lower by 4.4% to 31.3 million shares from 32.7 million shares for the same
period of the prior year. Benefiting the quarter were increases in premiums
earned, net, improvements in both realized and unrealized gains and losses and
an increase in commission revenue, offset by a decrease in net investment
income, policy fees and other revenue and an increase in operating costs and
expenses. Direct premium earned and premiums earned, net were up 15.2% and
10.2%, respectively, due to growth in all states in which we are licensed and
writing during the past 12 months and rate increases implemented during 2020 and
2021, offset by higher costs for reinsurance flowing through to premiums earned,
net. The net losses and LAE ratio was 59.2% for the three months ended March 31,
2021, compared to 61.2% for the same period in 2020 reflecting benefits from
prior years' development and a decrease in weather events partially offset by
higher core net losses when compared to the prior year quarter.
A detailed discussion of our results of operations follows the table below (in
thousands, except per share data).

                                                           Three Months Ended
                                                                March 31,                               Change
                                                         2021               2020                $                  %
PREMIUMS EARNED AND OTHER REVENUES
Direct premiums written                              $ 365,314          $ 334,553          $ 30,761                  9.2  %
Change in unearned premium                              10,292             (8,602)           18,894                      NM
Direct premium earned                                  375,606            325,951            49,655                 15.2  %
Ceded premium earned                                  (132,301)          (105,122)          (27,179)                25.9  %
Premiums earned, net                                   243,305            220,829            22,476                 10.2  %
Net investment income                                    2,986              6,834            (3,848)               (56.3) %
Net realized gains (losses) on investments                 542                299               243                 81.3  %
Net change in unrealized gains (losses) of equity
securities                                                (494)            (8,024)            7,530                (93.8) %
Commission revenue                                       9,126              7,015             2,111                 30.1  %
Policy fees                                              5,387              5,540              (153)                (2.8) %
Other revenue                                            1,905              2,782              (877)               (31.5) %
Total premiums earned and other revenues               262,757            235,275            27,482                 11.7  %
OPERATING COSTS AND EXPENSES
Losses and loss adjustment expenses                    143,963            135,048             8,915                  6.6  %
General and administrative expenses                     82,443             72,643             9,800                 13.5  %
Total operating costs and expenses                     226,406            207,691            18,715                  9.0  %
INCOME BEFORE INCOME TAXES                              36,351             27,584             8,767                 31.8  %
Income tax (benefit) expense                             9,943              7,517             2,426                 32.3  %
NET INCOME                                           $  26,408          $  20,067          $  6,341                 31.6  %
Other comprehensive income (loss), net of taxes        (16,910)            (8,946)           (7,964)                89.0  %
COMPREHENSIVE INCOME                                 $   9,498          $  11,121          $ (1,623)               (14.6) %
DILUTED EARNINGS PER SHARE DATA:
Diluted earnings per common share                    $    0.84          $    0.61          $   0.23                 37.7  %
Weighted average diluted common shares outstanding      31,277             32,731            (1,454)                (4.4) %

NM - Not Meaningful


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Direct premiums written increased by $30.8 million, or 9.2%, for the quarter
ended March 31, 2021, driven by growth within our Florida business of $28.5
million, or 10.2%, and growth in our other states business of $2.3 million, or
4.0%, as compared to the same period of the prior year. Rate increases approved
in 2020 in Florida and in certain other states were the principal driver of
higher written premiums despite a lower level of new writings and slightly lower
renewal retention compared to the same period of the prior year. During the
first quarter of 2021, management implemented efforts to prudently manage its
exposures while rate increases take effect, which has slowed the growth of
written premiums when compared to prior years. Policies in force declined from
984,830 at December 31, 2020 to 976,250 at March 31, 2021 as a result of
management's effort to reduce new business exposures. Policies in force declined
in 11 out of the 19 states that the Insurance Entities write in as a result of
management's actions. We actively wrote policies in 19 states during 2021
compared to 18 states at March 31, 2020. In addition, we are authorized to do
business in Tennessee and Wisconsin and are proceeding with product filings in
those states. Policies in force, premium in force and total insured value
increased as of March 31, 2021 when compared to March 31, 2020.
The following table provides direct premiums written for Florida and Other
States for the three months ended March 31, 2021 and 2020 (dollars in
thousands):
                                   For the Three Months Ended
                                                                                                 Growth
                         March 31, 2021                     March 31, 2020                   year over year
                                                          Direct
                      Direct                             Premiums
State             Premiums Written          %            Written             %               $               %
Florida        $     307,011              84.0  %    $      278,511        83.2  %    $      28,500        10.2  %
Other states          58,303              16.0  %            56,042        16.8  %            2,261         4.0  %
Total          $     365,314             100.0  %    $      334,553       100.0  %    $      30,761         9.2  %


We seek to grow and generate long-term rate adequate premium in each state where
we offer policies, including Florida. Diversified sources of business are an
important objective and premium growth outside Florida is a measure monitored by
management toward meeting that objective.
Direct premium earned increased by $49.7 million, or 15.2%, for the quarter
ended March 31, 2021, reflecting the earning of premiums written over the past
12 months including positive changes in rates and policies in force during that
time.
Reinsurance enables our Insurance Entities to limit potential exposures to
catastrophic events and other covered events. Ceded premium represents amounts
paid to reinsurers for this protection. Ceded premium earned increased $27.2
million, or 25.9%, for the quarter ended March 31, 2021, as compared to the same
period of the prior year. The increase in reinsurance costs reflects an increase
in costs associated with the increase in exposures we insure, increased pricing
when compared to the expired reinsurance program and differences in the
structure and design of the respective programs. Reinsurance costs, as a
percentage of direct premium earned, increased from 32.3% for the three months
ended March 31, 2020 to 35.2% for the three months ended March 31, 2021.
Reinsurance costs associated with each year's reinsurance program are earned
over the annual policy period which typically runs from June 1st to May 31st..
See the discussion above for the Insurance Entities' 2020-2021 reinsurance
programs and "Item 1-Note 4 (Reinsurance)."
Premiums earned, net of ceded premium earned, grew by 10.2%, or $22.5 million,
to $243.3 million for the three months ended March 31, 2021, reflecting an
increase in direct premium earned offset by increased costs for reinsurance.
Net investment income was $3.0 million for the three months ended March 31,
2021, compared to $6.8 million for the same period in 2020, a decrease of $3.8
million, or 56.3%. This decrease is largely attributable to significantly lower
yields on the reinvested portfolio following the sale of a majority of
securities in the portfolio that were in an unrealized gain position in the
third and fourth quarters of 2020. Market rates in the second half of 2020 were
considerably lower than the book yields of the portfolio prior to the sale.
Additionally, income from cash investing was down $0.8 million in the first
quarter of 2021 as compared to the same period of the prior year due to
significantly lower yields on cash sweep and short-term cash investing. Total
invested assets were $1,017.3 million as of March 31, 2021 compared to $919.9
million as of December 31, 2020. Cash and cash equivalents were $90.8 million at
March 31, 2021 compared to $167.2 million at December 31, 2020, a decrease of
45.7%. Cash and cash equivalents are invested short term until needed to settle
loss and LAE payments, reinsurance premium payments and operating cash needs or
until they are deployed by our investment advisors.
Yields from cash and cash equivalents, short-term investments and the
available-for-sale portfolio are dependent on future market forces, monetary
policy and interest rate policy from the Federal Reserve. The Federal Reserve
has broadly been lowering and maintaining lower interest rates, which has
impacted the effective yields on new available-for-sale portfolio and overnight
cash purchases and short-term investments. The overall trend has been lower
interest rates on new purchases of securities over the past year and lower
returns on cash and cash equivalents and short-term investments. As discussed
below, due to the significant sale of securities during the third and fourth
quarters of 2020, it is expected that future portfolio returns will reflect
lower book yields based on current market conditions.
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We sell investments, including securities, from our investment portfolio from
time to time to meet our investment objectives or take advantage of market
opportunities. During the three months ended March 31, 2021, sales of equity
securities resulted in net realized gain of $0.3 million, sales of
available-for-sale debt securities resulted in net realized losses of $0.2
million and the sale of an investment real estate property resulted in a
realized gain of $0.4 million, in total generating net realized gain of $0.5
million. During the three months ended March 31, 2020, sales of
available-for-sale debt securities resulted in net realized gains of $0.3
million See "Item 1-Note 3 (Investments)."
There was a $0.5 million net unrealized loss in equity securities during the
three months ended March 31, 2021 compared to an $8.0 million net unrealized
loss during the three months ended March 31, 2020 following the onset of the
COVID-19 pandemic. Unrealized gains or losses reflected on the income statement
are the result of changes in the fair market value of our equity securities
during the period for securities still held and the reversal of unrealized gains
or losses for securities sold during the period. See "Item 1-Note 3
(Investments)."
During 2020, the COVID-19 pandemic disrupted the financial markets. In the first
quarter of 2020, our investment portfolio was adversely impacted, but has since
substantially recovered. We took advantage of the recovery with the realization
of gains on our available-for-sale debt securities discussed above. We believe
the adverse impact to our investment portfolio was minimized in part during this
COVID-19 pandemic-induced market dislocation as a result of our conservative
investment strategy's focus on capital preservation and adequate liquidity to
pay claims. We believe the high credit rating and shorter duration foundation of
our portfolio and portfolio diversification will help us weather these difficult
market conditions, thereby limiting the impact of future economic financial
market downturns on the portfolio. Recent market yields have been lower when
compared to prior years and we expect the trend in lower interest income to
continue as long as we compare current yields to yields on the portfolio before
it was sold in 2020. We will continue to monitor the impact of the COVID-19
pandemic on our portfolio and the impact of the expected economic recovery.
Significant uncertainties and emerging risks still exist regarding the potential
long-term impact of the COVID-19 pandemic on the credit markets and our
investment portfolio.
Commission revenue is comprised principally of brokerage commissions we earn
from third-party reinsurers (excluding the FHCF) on reinsurance placed for the
Insurance Entities. Commission revenue is earned pro-rata over the reinsurance
policy period which runs from June 1st to May 31st of the following year. For
the three months ended March 31, 2021, commission revenue was $9.1 million,
compared to $7.0 million for the three months ended March 31, 2020. The increase
in commission revenue of $2.1 million, or 30.1%, for the three months ended
March 31, 2021 was primarily due to increased commissions from third-party
reinsurers earned on increased reinsurance premiums due to growth in our
exposures, as well as the difference in pricing and structure associated with
our reinsurance program when compared to the prior year.
Policy fees for the three months ended March 31, 2021 were $5.4 million compared
to $5.5 million for the same period in 2020. The decrease of $0.2 million, or
2.8%, was the result of a decrease in the total number of new and renewal
policies written during the three months ended March 31, 2021 compared to the
same period in 2020.
The following table presents losses and LAE incurred on a direct, ceded and net
basis expressed in dollars and as a percent of the respective amounts of
premiums earned. These amounts are further categorized as 1) core losses, 2)
weather events for the current accident year and 3) prior years' reserve
development (dollars in thousands):

                                                                            

Three months ended March 31, 2021

                                           Direct               Loss Ratio              Ceded              Loss Ratio               Net               Loss Ratio
Premiums earned                       $   375,606                                    $ 132,301                                  $ 243,305

Loss and loss adjustment expenses:
Core losses                           $   145,228                      38.7  %       $      28                       -  %       $ 145,200                    59.7  %
Weather events*                                 -                         -  %               -                       -  %               -                       -  %
Prior years' reserve development           92,070                      24.5  %          93,307                    70.5  %          (1,237)                   (0.5) %
Total losses and loss adjustment
expenses                              $   237,298                      63.2  %       $  93,335                    70.5  %       $ 143,963               

59.2%

* Only includes weather events for the current year beyond those expected.

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                                                                                    Three Months Ended March 31, 2020
                                           Direct               Loss Ratio              Ceded              Loss Ratio               Net               Loss Ratio
Premiums earned                       $   325,951                                    $ 105,122                                  $ 220,829

Loss and loss adjustment expenses:
Core losses                           $   129,728                      39.8  %       $      21                       -  %       $ 129,707                    58.7  %
Weather events*                             1,000                       0.3  %               -                       -  %           1,000                     0.5  %
Prior years' reserve development           42,515                      13.0  %          38,174                    36.3  %           4,341                     2.0  %
Total losses and loss adjustment
expenses                              $   173,243                      53.2  %       $  38,195                    36.3  %       $ 135,048               

61.2%

* Includes only weather events of the current year 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.
Management looks at losses and LAE in three areas, as described below and
represented in the tables above, each of which have different drivers which
impact reported results. As a result, these components of losses and LAE are
described separately. Overall losses and LAE, net of reinsurance recoveries,
were $144.0 million resulting in a 59.2% net loss and LAE ratio for the quarter
ended March 31, 2021. This compares to $135.0 million resulting in a 61.2% net
loss and LAE ratio for the quarter ended March 31, 2020.

Factors affecting losses and AEL are as follows:

•Core losses
•Our core losses consist of all other losses and LAE, current year strengthening
and excludes weather events beyond those expected and prior years' reserve
development. Core losses were 38.7% of direct premium earned for the quarter
ended March 31, 2021 compared to 39.8% for the same period in 2020. These losses
and loss ratios benefit from the profitable impact of ceded claim fees, which
are described below, reducing core losses. The core loss ratio for 2020 and 2021
reflects trends we have seen in higher expected costs to settle claims in the
Florida market, specifically in response to increased trends in litigated and
represented claims. Core losses also increase as premium volume increases year
over year. Although the Insurance Entities received rate increases in Florida
and certain other states, management has elected to keep the core loss ratio in
line with the prior year until management sees loss costs stabilize in Florida
and certain other states. The core loss ratio, net is also negatively impacted
in 2021 by a proportionally greater spend on reinsurance which increases the net
loss ratio. See the discussion above for the Insurance Entities' 2020-2021
reinsurance programs and "Item 1-Note 4 (Reinsurance)."

•Weather events beyond those expected
•There were no weather events above plan during the quarter ended March 31,
2021.
•During the quarter ended March 31, 2020, weather events totaled $1.0 million
direct and net, principally for weather events beyond those expected.
•Prior years' reserve development
•Management identifies two drivers which influence amounts recorded as prior
years' reserve development, namely: (i) changes to prior estimates of direct and
net ultimate losses on prior accident years excluding major hurricanes and (ii)
changes in prior estimates of direct and net ultimate losses on hurricanes.
During the quarter ended March 31, 2021, prior years' reserve development
totaled $92.1 million of direct losses and $1.2 million of net favorable loss
development after the benefit of reinsurance.

?Prior years' reserve development for the quarter ended March 31, 2021 was the
result of a gross increase in the ultimate losses for Hurricane Sally of $92
million. Changes to ceded reserves on prior years' hurricanes exceeded gross
development by $1.2 million, resulting in net favorable development on prior
years' reserve development. There was an increase in ceded reserves on Hurricane
Sally as a result of recoveries on losses outside of Florida, which have a lower
attachment point, offset by a reduction in Hurricane Irma recoveries
representing previously ceded losses not subject to recovery. As a result, net
prior years' reserve development was favorable.
?Excluding hurricanes, there was no prior years' reserve development for the
quarter ended March 31, 2021.
?For the quarter ended March 31, 2020, direct prior years' reserve development
of $42.5 million gross, less $38.2 million ceded, resulting in $4.3 million net
development. The direct and net prior years' reserve development was principally
due to increased ultimate direct losses and LAE for Hurricane Irma.
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The net loss and LAE ratio for the quarter ended March 31, 2021 was 59.2%
compared to 61.2% in the first quarter of the prior year. The decrease of 2.0
loss ratio points was a result of: (1) favorable prior years' reserve
development on prior years' losses and LAE reserves (2.5 loss ratio points); (2)
decreased weather (0.5 loss ratio points); and (3) increased estimated core
losses and LAE ratio and strengthening for the current year (4.1 loss ratio
points, which include 4.1 loss ratio points as a result of higher reinsurance
costs). The increase was partially offset by higher financial benefit from the
management of claims, including claims fees ceded to reinsurers (3.1 loss ratio
points).

The Company continues to experience inflated costs for losses and LAE in the
Florida market where an industry has developed around the solicitation, filing
and litigation of personal residential claims, resulting in a pattern of
continued increased year over year levels of represented claims, inflation of
purported claim amounts, and increased demands for attorneys' fee. Active
solicitation of personal residential claims in Florida by policyholder
representatives, remediation companies and repair companies has led to an
increase in the frequency and severity of personal residential claims in Florida
exceeding historical levels and levels seen in other jurisdictions. A Florida
statute providing a one-way right of attorneys' fees against insurers, coupled
with other adverse statutes and judicial rulings, have further produced a legal
environment in Florida that encourages litigation, in many cases without regard
to the underlying circumstances of the claims.

The market trends in losses and LAE led us to file in February 2020 for an
overall 12.4% rate increase in Florida, which was approved effective May 18,
2020 for new business and July 7, 2020 for renewals. In addition we filed and
received approval on December 31, 2020 to further increase our rates in Florida
by an additional 7.0% in response to higher reinsurance costs associated with
the reinsurance program we put into effect June 1, 2020. This rate change was
effective December 31, 2020 for new business and March 1, 2021 for renewal
business. In addition, we implemented changes to certain new business
underwriting guidelines, reduced new business writings in certain Florida
counties and developed and implemented specialized claims and litigation
management efforts to address market trends which we believe are driving up
claim costs.

The financial benefit from the management of claims, including claim fees ceded
to reinsurers, was $8.1 million for the three months ended March 31, 2021,
compared to $0.3 million during the three months ended March 31, 2020, driven
primarily by the recoveries from reinsurers in excess of costs and the financial
impact of internal claim services on the expected core loss ratio. The benefit
was recorded in the condensed consolidated financial statements as a reduction
to losses and LAE.
General and administrative expenses were $82.4 million for the three months
ended March 31, 2021, compared to $72.6 million during the same period in 2020,
as follows (dollars in thousands):
                                                                   Three Months Ended
                                                                        March 31,                                                Change
                                                       2021                                  2020                          $                %
                                               $                Ratio                $                Ratio
Premiums earned, net                      $ 243,305                             $ 220,829                             $ 22,476             10.2  %
General and administrative expenses:
Policy acquisition costs                     56,458               23.2  %          46,864               21.2  %          9,594             20.5  %
Other operating costs (1)                    25,985               10.7  %          25,779               11.7  %            206              0.8  %

Total general and administrative expenses $  82,443               33.9  %       $  72,643               32.9  %       $  9,800             13.5  %

(1) Other operating costs include $ 20 and $ 52 interest charges for the three months ended March 31, 2021 and 2020, respectively.



General and administrative expenses increased by $9.8 million, which was the
result of increases in policy acquisition costs of $9.6 million, primarily due
to commissions associated with increased premium volume and an increase in other
operating costs of $0.2 million. The expense ratio as a percentage of premiums
earned, net increased from 32.9% for the three months ended March 31, 2020 to
33.9% for the same period in 2021. The increase in policy acquisition costs as a
percentage of premiums earned, net increased during the quarter as a result of
bonus payouts to agents exceeding previous estimates, higher premium tax rate
and the ratio impact of higher reinsurance costs than previous years reducing
premiums earned, net. The commission rate paid to agents on the renewal of
Florida policies was reduced 2 percentage points effective April 1, 2021. Other
operating cost ratio for the three months ended March 31, 2021 was 10.7%
compared to 11.7% in the first quarter of 2020, reflecting lower advertising
costs and performance bonuses in 2021 and continued economies of scale as other
operating costs did not increase at the same rate as premiums earned, net.
Income tax expense was $9.9 million for the quarter ended March 31, 2021
compared to income tax expense of $7.5 million for the quarter ending March 31,
2020. Our effective tax rate ("ETR") increased to 27.4% for the three months
ended March 31, 2021, as compared to 27.3% for the three months ended March 31,
2020. The ETR increased as a result of a higher ratio of permanent items
relative to the amount of income before taxes, principally non-deductible
compensation, and a lower level of discrete tax benefits.
Other comprehensive loss, net of taxes for the three months ended March 31,
2021, was $16.9 million compared to other comprehensive loss of $8.9 million for
the same period in 2020, reflecting reclassifications out of cumulative other
comprehensive income for available-for-sale debt securities sold and after-tax
changes in fair value of available-for-sale debt securities held in our
investment portfolio. See "Item 1-Note 11 (Other Comprehensive Income (Loss))"
for additional information about the amounts comprising other comprehensive
income for these periods.
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Analysis of Financial Condition-As of March 31, 2021 Compared to December 31,
2020
We believe that cash flows generated from operations will be sufficient to meet
our working capital requirements for at least the next twelve months. We 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
                                       March 31,       December 31,
Type of Investment                       2021              2020

Debt securities available for sale $ 913,131 $ 819,861

Equity securities                         91,291             84,887
Assets held for sale                       6,855                  -
Investment real estate, net                6,027             15,176
Total                                $ 1,017,304      $     919,924


See "Item 1-Condensed Consolidated Statements of Cash Flows" and "Item 1-Note 3
(Investments)" for explanations on changes in investments.
Prepaid reinsurance premiums represent the portion of unearned ceded written
premium that will be earned pro-rata over the coverage period of our reinsurance
program, which runs from June 1st to May 31st of the following year. The
decrease of $115.5 million to $100.2 million as of March 31, 2021 was due to the
amortization of ceded written premium for the reinsurance costs relating to our
2020-2021 catastrophe reinsurance program earned during the period.
Reinsurance recoverable represents the estimated amount of paid and unpaid
losses, LAE and other expenses that are expected to be recovered from
reinsurers. The increase of $57.2 million to $217.6 million as of March 31, 2021
was primarily due to increased estimates of amounts recoverable from reinsurers
relating to settled claims from hurricanes and other events covered by our
reinsurance contracts.
Premiums receivable, net, represents amounts receivable from policyholders. The
decrease in premiums receivable, net, of $4.4 million to $62.5 million as of
March 31, 2021 relates to a slight decrease in direct premium written during the
quarter ended March 31, 2021 compared to the quarter ended December 31, 2020 and
consumer payment behavior of our business. The amount of direct premiums written
during a calendar year tends to increase just prior to the second quarter and
tends to decrease approaching the fourth quarter.
Income taxes recoverable represents the difference between estimated tax
obligations and tax payments made to taxing authorities. As of March 31, 2021,
the balance recoverable was $14.7 million, representing amounts due from taxing
authorities at that date, compared to a balance recoverable of $30.6 million as
of December 31, 2020. Income taxes recoverable as of March 31, 2021 will either
be refunded or applied to future periods to offset future federal and state
income tax obligations.
Deferred income taxes represent the estimated tax asset or tax liability caused
by temporary differences between the tax return basis of certain assets and
liabilities and amounts recorded in the financial statements. During the three
months ended March 31, 2021, deferred income tax asset, net increased by $11.2
million to $17.5 million. Deferred income taxes reverse in future years as the
temporary differences between book and tax reverse.
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 LAE. Unpaid losses
and LAE decreased by $6.7 million to $315.8 million as of March 31, 2021. The
reduction in unpaid losses and LAE was principally due to the settlement of
claims from previous hurricane and storm events, as more claims from those
events concluded during the three months ended March 31, 2021. Overall unpaid
losses and LAE decreased, as claim settlements exceeded new emerging claims.
Unpaid losses and LAE are net of estimated subrogation recoveries.
Unearned premiums represent the portion of direct premiums written that will be
earned pro-rata in the future. The decrease of $10.3 million from December 31,
2020 to $772.8 million as of March 31, 2021 reflects the seasonality of our
business, which varies from month to month.
Advance premium represents premium payments made by policyholders ahead of the
effective date of the policies. The increase of $24.2 million to $73.7 million
as of March 31, 2021 reflects customer payment behavior and the seasonality of
our business.
We exclude net negative cash balances, if any, from cash and cash equivalents
that we have with any single financial institution based on aggregating the book
balance of all accounts at the institution which have the right of offset. If
the aggregation results in a net negative book balance, that balance is
reclassified from cash and cash equivalents in our Condensed Consolidated
Balance Sheet to book overdraft. These amounts represent outstanding checks or
drafts not yet presented to the financial institution in excess of amounts on
deposit at the financial institutions. We maintain a short-term cash investment
strategy sweep to maximize investment returns on cash balances. There were no
book overdrafts as of March 31, 2021 compared to book overdrafts totaling $59.4
million as of December 31, 2020.
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Reinsurance payable, net, represents the unpaid reinsurance premium installments
owed to reinsurers, unpaid reinstatement premiums due to reinsurers and cash
advances received from reinsurers, if any. On June 1st of each year, we renew
our core catastrophe reinsurance program and record the estimated annual cost of
our reinsurance program. These estimated annual costs are increased or decreased
during the year based on premium adjustments or as a result of new placements
during the year. The annual cost initially increases reinsurance payable, which
is then reduced as installment payments are made over the policy period of the
reinsurance, which typically runs from June 1st to May 31st. The balance
increased by $14.2 million to $24.5 million as of March 31, 2021 as a result of
a new reinsurance placement during the quarter ended March 31, 2021 and the
timing of the above items.
Other liabilities and accrued expenses decreased by $11.2 million to $41.1
million as of March 31, 2021, primarily driven from the timing of payments and
payables relating to purchases of securities for our investment portfolio that
settled after December 31, 2020.
Capital resources, net, increased by $5.0 million for the three months ended
March 31, 2021. The increase in stockholders' equity was principally the result
of our 2021 net income and share-based compensation, offset by declines in the
after-tax changes in the fair value of our available-for-sale debt securities,
treasury share purchases and dividends to shareholders. See "Item 1-Condensed
Consolidated Statements of Stockholders' Equity" and "Item 1-Note 8
(Stockholders' Equity)" for explanation of changes in treasury stock.
The reduction in long-term debt of $0.4 million was the result of principal
payments on debt during 2021. See "-Liquidity and Capital Resources" for more
information.

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 and we expect them to be sufficient to meet our current and
long term liquidity requirements. While we have not experienced an adverse
impact on our liquidity as a result of the COVID-19 pandemic, we will continue
to monitor liquidity as the economic consequences of the COVID-19 pandemic
continue to unfold. See discussion below regarding the COVID-19 pandemic's
impact. Also see the discussion above under "Overview-Trends-Impact of the
COVID-19 Pandemic" regarding our response to the COVID-19 pandemic, the
financial impact to us in 2020, our general outlook and plans to monitor the
economic consequences of the COVID-19 pandemic.
The balance of cash and cash equivalents, excluding restricted cash, as of March
31, 2021 was $90.8 million, compared to $167.2 million at December 31, 2020. See
"Item 1-Condensed Consolidated Statements of Cash Flows" for a reconciliation of
the balance of cash and cash equivalents between March 31, 2021 and December 31,
2020. The decrease in cash and cash equivalents was driven by cash flows used in
investing and financing activities in excess of cash flows generated from
operating activities. We have not experienced an adverse impact on our liquidity
as a result of the COVID-19 pandemic. Our cash investment strategy at times
includes cash investments where the right of offset against other bank accounts
does not exist. A book overdraft occurs when aggregating the book balance of all
accounts at a financial institution, for accounts which have the right of
offset, and if the aggregation results in a net negative book balance, that
balance is reclassified from cash and cash equivalents in our Condensed
Consolidated Balance Sheet to book overdraft. Cash and cash equivalents balances
are available to settle book overdrafts, and to pay reinsurance premiums,
expenses and claims. Reinsurance premiums are paid in installments during the
reinsurance policy period, which runs from June 1st to May 31st of the following
year. The FHCF reimbursement premiums are paid in three installments on August
1st, October 1st, and December 1st, and third-party reinsurance premiums are
generally paid in four installments on July 1st, October 1st, January 1st and
April 1st, 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 March 31, 2021 and
December 31, 2020 represents cash equivalents on deposit with certain regulatory
agencies in the various states in which our Insurance Entities do business and,
in 2021, restricted cash and cash equivalents also includes collateral held by a
reinsurance captive arrangement with one of the Insurance Entities reported as a
variable interest entity ("VIE") in the condensed consolidated financial
statements. The amount of collateral held was $10.1 million as of March 31,
2021. See "Item 1-Note 14 (Variable Interest Entities)" for more information.
Liquidity is required at the holding company for us to cover the payment of
general operating expenses and contingencies, 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, net of amounts received from affiliates,
capital contributions to subsidiaries, if needed, and interest and principal
payments on outstanding debt obligations of the holding company, if any. See
"Item 1-Note 5 (Insurance Operations)." The declaration and payment of future
dividends to our shareholders, and any future repurchases of our 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 the holding
company include dividends paid by our service entities generated from income
earned on fees paid by the Insurance Entities to affiliated companies for
general agency, inspections and claims adjusting services. Dividends are also
paid from income earned from brokerage commissions earned on reinsurance
contracts placed by our wholly-owned subsidiary, Blue Atlantic Reinsurance
Corporation, and policy fees. We also maintain high quality investments in our
portfolio as a source of liquidity along with ongoing interest and dividend
income from those investments. 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, Protection Solutions, Inc. ("PSI",
formerly known as Universal Insurance Holding Company of Florida).
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The maximum amount of dividends that can be paid by Florida insurance companies
without prior approval of the FLOIR is subject to restrictions as referenced
below and in "Item 1-Note 5 (Insurance Operations)." The maximum dividend that
may be paid by the Insurance Entities to PSI without prior approval is limited
to the lesser of statutory net income from operations of the preceding calendar
year or statutory unassigned surplus as of the preceding year end. During the
three months ended March 31, 2021 and the year ended December 31, 2020, the
Insurance Entities did not pay dividends to PSI.
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, premium
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 premiums earned, net, 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 potential losses are paid under the policies
written. In the event of catastrophic events, many of our reinsurance agreements
provide for "cash advance" whereby reinsurers advance or prepay amounts to us,
thereby providing liquidity, which we utilize 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 average
credit rating on our available-for-sale securities was A+ as of March 31, 2021
and December 31, 2020. Credit ratings are a measure of collection risk on
invested assets. Credit ratings are provided by third party nationally
recognized rating agencies and are periodically updated. Management establishes
guidelines for minimum credit rating and overall credit rating for all
investments. The duration of our available-for-sale securities was 4.5 years at
March 31, 2021 compared to 4.0 years at December 31, 2020. Duration is a measure
of a bond's sensitivity to interest rate changes and is used by management to
limit the potential impact of longer-term investments.
The Insurance Entities are responsible for losses related to catastrophic events
in excess of coverage provided by the Insurance Entities' reinsurance programs
and retentions before our 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 default by reinsurers may have a material adverse effect on
either of the Insurance Entities, on 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-total capital
ratio and debt-to-equity ratio for the periods presented (dollars in thousands):
                                           As of
                               March 31,       December 31,
                                  2021             2020
Stockholders' equity          $ 454,665       $    449,262
Total long-term debt              8,088              8,456
Total capital resources       $ 462,753       $    457,718

Debt-to-total capital ratio         1.8  %             1.8  %
Debt-to-equity ratio                1.8  %             1.9  %


The debt-to-total capital ratio is total long-term debt divided by total capital
resources, whereas debt-to-equity ratio is total long-term debt divided by
stockholders' equity. These ratios help management measure the amount of
financing leverage in place in relation to equity and future leverage capacity.
As described in our Annual Report on Form 10-K for the year ended December 31,
2020, 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 March 31, 2021, UPCIC was in compliance with the terms of the
surplus note. Total adjusted capital and surplus, which includes the surplus
note, was in excess of regulatory requirements for both UPCIC and APPCIC.

In addition to the liquidity generally provided from operations, we maintain a
conservative, well-diversified investment portfolio, predominantly comprised of
fixed income securities with an average credit rating of A+, that focuses on
capital preservation and providing an adequate source of liquidity for potential
claim payments and other cash needs. The portfolio's secondary investment
objective is to provide a total rate of return with emphasis on investment
income. Historically, we have consistently generated funds from operations,
allowing our cash and invested assets to grow. We have not had to liquidate
investment holdings to fund either operations or financing activities.
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Impact of the COVID-19 Pandemic
There has been significant recovery in the fair value of invested assets since
the low point on or about March 23, 2020 and in the third and fourth quarters of
2020 the Company sold many of its securities in an unrealized gain position to
take advantage of the recovery in asset values. The proceeds from the sales of
available-for-sale debt securities in the third and fourth quarters of 2020 have
been fully reinvested. The sales took advantage of increased market prices
occurring on our available-for-sale debt investment portfolio. As a result of
the sales and reinvestment of available-for-sale debt securities, it is expected
that future portfolio investment income will be lower, as reinvestment rates
reflected market rates which were below the book yields of the securities sold.
The impact of the COVID-19 pandemic on the credit markets remains a key risk as
the world continues to navigate the consequences of the COVID-19 pandemic and
efforts taken by governments to accelerate and stimulate a financial recovery.
Our concern is that individual companies within our portfolio experience
business declines as a result of the COVID-19 pandemic's adverse impact on their
business which impacts their credit rating, reducing the market value of their
securities. We remain in regular contact with our advisors to monitor credit of
the issuers of our securities and discuss appropriate responses to credit
downgrades or changes in companies credit outlook. We believe these measures,
when combined with the inherent liquidity generated by our business model and in
our investment portfolio, will allow us to continue to meet our short- and
long-term obligations.

We implemented certain premium payment grace periods in Florida and other states
to assist policyholders affected by the COVID-19 pandemic. In addition, we have
waived late payment fees that otherwise would apply to those policyholders. To
date we have not seen significant use of these grace periods. We are not able at
this time to estimate the number of policyholders who might avail themselves of
an extended grace period. Generally, a significant number of our policies are
subject to payment by mortgage companies, which are likely to continue remitting
payments as scheduled. Our collection experience since March 2020 was consistent
with our average experience. This reflects on the nature of homeowners'
insurance and the priority that mortgage companies and policyholders place on
maintaining coverage for insured properties. We will monitor this as the impact
of the COVID-19 pandemic and its economic consequences are felt by our
policyholders.

Looking forward to

We continue to monitor a range of financial metrics related to our business.
Although we have not yet experienced material adverse impacts on our business or
liquidity, conditions are subject to change depending on the extent of the
economic downturn and the pace and extent of an economic recovery. Significant
uncertainties exist with the potential long-term impact of the COVID-19
pandemic, including unforeseen newly emerging risks that could affect us. We
will continue to monitor the broader economic impacts of the COVID-19 pandemic
and its impact on our operations and financial condition including liquidity and
capital resources.
Common Stock Repurchases
On November 3, 2020, we announced that our Board of Directors authorized a share
repurchase program under which we may repurchase in the open market up to $20
million of outstanding shares of our common stock through November 3, 2022. 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. We will fund the share repurchase program with cash
from operations.
During the three months ended March 31, 2021, we repurchased an aggregate of
15,444 shares of our common stock in the open market at an aggregate purchase
price of $0.2 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 March 31, 2021.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements that are reasonably
likely to have a material effect on the financial condition, results of
operations, liquidity, or capital resources of the Company, except for
multi-year reinsurance contract commitments for future years that will be
recorded at the commencement of the coverage period. See "Item 1-Note 12
(Commitments and Contingencies)" for more information.

Cash Dividends
The following table summarizes the dividends declared by the Company:
                                                                                                                           Cash Dividend
                                     Dividend                    Shareholders                    Dividend                Per Common Share
         2021                     Declared Date                   Record Date                  Payable Date                   Amount
First Quarter                           March 1, 2021                March 11, 2021                March 18, 2021       $           0.16
Second Quarter                         April 22, 2021                  May 14, 2021                  May 21, 2021       $           0.16



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CONTRACTUAL OBLIGATIONS
The following table represents our contractual obligations for which cash flows
are fixed or determinable as of March 31, 2021 (in thousands):
                                                            Less than                                                  Over
                                           Total              1 year           1-3 years          3-5 years          5 years
Reinsurance payable and multi-year
commitments (1)                         $ 252,342          $ 152,817          $  99,525          $       -          $     -
Unpaid losses and LAE, direct (2)         315,780            191,363             91,576             24,947            7,894
Long-term debt                              8,304              1,157              4,550              2,597                -
Total contractual obligations           $ 576,426          $ 345,337        

$ 195,651 $ 27,544 $ 7,894


(1)The amount in less than 1 year includes reinsurance payable reflected in the
Condensed Consolidated Balance Sheet and reinsurance premiums payable under
multi-year commitments. The 1-3 years solely 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 March 31, 2021. Unpaid losses and
LAE are net of estimated subrogation recoveries. In addition, these balances
exclude amounts recoverable from the Company's reinsurance program.
See "Item 1-Note 4 (Reinsurance)."

Agreements with variable interest entities

We entered into a captive reinsurance arrangement with a VIE in the normal course of business and consolidated the VIE as we are the primary beneficiary.

For a further discussion of our involvement with the VIE, see "Item 1-Note 14
(Variable Interest Entities)."
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
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, 2020.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk is the potential for economic losses due to adverse changes in fair
market value of available-for-sale debt securities, equity securities
("Financial Instruments") and investment real estate. We carry all of our
Financial Instruments at fair market value and investment real estate at net
book value in our statement of financial condition. Our investment portfolio as
of March 31, 2021 is comprised of available-for-sale debt securities and equity
securities, carried at fair market value, which expose us to changing market
conditions, specifically interest rates and equity price changes.
The primary objectives of the investment portfolio are the preservation of
capital and providing adequate liquidity for potential claim 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.
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Interest Rate Risk
Interest rate risk is the sensitivity of the fair market value 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 tables provide information about our fixed income Financial
Instruments as of March 31, 2021 compared to December 31, 2020, which are
sensitive to changes in interest rates. The tables present the expected cash
flows of Financial Instruments based on years to effective maturity using
amortized cost compared to fair market value and the related book yield compared
to coupon yield (dollars in thousands):
                                                                                                March 31, 2021
                                     2021              2022               2023               2024               2025            Thereafter          Other            Total
Amortized cost                   $  19,275          $ 59,504          $ 132,369          $ 100,014          $ 224,708          $ 395,139          $  165          $ 931,174
Fair market value                $  19,357          $ 59,620          $ 132,676          $  99,622          $ 221,455          $ 380,204          $  197          $ 913,131
Coupon rate                           3.31  %           1.61  %            1.97  %            3.09  %            2.62  %            2.29  %         7.50  %            2.39  %
Book yield                            2.26  %           0.69  %            0.91  %            1.01  %            1.07  %            1.68  %         6.31  %            1.31  %

* Years until effective maturity – 6.3 years


                                                                                               December 31, 2020
                                     2021              2022               2023               2024               2025            Thereafter          Other            Total
Amortized cost                   $  31,333          $ 58,790          $ 

107,735 $ 179,872 $ 133,872 $ 303,880 $

  165          $ 815,647
Fair market value                $  31,578          $ 58,868          $ 108,412          $ 180,111          $ 134,740          $ 306,041          $  211          $ 819,961
Coupon rate                           2.75  %           1.88  %            2.15  %            3.12  %            2.51  %            2.41  %         7.50  %            2.52  %
Book yield                            2.12  %           0.59  %            0.84  %            0.71  %            1.07  %            1.59  %         6.31  %            1.16  %

* Years until effective maturity – 5.4 years



All securities, except those with perpetual maturities, were categorized in the
tables above utilizing years to effective maturity. Effective maturity takes
into consideration all forms of potential prepayment, such as call features or
prepayment schedules, that shorten the lifespan of contractual maturity dates.
Equity Price Risk
Equity price risk is the potential for loss in fair value of Financial
Instruments in common stock and mutual funds and other 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):
                                 March 31, 2021                  December 31, 2020
                            Fair Value        Percent         Fair Value         Percent
Equity Securities:
Common stock              $       6,225         6.8  %    $          2,435         2.9  %
Mutual funds and other           85,066        93.2  %              82,452        97.1  %
Total equity securities   $      91,291       100.0  %    $         84,887       100.0  %


A hypothetical decrease of 20% in the market prices of each of the equity
securities held at March 31, 2021 and December 31, 2020 would have resulted in a
decrease of $18.3 million and $17.0 million, respectively, in the fair value of
those securities.
The COVID-19 pandemic presents uncertainty to the financial markets. See further
discussion in "Item 2- Management's Discussion and Analysis of Financial
Condition and Results of Operations."
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