# UNIVERSAL INSURANCE HOLDINGS, INC. (UVE) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from UNIVERSAL INSURANCE HOLDINGS, INC.'s 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/891166/000089116624000013/uve-20231231.htm
Accession: 0000891166-24-000013
Filing date: 2024-02-28
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/UVE/
All MD&A years: /company/UVE/mda/
Previous year: /company/UVE/mda/fy2022/ (FY 2022)
Next year: /company/UVE/mda/fy2024/ (FY 2024)

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to assist in an understanding of our financial condition and results of operations and should be read in conjunction with our consolidated financial statements and accompanying notes in “Item 8—Financial Statements and Supplementary Data” below. 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” and “Part I— Item 1A—Risk Factors.”

Overview

We are a vertically integrated holding company offering homeowners insurance to our customers. In addition, we generate revenue from our investment portfolio, reinsurance brokerage services, the receipt of managing general agency fees from policy holders, and from other sources of revenue (collectively “Other Revenue Sources”). We develop, market, and underwrite insurance products for consumers predominantly in the personal residential homeowners lines of business and perform substantially all insurance-related services for our Insurance Entities, including risk management, claims management, and distribution. Our Insurance Entities offer insurance products through both appointed independent insurance agents and through our online distribution channel. We currently sell insurance policies in 18 states with Florida representing 81.4% of our direct premiums written, with licenses to write insurance in two additional states. We seek to produce an underwriting profit (defined as earned premium-net minus losses, LAE, policy acquisition costs and other operating costs) over the long term, along with growing our Other Revenue Sources.

Revenues

We generate revenue primarily from the collection of insurance premiums. Other sources of revenue include: commissions paid by our reinsurers to our reinsurance intermediary subsidiary BARC on reinsurance it places for the Insurance Entities; policy fees collected from policyholders by our managing general agent subsidiary, ERA (formerly Universal Risk Advisors, Inc.); and financing fees charged to policyholders who choose to defer premium payments reflected in other income. In addition, our subsidiary Alder 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 consolidated financial statements as an adjustment to LAE. We also generate income by investing our assets.

The nature of our business tends to be seasonal during the year, reflecting consumer behaviors in connection with the Florida residential real estate market and the hurricane season. The amount of direct premiums written tends to be highest in the second and third quarters of our fiscal year and lowest in the first and fourth quarters.

Trends and Geographical Distribution

Florida Trends

We are currently working through a cycle to improve long-term rate adequacy and earnings for the Insurance Entities by adjusting rates, managing exposures, and implementing Florida statutory reforms intended to curtail claims-related abuses, while taking advantage of what we believe to be opportunities in a dislocated market. The Florida personal lines homeowners’ market in recent years, and continuing currently, can be characterized as a “hard market,” where insurance premium rates have been escalating, insurers have been reducing coverages, and underwriting standards have tightened as insurers closely monitor insurance rates and manage coverage capacity. Due to conditions in the Florida market and factors more generally affecting the U.S. and global reinsurance markets, reinsurance capacity in recent years has also been subject to less favorable pricing and terms. These market forces decrease competition among admitted insurers, and ultimately result in the increased use of Citizens, which was created to be the State’s residual property insurance market. In recent years, in response to rising claims costs, increased reinsurance costs, and deteriorating conditions in the Florida residential market, most admitted market competitors have implemented significant rate increases. Meanwhile, Citizens’ rate increases are limited by law, resulting in its policies typically being priced lower than admitted market policies. This causes Citizens to become viewed as a desirable alternative to the admitted market as admitted market insurers continue to manage through the hard market challenges. Our Insurance Entities likewise have taken and continue to take action to manage through this hard market by increasing rates, tactically managing exposures, and implementing Florida statutory reforms intended to curtail claims-related abuses, while also seeking to maintain their competitive position in the Florida market, supporting our current policyholders and agents.

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In December 2022, the Florida legislature enacted substantial reforms intended to mitigate rising claims costs and resulting premium increases while also enhancing service to policyholders. These laws have required insurers, including the Insurance Entities, to implement faster claims-response standards and to comply with additional regulatory oversight requirements intended to increase consumer protections. The reforms also seek to curtail certain claimants’ abusive claims practices against insurance carriers, which have contributed substantially to the Florida market’s recent problems of escalating claim costs. Among the reforms, the Florida legislature eliminated policyholders’ former one-way statutory right to attorneys’ fees reimbursement and eliminated the ability of policyholders to assign their insurance benefits to third parties. The Florida legislature also reduced the post-loss time period for submitting claims to one year as contrasted with prior laws permitting claims to be reported two years or even three years after loss events, which led to extended solicitations of claims by contractors, public adjusters, and attorneys and challenges for insurers in evaluating the cause and amount of the late-reported claims.

The most significant statutory reforms took effect for policies issued after December 16, 2022. Policies written before this date might benefit from procedural changes made by the legislature but remain subject to substantive laws previously in effect. Claims associated with policies issued prior to the reforms typically continue to be adversely impacted by the concerns that have plagued the market in recent years, including disproportionately high incidences of represented and litigated claims. As a result, losses and loss adjustment expenses associated with these claims remain high, exceeding historical patterns in Florida and in other states. Although the Insurance Entities’ number of remaining claims subject to pre-reform laws continues to decline, it will be several years before all of these claims are settled or brought to an adjudicated conclusion. We are optimistic that the legislative reforms will gradually improve the Florida claims environment as the number of claims associated with the pre-reform era continues to decline and more of the Insurance Entities’ claims benefit from the reforms.

We seek to achieve rate adequacy for the Insurance Entities, recognizing the effects of the recent Florida claims environment on losses, LAE and expenses, while also taking into account potential benefits associated with the reforms. We have continued to experience increased costs for losses and LAE in the Florida market, where an industry has developed around the solicitation, filing, and litigation of personal residential claims. These dynamics have worsened due to the litigation financing industry, which in some cases funds these actions. In addition, rising inflation, as seen in the cost of labor and material supplies, has further escalated costs associated with the settlement of claims. These conditions and the resulting increases in losses and LAE are chief contributing factors for the rate increases in this market. Adverse actions by public adjusters and lawyers have resulted in a pattern of continued increases in year-over-year levels of represented claims, increases in purported claim amounts, and increased demands for attorneys’ fees. 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. Information prepared by the FLOIR shows that claims in Florida are litigated at a substantially disproportionate rate when compared to other states. This is largely due to a Florida statute in effect prior to December 16, 2022, providing a one-way right of attorneys’ fees against insurers which has, when coupled with certain other statutes and judicial rulings, produced a legal environment in Florida that encourages litigation, in many cases without regard to the underlying merits of the claims. The one-way right to attorneys’ fees essentially means that unless an insurer’s position is substantially upheld in litigation, the insurer must pay the plaintiff’s attorneys’ fees in addition to its own defense costs. This affects not only pre-reform claims that are litigated to resolution, but also the settlement discussions that take place with nearly all litigated pre-reform claims. This also affects a large number of claims from inception or during the adjusting process as a substantial percentage of policyholders obtain representation early in the process, sometimes even before notifying insurers of their claims. These market conditions also add, and will continue to add, complexity to efforts to efficiently and expeditiously adjust claims. This is due to an increasing number of policyholders who have one or more recent prior losses with the Insurance Entities or with other insurers, which then require evaluation during subsequent claims and determinations regarding whether property has been repaired consistently with the scope and amount of damage previously asserted. The law changes referenced above are intended to curtail the abuses and mitigate the costs associated with represented and litigated claims, assignments of benefits, and late-reported claims. Because many of the reforms apply only to new or renewal policies issued after the effective date of the law change, the impact of the new laws on claims and claims-related costs will not be known for several years. This is especially the case as many of the Insurance Entities’ pre-reform claims that remain open have not been conducive to resolution through the claims adjusting process or efficient alternative dispute resolution methods.

Despite our initiatives in implementing law changes and responding to adverse claims behaviors and trends, our costs to settle claims in Florida have increased for the reasons noted herein. For example, the Company continues to adjust its estimate of expected losses and has increased its current year gross loss estimates and increased estimates associated with prior years’ claims when indicated. Over the past four years, even as we have increased our estimates of expected losses each year, we have recorded adverse claim development on prior years’ loss reserves and further strengthened current year losses during the year to address the increasing impact that Florida’s market disruptions had on claim cost trends, especially rising costs from one-way attorneys’ fees as well as the impact of rising costs of building materials and labor. The full extent and duration of these market disruptions on the claim settlement process and inflationary pressures are unknown and still unfolding, and we will monitor the impact of such disruptions on the recording and reporting of claim costs.

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The Company has taken a series of steps over time to mitigate the financial impact of these negative trends in the Florida market. We also have closely monitored rate levels, especially in the Florida market, and have submitted rate filings based upon evolving data. However, because rate filings rely upon past loss and expense data and take time to develop, file and implement, we can experience significant delays between identifying needed rate adjustments, filing the associated rate changes, and ultimately collecting and earning the resulting increased premiums. This is particularly the case in an era of rising costs such as the current Florida market, in which the costs of losses and loss adjustment expenses continue to increase due to Florida’s outsized claims litigation environment and inflationary pressure. Similarly, the Company evaluates and periodically adjusts its policy forms in response to market factors and competitive considerations. While policy form changes can be beneficial in the Company’s risk management initiatives, like with rate adjustments, we can experience delays between identifying desired changes, filing and gaining regulatory approval of the changes, and implementing the new forms.

The Company also updates its claims-handling procedures over time in response to market trends. The Company has adopted initiatives to adjust and pay straightforward, meritorious claims as promptly as possible to mitigate the adverse impacts that can be seen with claims that remain open for longer periods. The Company also has increasingly used video and other technology to facilitate reviews of damaged property and improve efficiency in the claims process. In addition, we develop in-house expertise, often in the form of dedicated internal units, to respond to certain types of claims such as water damage claims, represented claims, and large-loss claims. The Company additionally has established significant in-house legal services to address the high volume of litigated or represented claims as cost-effectively as possible, as well as a subrogation unit that seeks to mitigate losses for the benefit of policyholders and the Company when damages are caused by third parties.

Summary of Recent Rate Increases

In November 2022, UPCIC filed a 3.7% rate increase on Florida personal residential homeowners’ line of business, effective February 15, 2023, for new business and April 1, 2023, for renewals.

In April 2023, UPCIC submitted and received approval for a rate decrease of 1.4% for Homeowners’, and a rate decrease of 1.6% for Dwelling Fire in the State of Florida, effective July 15, 2023, for new and renewal business. This filing resulted from UPCIC’s statutorily required participation in Florida’s Reinsurance to Assist Policyholders Program (“RAP”). This program is unrelated to the FHCF and allows insurers to access a layer of reinsurance coverage that is below the FHCF industry retention at no cost to the insurer. In exchange the Insurance Entities adopted a corresponding one-year rate reduction. Under current law, the RAP program expires with the reinsurance contract year ending May 31, 2024. Accordingly, the rate decrease that was temporarily implemented in response to the RAP coverage will expire one year from its effective date, on July 15, 2024.

In July 2023, UPCIC filed a 7.5% rate increase on Florida personal residential homeowners’ line of business, effective July 17, 2023, for new business and November 4, 2023, for renewal business. Additionally, in October 2023, UPCIC filed a 4.1% rate increase on Florida personal dwelling-fire lines of business, effective January 15, 2024, for both new and renewal business. Both of these rate increases were implemented under file-and-use rating laws and are pending review with regulators.

Throughout 2023, the following rate changes for UPCIC have become effective in states other than Florida:

•Georgia: +9.8% effective January 10, 2023, for renewal business

•Virginia: +7.3% effective February 23, 2023 for new business, and April 14, 2023 for renewal business

•Minnesota: +8.0% effective February 23,2023, for new business, and April 29, 2023, for renewal business

•Alabama: +9.5% effective February 13, 2023, for new business, and April 4, 2023, for renewal business

•Indiana: +6.0% effective March 22, 2023, for new business, and May 11, 2023, for renewal business

•Pennsylvania: +5.0% effective June 1, 2023, for new business, and July 21, 2023, for renewal business

•New Jersey: +6.7% effective August 21, 2023, for new business, and October 10, 2023, for renewal business

•Georgia: +14.8% effective November 21, 2023 for new business, and January 10, 2024, for renewal business

In addition to this, a file and use rate filing was made in Massachusetts for a rate increase of 11.9% which would become effective November 1, 2023, for new business, and December 21, 2023, for renewal business upon approval.

An additional three rate increases were filed in 2023 which are currently pending approval:

•South Carolina: +7.8% effective January 16, 2024 for new business, and March 6, 2024 for renewal business

•Maryland: +13.3% effective January 22, 2024 for new business, and March 12, 2024, for renewal business

•New York: +14.7% effective March 11, 2024, for new business, and April 30, 2024, for renewal business

•Indiana: +8.0% effective March 22, 2024 for new business, and May 11, 2024, for renewal business

Geographical Distribution

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Direct premiums written continue to increase across in 16 of the 18 states in which we conduct business year-over-year. As a result of our business strategy, rate changes and disciplined underwriting initiatives, we have seen a decrease in total policy count in 9 out of 19 states, but an increase in in-force premium and total insured value in a majority of states for the past two years. Direct premiums written for states outside of Florida increased 15.9%, representing a $49.0 million increase during 2023. Direct premiums written for Florida increased 1.8%, representing a $27.1 million increase during 2023. The following table provides direct premiums written for Florida and other states for the years ended December 31, 2023 and 2022 (dollars in thousands):

[[GREPCENT_TABLE]]
[["","","For the Years Ended","","Growth Year Over Year"],["","","December 31, 2023","","December 31, 2022"],["State","","Direct Premiums Written","","%","","Direct Premiums Written","","%","","$","","%"],["Florida","","$","1,565,197","","","81.4","%","","$","1,538,143","","","83.3","%","","$","27,054","","","1.8","%"],["Other states","","356,636","","","18.6","%","","307,643","","","16.7","%","","48,993","","","15.9","%"],["Grand total","","$","1,921,833","","","100.0","%","","$","1,845,786","","","100.0","%","","$","76,047","","","4.1","%"]]
[[/GREPCENT_TABLE]]

We seek to prudently grow and generate long-term rate adequate premium in each state where we offer policies. Our diversification strategy seeks to increase business outside of Florida and to improve geographical distribution within Florida.

The geographical distribution of our policies in force, premium in force and total insured value across all states were as follows, as of December 31, 2023, 2022 and 2021 (dollars in thousands, rounded to the nearest thousand):

[[GREPCENT_TABLE]]
[["","","As of December 31, 2023"],["","","Policies","","","","Premium","","","","Total Insured"],["State","","In Force","","%","","In Force","","%","","Value","","%"],["Florida","","567,893","","","70.1","%","","$","1,577,210","","","81.5","%","","$","188,516,949","","","58.3","%"],["North Carolina","","56,787","","","7.0","%","","70,170","","","3.6","%","","25,990,577","","","8.0","%"],["Georgia","","31,335","","","3.9","%","","54,315","","","2.8","%","","16,704,678","","","5.2","%"],["Massachusetts","","21,443","","","2.6","%","","33,902","","","1.8","%","","16,702,823","","","5.2","%"],["Virginia","","19,213","","","2.4","%","","25,736","","","1.3","%","","12,788,156","","","4.0","%"],["New Jersey","","18,606","","","2.3","%","","25,712","","","1.3","%","","13,358,747","","","4.1","%"],["Alabama","","16,440","","","2.0","%","","29,589","","","1.5","%","","7,404,975","","","2.3","%"],["South Carolina","","19,201","","","2.4","%","","28,184","","","1.5","%","","8,997,564","","","2.8","%"],["Indiana","","12,584","","","1.6","%","","18,386","","","1.0","%","","5,326,469","","","1.6","%"],["Minnesota","","9,446","","","1.2","%","","19,407","","","1.0","%","","5,613,856","","","1.7","%"],["Pennsylvania","","9,439","","","1.2","%","","12,648","","","0.7","%","","4,965,478","","","1.5","%"],["Maryland","","8,671","","","1.1","%","","9,379","","","0.4","%","","4,431,977","","","1.4","%"],["New York","","7,102","","","0.9","%","","12,359","","","0.6","%","","5,771,055","","","1.8","%"],["Michigan","","4,890","","","0.6","%","","7,641","","","0.4","%","","2,634,991","","","0.8","%"],["Delaware","","2,341","","","0.2","%","","3,330","","","0.2","%","","1,531,896","","","0.5","%"],["Hawaii","","858","","","0.1","%","","1,100","","","0.1","%","","510,735","","","0.2","%"],["Illinois","","2,491","","","0.3","%","","3,720","","","0.2","%","","1,498,349","","","0.4","%"],["New Hampshire","","318","","","\u2014","%","","358","","","\u2014","%","","230,587","","","0.1","%"],["Iowa","","874","","","0.1","%","","1,222","","","0.1","%","","476,843","","","0.1","%"],["Total","","809,932","","","100.0","%","","$","1,934,368","","","100.0","%","","$","323,456,705","","","100.0","%"]]
[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["","","As of December 31, 2022"],["","","Policies","","","","Premium","","","","Total Insured"],["State","","In Force","","%","","In Force","","%","","Value","","%"],["Florida","","615,796","","","72.5","%","","$","1,547,383","","","83.4","%","","$","201,237,145","","","62.4","%"],["North Carolina","","54,988","","","6.5","%","","60,990","","","3.3","%","","23,135,353","","","7.2","%"],["Georgia","","35,174","","","4.2","%","","53,250","","","2.9","%","","17,684,518","","","5.5","%"],["Massachusetts","","18,849","","","2.2","%","","28,729","","","1.5","%","","13,886,783","","","4.3","%"],["Virginia","","20,123","","","2.4","%","","24,622","","","1.3","%","","12,691,444","","","3.9","%"],["New Jersey","","17,965","","","2.1","%","","23,551","","","1.3","%","","12,434,136","","","3.9","%"],["Alabama","","14,218","","","1.7","%","","22,794","","","1.2","%","","6,043,021","","","1.9","%"],["South Carolina","","17,260","","","2.0","%","","20,304","","","1.1","%","","7,344,000","","","2.3","%"],["Indiana","","14,441","","","1.7","%","","18,804","","","1.0","%","","5,885,207","","","1.8","%"],["Minnesota","","9,545","","","1.1","%","","18,100","","","1.0","%","","5,456,394","","","1.7","%"],["Pennsylvania","","11,179","","","1.3","%","","13,700","","","0.7","%","","5,645,993","","","1.7","%"],["Maryland","","6,840","","","0.8","%","","6,642","","","0.4","%","","3,116,236","","","1.0","%"],["New York","","3,897","","","0.5","%","","5,963","","","0.3","%","","2,912,117","","","0.9","%"],["Michigan","","3,497","","","0.4","%","","4,995","","","0.3","%","","1,756,525","","","0.5","%"],["Delaware","","1,939","","","0.2","%","","2,645","","","0.1","%","","1,220,586","","","0.4","%"],["Hawaii","","1,566","","","0.2","%","","1,901","","","0.1","%","","875,158","","","0.3","%"],["Illinois","","1,057","","","0.1","%","","1,435","","","0.1","%","","588,925","","","0.2","%"],["New Hampshire","","350","","","0.1","%","","306","","","\u2014","%","","239,970","","","0.1","%"],["Iowa","","172","","","\u2014","%","","225","","","\u2014","%","","89,629","","","\u2014","%"],["Total","","848,856","","","100.0","%","","$","1,856,339","","","100.0","%","","$","322,243,140","","","100.0","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","","As of December 31, 2021"],["","","Policies","","","","Premium","","","","Total Insured"],["State","","In Force","","%","","In Force","","%","","Value","","%"],["Florida","","695,533","","","73.7","%","","$","1,395,476","","","83.1","%","","$","203,062,948","","","63.3","%"],["North Carolina","","58,644","","","6.2","%","","57,534","","","3.4","%","","22,703,801","","","7.1","%"],["Georgia","","41,097","","","4.4","%","","53,956","","","3.2","%","","19,057,338","","","5.9","%"],["Massachusetts","","16,793","","","1.8","%","","23,790","","","1.4","%","","11,467,490","","","3.6","%"],["Virginia","","23,306","","","2.5","%","","21,069","","","1.3","%","","13,854,648","","","4.3","%"],["Alabama","","14,484","","","1.5","%","","19,966","","","1.2","%","","5,725,381","","","1.8","%"],["Indiana","","17,744","","","1.9","%","","19,018","","","1.1","%","","6,810,107","","","2.1","%"],["Minnesota","","11,934","","","1.2","%","","18,216","","","1.1","%","","6,372,221","","","2.0","%"],["New Jersey","","14,844","","","1.6","%","","18,054","","","1.1","%","","9,523,904","","","3.0","%"],["South Carolina","","17,563","","","1.8","%","","17,976","","","1.1","%","","6,860,210","","","2.1","%"],["Pennsylvania","","13,930","","","1.5","%","","14,688","","","0.9","%","","6,528,352","","","2.0","%"],["Maryland","","6,615","","","0.7","%","","6,003","","","0.4","%","","2,802,756","","","0.9","%"],["Michigan","","3,476","","","0.4","%","","4,572","","","0.3","%","","1,585,940","","","0.5","%"],["New York","","2,808","","","0.3","%","","3,814","","","0.2","%","","1,898,297","","","0.6","%"],["Delaware","","1,819","","","0.2","%","","2,316","","","0.1","%","","1,061,987","","","0.3","%"],["Hawaii","","1,773","","","0.2","%","","1,974","","","0.1","%","","903,844","","","0.3","%"],["Illinois","","786","","","0.1","%","","1,006","","","\u2014","%","","409,660","","","0.1","%"],["New Hampshire","","369","","","\u2014","%","","301","","","\u2014","%","","235,154","","","0.1","%"],["Iowa","","75","","","\u2014","%","","92","","","\u2014","%","","34,396","","","\u2014","%"],["Total","","943,593","","","100.0","%","","$","1,679,821","","","100.0","%","","$","320,898,434","","","100.0","%"]]
[[/GREPCENT_TABLE]]

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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. Please also refer to “Item 8—Note 2 (Summary of Significant Accounting Policies)” for definitions of certain other terms we use when describing our financial results.

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

In addition to our key performance indicators and other financial measures presented in accordance with United States Generally Accepted Accounting Principles (“GAAP”), management also uses certain non-GAAP financial measures to evaluate the Company's financial performance and the overall growth in value generated for the Company’s common shareholders. Management believes that non-GAAP financial measures, which may be defined differently by other companies, help to explain the Company’s results to investors in a manner that allows for a more complete understanding of the underlying trends in the Company’s business. The non-GAAP measures should not be viewed as a substitute for those determined in accordance with GAAP. The calculation of these key financial measures including the reconciliation of non-GAAP measures to the nearest GAAP measure are found below under “—Non-GAAP Financial Measures.”

Definitions of Key Performance Indicators and GAAP and Non-GAAP Measures

Adjusted book value per common share ― is a non-GAAP measure that is calculated as adjusted common stockholders’ equity divided by common shares outstanding at the end of the period. Management believes this metric is meaningful, as it allows investors to evaluate underlying book value growth by excluding the impact of unrealized gains and losses due to interest rate volatility.

Adjusted common stockholders’ equity ― is a non-GAAP measure that is calculated by GAAP common stockholders’ equity, excluding accumulated other comprehensive income (loss). Management believes this metric is meaningful, as it allows investors to evaluate underlying growth in stockholders’ equity by excluding the impact of unrealized gains and losses due to interest rate volatility.

Adjusted net income (loss) attributable to common stockholders ― is a non-GAAP measure that is calculated by GAAP net income (loss) attributable to common stockholders, excluding net realized gains (losses) on investment and net changes in unrealized gains (losses) on investments, net of tax. Management believes this metric is meaningful, as it allows investors to evaluate underlying profitability and enhances comparability across periods, by excluding items that are heavily impacted by investment market fluctuations and other economic factors and are not indicative of operating trends.

Adjusted operating income (loss) ― is a non-GAAP measure that is computed by GAAP operating income (loss), excluding net realized gains (losses) on investment and net changes in unrealized gains (losses) on investments. Management believes this metric is meaningful, as it allows investors to evaluate underlying profitability and enhances comparability across periods, by excluding items that are heavily impacted by investment market fluctuations and other economic factors and are not indicative of operating trends.

Adjusted operating income (loss) margin ― is a non-GAAP measure that is computed by adjusted operating income (loss) divided by core revenue. Management believes this metric is meaningful, as it allows investors to evaluate underlying profitability and enhances comparability across periods, by excluding items that are heavily impacted by investment market fluctuations and other economic factors and are not indicative of operating trends.

Adjusted return on common equity (Adjusted “ROCE”) ― is a non-GAAP measure, that is calculated by actual or annualized adjusted net income attributable to common stockholders divided by average adjusted common stockholders’ equity, with the denominator excluding current period income statement net realized gains (losses) on investments and net changes in unrealized gains (losses) on investments, net of tax. Management believes this metric is meaningful, as it allows investors to evaluate underlying profitability and enhances comparability across periods, by excluding items that are heavily impacted by investment market fluctuations and other economic factors and are not indicative of operating trends.

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.

36

Core Loss Ratio ― a common operational metric used in the insurance industry to describe the ratio of current accident year expected losses and LAE, excluding current accident year weather events beyond those expected, to premiums earned. Core loss ratio is an important measure identifying profitability trends of premiums in force. Core losses consists of losses and LAE excluding current accident year 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. The core loss ratio can be measured on a direct basis, using direct earned premiums, or on a net basis, using premiums earned, net (i.e., direct premiums earned less ceded premiums earned).

Core revenue ― is a non-GAAP measure that is calculated by total GAAP revenue, excluding net realized gains (losses) on investments and net changes in unrealized gains (losses) on investments. Management believes this metric is meaningful, as it allows investors to evaluate underlying revenue trends and enhances comparability across periods, by excluding items that are heavily impacted by investment market fluctuations and other economic factors and are not indicative of operating trends.

Debt-to-Equity Ratio ― long-term debt divided by stockholders’ equity. This ratio helps management measure the amount of financing leverage in place in relation to equity and future leverage capacity.

Debt-to-Total Capital Ratio ― long-term debt divided by the sum of total stockholders’ equity and long-term debt (often referred to as total capital resources). This ratio helps management measure the amount of financing leverage in place (long-term debt) in relation to total capital resources and future leverage capacity.

Diluted adjusted earnings per common share ― is a non-GAAP measure that is calculated by adjusted net income available to common stockholders divided by weighted average diluted common shares outstanding. Management believes this metric is meaningful, as it allows investors to evaluate underlying revenue trends and enhances comparability across periods, by excluding items that are heavily impacted by investment market fluctuations and other economic factors and are not indicative of operating trends.

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) ― includes only DPW in the state of Florida. This measure allows management to analyze growth in our primary market and is also a measure of business 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.

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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 12 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 Common Equity (“ROCE”) ― calculated by actual net income (loss) attributable to common stockholders divided by average common stockholders’ equity. ROCE is a capital profitability measure of how efficiently management creates profits.

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.

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 FHCF. The 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 2023-2024 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. Similarly, the Insurance Entities’ respective 2023-2024 reinsurance programs meet the stress test and review requirements of Demotech, Inc., for maintaining Financial Stability Ratings® of A (Exceptional) and of Kroll for maintaining insurer financial strength ratings of “A-”.

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, 2023, the Insurance Entities entered into multiple reinsurance agreements comprising our 2023-2024 reinsurance program. See “Item 1—Note 4 (Reinsurance).”

UPCIC/APPCIC 2023-2024 All States Reinsurance Program

•First event All States retention of $45 million.

•All States first event tower extends to $2.61 billion with no co-participation in any of the layers, no limitation on loss adjustment expenses for the non-catastrophe bond Cosaint Re Pte. Ltd. traditional reinsurance and no accelerated deposit premiums.

•Assuming a first event completely exhausts the $2.61 billion tower, the second event exhaustion point would be $912 million.

38

•Full reinstatement available on $867 million of non-FHCF and non-RAP first event catastrophe coverage for guaranteed second event coverage. For all layers purchased between $45 million and the RAP layer, 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 enough reinstatement premium protection ("RPP") limit to pay the premium necessary for the reinstatement of these coverages or have secured a specific second event contract.

•First event layer of 100% of $66 million in excess of $45 million established by Universal in captive insurance arrangement. While the Company retains the risk that otherwise would be transferred to third-party reinsurers for this layer, the additional risk is substantially offset by the savings in premiums that would otherwise have been paid to third-party reinsurers.

•Specific 2nd event private market excess of loss coverage of $66 million in excess of $45 million sitting behind captive arrangement.

•Specific 3rd and 4th event private market catastrophe excess of loss coverage of $86 million in excess of $25 million provides frequency protection for multiple events during the treaty period including a $20 million reduction in retention for a 3rd and 4th event.

•For the FHCF Reimbursement Contracts effective June 1, 2023, both UPCIC and APPCIC have continued the election of the 90% coverage level. We estimate the total mandatory FHCF layer will provide approximately $1.316 billion of coverage for UPCIC, which insures to the benefit of the open market coverage secured from private reinsurers and Cosaint Re Pte. Ltd (covers UPCIC only) and we estimate the total mandatory FHCF layer will provide approximately $22.5 million of coverage for APPCIC, which insures to the benefit of the open market coverage secured from private reinsurers.

•For the participation in the RAP program for the 2023-2024 period, we estimate the total RAP layer will provide approximately $202.8 million of coverage for UPCIC and $3.5 million of coverage for APPCIC, both of which inure to the benefit of the open market coverage secured from private reinsurers.

•To further insulate future years, UPCIC has secured $277 million of catastrophe capacity below the FHCF, with contractually agreed limits that extend coverage to include the 2024 wind season. UPCIC’s catastrophe bond, secured leading up to the 2021-2022 renewal, Cosaint Re Pte. Ltd, continues to provide one limit of $150 million in this year’s program and is in its third and final year.

Reinsurers

The table below provides the A.M. Best and S&P financial strength ratings for each of the largest rated third-party reinsurers in UPCIC’s 2023-2024 reinsurance program:

[[GREPCENT_TABLE]]
[["Reinsurer","","A.M. Best","","S&P"],["Florida Hurricane Catastrophe Fund (1)","","N/A","","N/A"],["Various Lloyd\u2019s of London Syndicates","","A","","A+"],["Munich Reinsurance America Inc.","","A+","","AA-"],["DaVinci Reinsurance Ltd.","","A","","A+"],["Renaissance Reinsurance Ltd.","","A+","","A+"],["Chubb Tempest Reinsurance Ltd.","","A++","","AA"],["Allianz Risk Transfer AG. Bermuda Branch","","A+","","AA"],["Markel Bermuda Ltd.","","A","","A"]]
[[/GREPCENT_TABLE]]

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

The cost of the 2023-2024 all states reinsurance programs for UPCIC and APPCIC is projected to be $620.6 million, prior to any potential reinstatement premiums due, and represents approximately 31.97% of projected direct premium earned for the 12-month treaty period.

[[GREPCENT_TABLE]]
[["","SELECTED FINANCIAL DATA"]]
[[/GREPCENT_TABLE]]

The following selected historical consolidated financial data should be read in conjunction with our consolidated financial statements and notes thereto and “Item 7—Management’s Discussion and Analysis of Financial Condition and Results of

39

Operations” set forth elsewhere in the Annual Report on Form 10-K. The historical results are not necessarily indicative of the results to be expected in any future period.

The following tables present historical selected consolidated financial data of Universal Insurance Holdings, Inc. and Subsidiaries for the five years ended December 31, 2023 (in thousands, except per share data):

[[GREPCENT_TABLE]]
[["","","Years Ended December 31,"],["","","2023","","2022","","2021","","2020","","2019"],["Statement of Income Data:"],["Revenues:"],["Direct premiums written","","$","1,921,833","","","$","1,845,786","","","$","1,671,252","","","$","1,517,479","","","$","1,292,721"],["Change in unearned premium","","(46,704)","","","(86,085)","","","(74,634)","","","(121,856)","","","(59,600)"],["Direct premium earned","","1,875,129","","","1,759,701","","","1,596,618","","","1,395,623","","","1,233,121"],["Ceded premium earned","","(623,193)","","","(631,075)","","","(561,155)","","","(472,060)","","","(390,619)"],["Premiums earned, net","","1,251,936","","","1,128,626","","","1,035,463","","","923,563","","","842,502"],["Net investment income (1)","","48,449","","","25,785","","","12,535","","","20,393","","","30,743"],["Other revenue (2)","","80,380","","","81,044","","","71,993","","","65,437","","","55,633"],["Total revenues","","1,391,582","","","1,222,658","","","1,121,851","","","1,072,770","","","939,351"],["Costs and expenses:"],["Losses and loss adjustment expenses","","992,636","","","938,399","","","779,205","","","758,810","","","603,406"],["Policy acquisition costs","","208,011","","","214,259","","","226,167","","","199,102","","","177,530"],["Other operating costs","","96,055","","","90,638","","","87,428","","","90,532","","","94,655"],["Total expenses","","1,296,702","","","1,243,296","","","1,092,800","","","1,048,444","","","875,591"],["Interest and amortization of debt issuance costs","","6,531","","","6,609","","","638","","","95","","","243"],["Income (loss) before income tax expense (benefit)","","88,349","","","(27,247)","","","28,413","","","24,231","","","63,517"],["Income tax expense (benefit)","","21,526","","","(4,990)","","","8,006","","","5,126","","","17,003"],["Net income (loss)","","$","66,823","","","$","(22,257)","","","$","20,407","","","$","19,105","","","$","46,514"],["Per Share Data:"],["Basic earnings (loss) per common share","","$","2.24","","","$","(0.72)","","","$","0.65","","","$","0.60","","","$","1.37"],["Diluted earnings (loss) per common share","","$","2.22","","","$","(0.72)","","","$","0.65","","","$","0.60","","","$","1.36"],["Dividends declared per common share","","$","0.77","","","$","0.77","","","$","0.77","","","$","0.77","","","$","0.77"],["","","As of December 31,"],["","","2023","","2022","","2021","","2020","","2019"],["Balance Sheet Data:"],["Total invested assets","","$","1,160,784","","","$","1,105,806","","","$","1,093,680","","","$","919,924","","","$","914,586"],["Cash and cash equivalents","","397,306","","","388,706","","","250,508","","","167,156","","","182,109"],["Total assets","","2,316,561","","","2,890,154","","","2,056,141","","","1,758,741","","","1,719,852"],["Unpaid losses and loss adjustment expenses","","510,117","","","1,038,790","","","346,216","","","322,465","","","267,760"],["Unearned premiums","","990,559","","","943,854","","","857,769","","","783,135","","","661,279"],["Long-term debt (3)","","102,006","","","102,769","","","103,676","","","8,456","","","9,926"],["Total liabilities","","1,975,264","","","2,602,258","","","1,626,439","","","1,309,479","","","1,225,951"],["Total stockholders\u2019 equity","","$","341,297","","","$","287,896","","","$","429,702","","","$","449,262","","","$","493,901"],["Shares outstanding end of period","","28,966","","","30,389","","","31,221","","","31,137","","","32,638"],["Book value per share","","$","11.78","","","$","9.47","","","$","13.76","","","$","14.43","","","$","15.13"],["Return on average common equity (ROCE)","","21.2","%","","(6.2)","%","","4.6","%","","4.1","%","","9.2","%"],["Selected Data:"],["Loss and loss adjustment expense ratio (4)","","79.3","%","","83.2","%","","75.3","%","","82.1","%","","71.6","%"],["General and administrative expense ratio (5)","","24.3","%","","27.0","%","","30.2","%","","31.4","%","","32.3","%"],["Combined Ratio (6)","","103.6","%","","110.2","%","","105.5","%","","113.5","%","","103.9","%"]]
[[/GREPCENT_TABLE]]

(1)Net investment income excludes net realized gains (losses) on sale of investments and net change in unrealized gains (losses) on investments.

(2)Other revenue consists of commission revenue, policy fees, and other revenue.

40

(3)For the year ended December 31, 2023 and 2022, long-term debt includes a private placement of $100 million of 5.625% Senior Unsecured Notes due 2026. See “Part II—Item 8—Note 7 (Long-term debt).”

(4)The loss and loss adjustment expense ratio is calculated by dividing losses and loss adjustment expenses by premiums earned, net.

(5)The general and administrative expense ratio is calculated by dividing general and administrative expense by premiums earned, net.

(6)The combined ratio is the sum of the losses and loss adjustment expense ratio and the general and administrative expense ratio.

41

RESULTS OF OPERATIONS AND ANALYSIS OF FINANCIAL CONDITION

2023 Financial and Business Highlights (comparisons are to 2022 unless otherwise specified)

•Rate filings and automatic policy inflation adjustments to policy insured values are increasing written and earned premium as the new rates and property insured values take effect on policy renewals and new business, and earn prospectively over the policy period.

•Management is continuing its efforts to prudently manage new business risk selection, improve risk exposure diversification, while rate increases are taking effect to improve profitability. As a result of management’s efforts to manage exposures, the number of total policies in force has been decreasing. Offsetting the impact of lower policies in force are increases in written and earned premiums driven by rate increases and inflation increases to insured values.

•UPCIC filed with its regulators in Hawaii to withdraw from the state. There were 858 policies in Hawaii as of December 31, 2023. The withdrawal and nonrenewal of policies in Hawaii are expected to be completed within the next year.

•UPCIC filed its initial rate filing in Wisconsin (a new expansion state in 2023), which was subsequently approved.

•Costs for the 2023 reinsurance were lower than 2022 because of Florida’s RAP program as well as existing multi-year reinsurance agreements previously placed in the 2023-2024 reinsurance program. RAP is a one-time, no-cost reinsurance benefit to the Insurance Entities which in exchange provided a rate decrease to policyholders of approximately 1.4%. The lower reinsurance costs, effective June 1 2023, have a favorable effect on financial ratios which are based on net earned premium.

•The Insurance Entities concluded a mandatory commutation with the FHCF relating to the 2017/18 contract year, which covered Hurricane Irma. Additionally, commutations with certain other reinsurers were concluded during the year, which the Insurance Entities deemed were in their best interests.

•Net investment income increased as cash and maturing interest earning investments are redeployed into higher interest rate investments.

•For the year ended December 31, 2023, the net loss ratio declined to 79.3% from 83.2% due to the absence of major hurricane events in 2023 when compared to Hurricane Ian in 2022, offset by higher prior year development in 2023 including reserve strengthening of pre-reform losses. See “Overview—Trends and Geographical Distribution—Florida Trends” above and “Losses and Loss Adjustment Expenses” below.

•General and administrative expenses have declined year-over-year, including a decline in the expense ratio, as a result of management’s efforts in this area. Over the past two years, commissions paid on renewal policies in Florida have been reduced to 8% from 10%. The rollout to this new lower commission rate was concluded in May 2023. The benefit of lower commission rates is realized over 12 months as policies are renewed under the lower commission rate structure. Further reducing the expense ratio was continued net earned premium growth.

•The Company continued to return shareholder value with quarterly dividends and share repurchases. Also, during the year, the Company approved a new share repurchase plan permitting share repurchases not to exceed $20.0 million during the period between June 12, 2023, until June 10, 2025. The Company’s current share repurchase authorization program has $4.1 million remaining.

•The Company entered into a June 30, 2023 committed, unsecured $40.0 million (previously $37.5 million) revolving credit line with JP Morgan Chase. As of December 31, 2023, the Company has not borrowed any amount under this revolving loan.

•All three rating agencies, Kroll (A- stable), Demotech (A rating) and Egan-Jones (A rating), updated and affirmed their previous ratings.

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All comparisons for the year ended December 31, 2023 results of operations are to the corresponding prior year period (unless otherwise specified).

YEAR ENDED DECEMBER 31, 2023 COMPARED TO YEAR ENDED DECEMBER 31, 2022

Net income was $66.8 million for the year ended December 31, 2023, compared to a net loss of $22.3 million for the year ended December 31, 2022. Benefiting the year ended December 31, 2023 were increases in premiums earned, net, an increase in net investment income, the change in unrealized gains in the current year compared to unrealized losses in the prior year, offset by an increase in losses and loss adjustment expenses, net. In 2023, direct premium earned and premiums earned, net were up 6.6% and 10.9%, respectively compared to direct premium earned and premiums earned in 2022, due to premium growth in the majority of states in which we are licensed and writing during the past 12 months as a result of rate increases implemented during 2022 and 2023, in addition to an increase in policies in force in 11 states. Premiums earned, net, were favorably impacted by a decrease in reinsurance expenses for the 2023-2024 contract year primarily due to the Insurance Entities’ mandatory participation in Florida’s RAP program, which allowed insurers to access a layer of reinsurance coverage below the FHCF industry retention at no cost to the insurers. The lower reinsurance costs, effective June 1 2023, have a favorable effect on financial ratios which are based on net earned premium. For the year ended December 31, 2023, the loss ratio declined to 79.3% from 83.2% in 2022 due to the absence of major hurricane events in 2023 when compared to Hurricane Ian in 2022, offset by higher prior year development in 2023. See 2023 Reinsurance Ratio Benefit noted below. As a result of the above and as further explained below, the combined ratio for the year ended December 31, 2023 was 103.6% compared to 110.2% for the year ended December 31, 2022. See “Overview—Trends and Geographical Distribution—Florida Trends” regarding our response to the Florida market.

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

[[GREPCENT_TABLE]]
[["","","(in thousands)"],["","","Years Ended December 31,","","Change"],["","","2023","","2022","","$","","%"],["REVENUES"],["Direct premiums written","","$","1,921,833","","","$","1,845,786","","","$","76,047","","","4.1","%"],["Change in unearned premium","","(46,704)","","","(86,085)","","","39,381","","","(45.7)","%"],["Direct premium earned","","1,875,129","","","1,759,701","","","115,428","","","6.6","%"],["Ceded premium earned","","(623,193)","","","(631,075)","","","7,882","","","(1.2)","%"],["Premiums earned, net","","1,251,936","","","1,128,626","","","123,310","","","10.9","%"],["Net investment income","","48,449","","","25,785","","","22,664","","","87.9","%"],["Net realized gains (losses) on investments","","(1,229)","","","348","","","(1,577)","","","NM"],["Net change in unrealized gains (losses) on investments","","12,046","","","(13,145)","","","25,191","","","NM"],["Commission revenue","","54,058","","","53,168","","","890","","","1.7","%"],["Policy fees","","18,881","","","20,182","","","(1,301)","","","(6.4)","%"],["Other revenue","","7,441","","","7,694","","","(253)","","","(3.3)","%"],["Total revenues","","1,391,582","","","1,222,658","","","168,924","","","13.8","%"],["OPERATING COSTS AND EXPENSES"],["Losses and loss adjustment expenses","","992,636","","","938,399","","","54,237","","","5.8","%"],["General and administrative expenses","","304,066","","","304,897","","","(831)","","","(0.3)","%"],["Total operating costs and expenses","","1,296,702","","","1,243,296","","","53,406","","","4.3","%"],["Interest and amortization of debt issuance costs","","6,531","","","6,609","","","(78)","","","(1.2)","%"],["INCOME (LOSS) BEFORE INCOME TAX EXPENSE (BENEFIT)","","88,349","","","(27,247)","","","115,596","","","NM"],["Income tax expense (benefit)","","21,526","","","(4,990)","","","26,516","","","NM"],["NET INCOME (LOSS)","","$","66,823","","","$","(22,257)","","","$","89,080","","","NM"],["Other comprehensive income (loss), net of taxes","","29,610","","","(88,214)","","","117,824","","","NM"],["COMPREHENSIVE INCOME (LOSS)","","$","96,433","","","$","(110,471)","","","$","206,904","","","NM"],["DILUTED EARNINGS (LOSS) PER SHARE DATA:"],["Diluted earnings (loss) per common share","","$","2.22","","","$","(0.72)","","","$","2.94","","","NM"],["Weighted average diluted common shares outstanding","","30,147","","","30,751","","","(604)","","","(2.0)","%"],["NM - Not Meaningful"]]
[[/GREPCENT_TABLE]]

43

Revenues

Direct premiums written increased by $76.0 million, or 4.1%, for the year ended December 31, 2023, driven by premium growth within our Florida business of $27.1 million, or 1.8%, and premium growth in our other states business of $49.0 million, or 15.9%, as compared to the prior year. Rate increases approved in 2022 and 2023 for Florida and for certain other states and policy inflation adjustments were the principal driver of higher written premiums, in addition to an increase in policies in force in 11 other states. In total, policies in force declined 38,924, or 4.6%, from 848,856 at December 31, 2022 to 809,932 at December 31, 2023. A summary of the recent rate increases which are driving increases in written premium is discussed above under “Overview—Trends and Geographical Distribution—Florida Trends.”

Rate changes are applied on new business submissions and renewals from the effective date of their renewal, and then are earned subsequently over the policy period. The recent rate and inflation increases in Florida are in response to rising claim costs driven by higher costs of material and labor associated with claims, the cost of weather events, the rising cost of catastrophe and other reinsurance protecting policyholders and, more importantly, the impact of an increased cost and use of litigation by policyholders on claims as claim settlements increasingly have involved inflated demands, representation, and litigation. In addition, the Insurance Entities’ policies provide for coverage limits to be adjusted at renewal to adjust insured value coverage limits for the impact of changes in inflation. This is based on third-party industry data sources that monitor inflation factors such as changes in costs for residential building materials and labor.

During 2023, management continued efforts to tactically manage policy counts and exposures intended to slow the growth of exposures relating to new business compared to prior years while filed rate increases are taking effect. The impact of policy reductions through attrition attributable to selective underwriting, together with selected policy non-renewals, have resulted in a decrease in policies in force of 38,924, or 4.6%, during 2023 from 848,856 at December 31, 2022 to 809,932 at December 31, 2023. Direct premiums written continue to increase across the majority of states in which we conduct business. As a result of our business strategy, rate changes and disciplined underwriting initiatives, we have seen an overall decrease in policies in force in the aggregate, but an increase in premium in force, and an increase in total insured value in a majority of states for the past two years. We actively wrote policies in 18 states during 2023 and 19 states during 2022. In addition, we are authorized to do business in Tennessee and Wisconsin. In 2023, UPCIC filed with its regulators in Hawaii to withdraw from the state, with the withdrawal and nonrenewal of policies expected to be completed within the next year. At December 31, 2023, policies in force decreased by 38,924 policies, or 4.6%, premium in force increased $78.0 million, or 4.2%, and total insured value increased $1.2 billion, or 0.4%, compared to December 31, 2022.

Direct premium earned increased by $115.4 million, or 6.6%, for the year ended December 31, 2023, reflecting the earning of premiums written over the past 12 months, including the benefit of rate changes due to primary rate filings, filings to cover increased reinsurance costs as well as policy premium adjustments due to increases in insured values caused by inflation.

Reinsurance

Reinsurance enables our Insurance Entities to limit potential exposures to catastrophic events and other covered events. Ceded premium represents premiums paid to reinsurers for this protection and is a cost which reduces net written and net earned premiums. Hurricane Ian triggered reinstatement premiums, increasing ceded premiums written by $24.6 million which were earned prospectively effective September 28, 2022 to May 31, 2023, increasing ceded premiums earned for the year ended December 31, 2023 by $15.0 million, in addition to $2.2 million of reinstatement premiums in December 2023 which were also attributable to Hurricane Ian, and which were earned immediately. In total, ceded premium earned decreased $7.9 million, or 1.2%, for the year ended December 31, 2023 as compared to the same period of the prior year. The decrease in reinsurance cost reflects several factors, including the Insurance Entities’ mandatory participation in the RAP program for the 2023/2024 reinsurance program, which allowed insurers to access a layer of reinsurance coverage that is below the FHCF industry retention at no cost to the insurer. In exchange, the Insurance Entities adopted a 1.4% one-year rate reduction. Also benefiting the year were lower reinstatement premiums in the second half of the year. Reinsurance costs, as a percentage of direct premium earned, decreased from 35.9% in 2022 to 33.2% in 2023. 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’ 2022-2023 reinsurance programs and “Part II—Item 8— Note 4 (Reinsurance).”

2023 Reinsurance Ratio Benefit

Costs for the 2023 reinsurance was lower than 2022 because of Florida’s RAP program in the 2023-2024 reinsurance program. This is a one time, no cost reinsurance benefit to the Insurance Entities which in exchange provided a rate decrease to policyholders of approximately 1.4%. The lower reinsurance costs, effective June 1 2023, have a favorable effect on financial ratios which are based on net earned premium.

Premiums earned, net of ceded premium earned, grew by 10.9%, or $123.3 million, to $1,251.9 million for the year ended December 31, 2023, reflecting an increase in direct premium earned and decreased costs for reinsurance.

Investment Results

Net investment income was $48.4 million for the year ended December 31, 2023, compared to $25.8 million for the same period in 2022, an increase of $22.7 million, or 87.9%. Invested cash balances along with liquidity generated by our investment portfolio from maturities, principal repayments, and interest payments received were invested in higher rates, resulting in an increase in investment returns on our portfolio and cash balances.

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We look to optimize our investment portfolio on a rolling basis, which, from time-to-time, results in portfolio shaping opportunities. During the year ended December 31, 2023, sales of available-for-sale debt securities and sales of equity securities resulted in a net realized loss of $1.2 million.

There was a $12.0 million net unrealized gain on investments during the year ended December 31, 2023, largely driven by our portfolio optimization efforts in the private and public equity markets, coupled with the overall domestic equity market appreciation tailwind during 2023, compared to a $13.1 million net unrealized loss on investments during the year ended December 31, 2022.

Total invested assets were $1.16 billion as of December 31, 2023 compared to $1.11 billion as of December 31, 2022. The increase is primarily attributable to unrealized gains on our fixed income and equity portfolio, and increases in net investment income. Cash and cash equivalents were $397.3 million at December 31, 2023 compared to $388.7 million at December 31, 2022, an increase of 2.2%. See below “—Analysis of Financial Condition” for more information. 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.

Commissions, Policy Fees and Other Revenue

Commission revenue is comprised principally of brokerage commissions we earn from traditional open market third-party reinsurers, which excludes reinsurance provided by the State of Florida as well as catastrophe bond participants. 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 year ended December 31, 2023, commission revenue was $54.1 million, compared to $53.2 million for the year ended December 31, 2022. The increase in commission revenue of $0.9 million, or 1.7%, for the year ended December 31, 2023 was primarily due to reinstatement premiums attributable to Hurricane Ian which were earned through May 31, 2023, or the conclusion of the 2022-2023 reinsurance contract period.

Policy fees for the year ended December 31, 2023 were $18.9 million compared to $20.2 million for the same period in 2022. The decrease of $1.3 million, or 6.4%, was the result of a decrease in the combined total number of new and renewal policies written during the year ended December 31, 2023 compared to the same period in 2022 in states where we are permitted to charge this fee.

Other revenue, representing revenue from policy installment fees, premium financing, and other miscellaneous income, was $7.4 million for the year ended December 31, 2023 compared to $7.7 million for the same period in 2022.

Non-GAAP

Core revenue, representing total GAAP revenue, excluding net realized gains (losses) on investments and net changes in unrealized gains (losses) on investments, was $1.4 billion for the year ended December 31, 2023 compared to $1.2 billion for the same period in 2022.

Operating Costs and Expenses

Losses and Loss Adjustment Expenses

Losses and LAE experience over the past several years including both 2023 and 2022, reflects an adverse litigation environment and other market conditions in Florida that the Florida Legislature has been attempting to address with the passage of legislation spanning several years with the most significant changes made during a special session held in December 2022.

Losses and LAE, net of reinsurance recoveries was $992.6 million for the year ended December 31, 2023, resulting in a net loss ratio of 79.3%, compared to $938.4 million, and 83.2%, respectively, for the year ended December 31, 2022. For the year ended December 31, 2023, the decline in loss ratio was primarily due to the absence of major hurricane events in 2023, in contrast to 2022 which saw Hurricane Ian make landfall on Florida’s gulf coast, offset by higher prior year development in 2023. See 2023 Reinsurance Ratio Benefit noted above.

Prior year development includes changes in previous estimates for unpaid Losses and LAE for all events occurring in prior years including hurricanes, other weather, and non-weather claims affected by pre-reform market conditions in Florida as well as changes in prior estimates resulting from the evaluation of claims in anticipation of the commutation of Hurricane Irma losses with the FHCF. In recent years, we have strengthened reserves as a result of adverse development due to Florida homeowners, tenants and condo owners coverages arising from non-weather and weather events. Similar to other carriers operating in the Florida homeowners marketplace, we have experienced deterioration in water and hurricane claims due to an unfavorable claims environment characterized by increases in policyholder demands related to roof repairs and significant attorney representation. In 2023, adverse development was due to represented and litigated claims, and Florida weather claims for accident years 2017 and later. One of management’s objectives in 2023 was to strengthen reserves on those prior period claims which do not benefit from the new legislation signed in late 2022 that eliminated the one-way attorneys’ fee statute and assignments of benefits and made other reforms intended to improve the Florida market. Prior year development was $110.6 million, or 8.8 net loss ratio points for the year ended December 31, 2023, compared to $25.0 million for 2022, or 2.2 net loss ratio points. We continue to see adverse claim trends on Florida losses which occurred prior to the effective date of recent legislation (December 16, 2022) introduced in Florida, which was intended to curtail the impact of certain abusive claims

45

practices, however prior years claims not covered by the new legislation continued to experience adverse development, as claims settled above previously estimated amounts.

We believe the legislation passed in late 2022 represents a positive step towards reducing claim costs in Florida and management is optimistic about its eventual benefits. However, the full transition to these new laws will take many years. Many of the reforms apply only prospectively and provide only marginal benefit for claims filed prior to the new laws’ effective date. The transition to the new laws therefore involves first renewing policies during the year following the effective date, such that the policies, and subsequent claims under those policies, are governed by the new requirements. As for prior policy periods, insurers must continue to adjust claims under the prior laws that were subject to abuse while awaiting the expiration of claim reporting periods and statute of limitations periods applicable to those policies. Therefore, it will be several years until the abusive claim practices permitted under the prior laws, including those resulting from requiring insurance companies to pay claimants’ litigation costs, are fully extinguished and the full benefit of the new legislation can be realized. See “Overview—Trends and Geographical Distribution—Florida Trends.”

Excluding prior year development recorded in 2023, for prior accident years, all other losses and LAE, net for the current accident year are estimated to be $882.1 million or 70.5 net loss ratio points for the year ended December 31, 2023, compared to $802.4 million, or 71.1 net loss ratio points in 2022. See 2023 ratio benefit noted above. This category also reflects savings from activities performed by affiliates within our holding company system on behalf of our Insurance Entities and our reinsurers when losses and LAE are ceded under our reinsurance contracts. When claims are adjusted by our claims team and files handled by our legal group in this litigious environment in Florida, there are synergies achieved by having these two functions within the same consolidated group that could not be achieved through third parties. This synergistic relationship results in more efficient handling and coordination of claims including represented claims handled by our legal group of close to 500 employees. By choosing not to outsource these activities, we also save money for the consolidated group by generating a potential financial benefit outside of the Insurance Entities that serves to reduce LAE at the consolidated level (contra LAE). During 2023 these claims related activities generated a financial benefit of $50.4 million compared to $62.4 million during 2022

General and Administrative Expenses

For the year ended December 31, 2023, general and administrative expenses were $304.1 million, compared to $304.9 million during the same period in 2022, as follows (dollars in thousands):

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[[/GREPCENT_TABLE]]

General and administrative expenses decreased by $0.8 million, which was the result of decreases in policy acquisition costs of $6.2 million offset by an increase in other operating costs of $5.4 million. The total general and administrative expense ratio was 24.3% for the year ended December 31, 2023 compared to 27.0% for the year ended December 31, 2022.

•The decrease in policy acquisition costs of $6.2 million was primarily attributable to an increase in reinsurance profit commissions which were received as a result of commutations with reinsurers concluded during the year and lower total commissions expense for the year offset by slightly higher premium taxes.

•The increase in other operating costs of $5.4 million primarily reflects an increase in salaries, performance bonuses, and stock based compensation and an increase in other miscellaneous operating expenses. The other operating cost ratio was 7.7% for the year ended December 31, 2023 compared to 8.0% in the year ended December 31, 2022. This reduction primarily reflects the increase in premiums earned, net for the year.

As a result of the above, the combined ratio for the year ended December 31, 2023 was 103.6% compared to 110.2% for the same period in 2022. The decrease was due to the absence of a hurricane in the current year compared to Hurricane Ian in 2022, in addition to an increase in premiums earned, net, offset by higher prior year development.

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Interest and Amortization of Debt Issuance Costs

Interest and amortization of debt issuance costs for the year ended December 31, 2023 was $6.5 million compared to $6.6 million for the same period in 2022.

Income Tax Expense (Benefit)

Income tax expense was $21.5 million for the year ended December 31, 2023, compared to income tax benefit of $(5.0) million for the year ended December 31, 2022. Our effective tax rate (“ETR”) increased to 24.4% for the year ended December 31, 2023, as compared to 18.3% for the year ended December 31, 2022. See “Part II—Item 8—Note 12 (Income Taxes)” for a table of items reconciling statutory rates to the effective rate for years 2023 and 2022.

Comprehensive Income (Loss)

Other comprehensive income, net of taxes for the year ended December 31, 2023 was $29.6 million compared to other comprehensive loss of $88.2 million for the same period in 2022, reflecting after-tax changes in fair value of available-for-sale debt securities held in our investment portfolio and reclassifications out of accumulated other comprehensive income for available-for-sale debt securities sold. The improvement in 2023 reflects investment actions and relative stability in market prices during 2023 compared to 2022. During 2023, maturing securities and investment returns were reinvested at market rates, reducing unrealized losses on maturing securities. The maturity of the remaining securities in an unrealized loss position has also reduced during the year. Over time, unrealized losses on securities in an unrealized loss position lessens as the remaining maturity shortens and securities approach their maturity or par value. See discussion above and “Part II—Item 8—Note 14 (Other Comprehensive Income (Loss))” for additional information about the amounts comprising other comprehensive income (loss), net of taxes for these periods.

Non-GAAP

Adjusted operating income (loss) represents GAAP operating income (loss), excluding net realized gains (losses) on investments and net changes in unrealized gains (losses) on investments. Adjusted operating income was $84.1 million for the year ended December 31, 2023 compared to adjusted operating income of $7.8 million for the same period in 2022.

Adjusted operating income (loss) margin represents adjusted operating income (loss) divided by core revenue. Adjusted operating income margin was 6.1% for the year ended December 31, 2023 compared to adjusted operating loss margin of 0.6% for the same period in 2022.

Adjusted net income (loss) attributable to common stockholders represents GAAP net income (loss) attributable to common stockholders, excluding net realized gains (losses) on investments and net changes in unrealized gains (losses) on investments, net of tax. Adjusted net income attributable to common stockholders was $58.7 million for the year ended December 31, 2023 compared to adjusted net loss attributable to common stockholders of $12.6 million for the same period in 2022.

Diluted adjusted earnings (loss) per common share represents adjusted net income (loss) available to common stockholders divided by weighted average diluted common shares outstanding. Diluted adjusted income per common share was $1.95 for the year ended December 31, 2023 compared to diluted adjusted loss per common share of $0.41 for the same period in 2022.

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YEAR ENDED DECEMBER 31, 2022 COMPARED TO YEAR ENDED DECEMBER 31, 2021

Net loss was $22.3 million for the year ended December 31, 2022, due primarily to the $111 million net loss and LAE from Hurricane Ian, compared to net income of $20.4 million for the same period in 2021. Benefiting the year ended December 31, 2022 were increases in premiums earned, net, an increase in net investment income, an increase in commission revenue, and a decrease in acquisition costs offset by an increase in unrealized losses, a decrease in realized gains, a decrease in revenue from policy fees, and an increase in losses and loss adjustment expenses. Direct premium earned and premiums earned, net were up 10.2% and 9.0%, respectively, due to premium growth in the majority of states in which we are licensed and writing during the past 12 months as a result of rate increases implemented during 2021 and 2022, partially offset by higher costs for reinsurance flowing through to premiums earned, net. Renewal commissions to agents were lowered to 8% from 10% during 2022 resulting in lower acquisition costs compared to the prior year. The net loss and LAE ratio was 83.2% for the year ended December 31, 2022, compared to 75.3% for the year ended 2021 reflecting the impact of Hurricane Ian, and higher core net losses, an increase in the cost of litigated claims, and increased other weather losses compared to the prior year, partially offset by lower prior years’ reserve development. As a result of the above and as further explained below, the combined ratio for the year ended December 31, 2022 was 110.2% compared to 105.5% for the year ended December 31, 2021. See “Overview—Trends and Geographical Distribution—Florida Trends” regarding our response to the Florida market.

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

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[[/GREPCENT_TABLE]]

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Revenues

Direct premiums written increased by $174.5 million, or 10.4%, for the year ended December 31, 2022, driven by premium growth within our Florida business of $149.8 million, or 10.8%, and premium growth in our other states business of $24.7 million, or 8.7%, as compared to the same period of the prior year. Rate increases approved in 2021 and 2022 for Florida and for certain other states and policy inflation adjustments were the principal driver of higher written premiums. In total, policies in force declined 94,737, or 10.0%, from 943,593 at December 31, 2021 to 848,856 at December 31, 2022. A summary of the recent rate increases which are driving increases in written premium is discussed above under “Overview—Trends and Geographical Distribution—Florida Trends.”

Rate changes are applied on new business submissions and renewals from the effective date of their renewal, and then are earned subsequently over the policy period. The recent rate and inflation increases in Florida are in response to rising claim costs driven by higher costs of material and labor associated with claims, the cost of weather events, the rising cost of catastrophe, and other reinsurance protecting policyholders and, more importantly, the impact of an increased use of litigation by policyholders on claims as claim settlements increasingly have involved inflated demands, representation, and litigation. In addition, the Insurance Entities’ policies provide for coverage limits to be adjusted at renewal to adjust insured value coverage limits for the impact of changes in inflation. This is based on third-party industry data sources that monitor inflation factors such as changes in costs for residential building materials and labor.

During 2022, management continued efforts to prudently manage policy counts and exposures intended to slow the growth of exposures relating to new business compared to prior years while filed rate increases are taking effect. Reduced new business writings, declines in renewal retentions in 2022 and the impact of selected policy non-renewals have resulted in a decrease in policies in force of 94,737, or 10.0%, during 2022 from 943,593 at December 31, 2021 to 848,856 at December 31, 2022. Direct premiums written continue to increase across the majority of states in which we conduct business. As a result of our business strategy, rate changes, and disciplined underwriting initiatives, we have seen a decrease in policies in force, but an increase in premium in force and an increase in total insured value in a majority of states for the past two years. We actively wrote policies in 19 states during 2022 and 2021. In addition, we are authorized to do business in Tennessee and Wisconsin and are proceeding with product filings in those states. At December 31, 2022, policies in force decreased by 94,737 policies, or 10.0%, premium in force increased $176.5 million, or 10.5%, and total insured value increased $1.3 billion, or 0.4%, compared to December 31, 2021.

Direct premium earned increased by $163.1 million, or 10.2%, for the year ended December 31, 2022, reflecting the earning of premiums written over the past 12 months, including the benefit of rate changes due to primary rate filings, filings to cover increased reinsurance costs as well as policy premium adjustments due to increases in insured values caused by inflation.

Reinsurance enables our Insurance Entities to limit potential exposures to catastrophic events and other covered events. Ceded premium represents premiums paid to reinsurers for this protection and is a cost which reduces net written and net earned premiums. Hurricane Ian triggered reinstatement premiums, increasing ceded premiums written by $24.6 million which were earned prospectively effective September 28, 2022 to May 31, 2023, increasing ceded premiums earned for the year ended December 31, 2022 by $9.5 million. In total, ceded premium earned increased $69.9 million, or 12.5%, for the year ended December 31, 2022 as compared to the same period of the prior year. The increase in reinsurance costs reflects an increase in the value of 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 35.1% in 2021 to 35.9% in 2022. 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’ 2022-2023 reinsurance programs and “Part II—Item 8— Note 4 (Reinsurance).”

Premiums earned, net of ceded premium earned, grew by 9.0%, or $93.2 million, to $1.1 billion for the year ended December 31, 2022, reflecting an increase in direct premium earned offset by increased costs for reinsurance.

Net investment income was $25.8 million for the year ended December 31, 2022, compared to $12.5 million for the same period in 2021, an increase of $13.3 million, or 105.7%. 2022 saw significant increases in fixed income investment yields as the Federal Reserve took actions to address the market concerns of inflation and full employment. As a result, liquidity generated by our portfolio from maturities, principal repayments, interest payments, and new deposits were invested at higher rates, resulting in an increase in investment returns on our portfolio.

Total invested assets were $1.11 billion as of December 31, 2022 compared to $1.09 billion as of December 31, 2021. The increase is primarily attributable to new cash deposits, offset by increased unrealized losses on our portfolio due to a decline in bond prices, which move inversely with the rate increases seen throughout 2022. Unrealized losses reverse over time as debt instruments are generally held to maturity. Cash and cash equivalents were $388.7 million at December 31, 2022 compared to $250.5 million at December 31, 2021, an increase of 55.2%. This increase is largely attributable to cash calls to reinsurers to support Hurricane Ian claim settlement liquidity and changes in operational cash flows since year end. See below “—Analysis of Financial Condition” for more information. 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 debt portfolio are dependent on the composition of the portfolio, future market forces, monetary policy, and interest rate policy from the Federal Reserve. During most of 2021, the Federal Reserve broadly maintained lower interest rates, which impacted the effective yields on newly purchased available-for-sale debt securities and overnight cash purchases and short-term investments. This overall trend changed in late 2021, and throughout 2022, as inflation worries began to impact the financial markets, including the markets’ concern over future Federal Reserve actions of rate hikes and other actions to address inflation concerns. As a result, we saw

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increased yields on securities purchased in late 2021, and throughout 2022, and increased unrealized losses on our portfolio, reflected after-tax in the equity section of our balance sheet as increased market yields negatively impacted the fair value of much of our available-for-sale debt securities.

We sell invested assets from our portfolio from time to time to meet our investment objectives or to take advantage of market opportunities. During the year ended December 31, 2022, sales of available-for-sale debt securities resulted in net realized losses of $1.8 million and sales of equity securities resulted in a net realized gain of $2.2 million, in total generating net realized gains of $0.4 million. During the year ended December 31, 2021, sales of available-for-sale debt securities resulted in a net realized gain of $0.2 million, sales of equity securities resulted in a net realized gain of $2.8 million, the sale of two investment real estate properties, which includes one classified as assets held for sale in 2021, resulted in a realized gain of $2.7 million, and one real estate property classified as assets held for sale in 2021 resulted in a realized gain of $0.2 million, in total generating a net realized gain of $5.9 million. See “Part II—Item 8—Note 3 (Investments).”

There was a $13.1 million net unrealized loss in equity securities during the year ended December 31, 2022 compared to a $4.0 million net unrealized loss in equity securities during the year ended December 31, 2021. Net change in unrealized gains or losses for equity securities still held at the end of the reported period are recorded at fair value in the Consolidated Balance Sheet with changes in the fair value of equity securities reported in current period earnings in the Consolidated Statements of Income within net change in unrealized gains (losses) on investments as they occur.

Commission revenue is comprised principally of brokerage commissions we earn from traditional open market third-party reinsurers, which excludes reinsurance provided by the State of Florida as well as catastrophe bond participants. Commission revenue is earned pro-rata over the reinsurance policy period which runs from June 1st to May 31st of the following year. Reinstatement premiums for Hurricane Ian resulted in $13.1 million of additional brokerage commissions which will be earned prospectively from September 28, 2022 to May 31, 2023, increasing brokerage commission revenue earned of $5.0 million from September 28, 2022 through December 31, 2022. For the year ended December 31, 2022, commission revenue was $53.2 million, compared to $41.7 million for the year ended December 31, 2021. The increase in commission revenue of $11.5 million, or 27.7%, for the year ended December 31, 2022 was primarily due to increased commissions from third-party reinsurers earned on increased reinsurance premiums which is attributable to growth in our insured values, as well as the difference in pricing and structure associated with our reinsurance program when compared to the prior year.

Policy fees for the year ended December 31, 2022 were $20.2 million compared to $22.7 million for the same period in 2021. The decrease of $2.5 million, or 11.1%, was the result of a decrease in the combined total number of new and renewal policies written during the year ended December 31, 2022 compared to the same period in 2021 in states where we are permitted to charge this fee.

Other revenue, representing revenue from policy installment fees, premium financing, and other miscellaneous income, was $7.7 million for the year ended December 31, 2022 compared to $7.6 million for the same period in 2021.

Core revenue, representing total GAAP revenue, excluding net realized gains (losses) on investments and net changes in unrealized gains (losses) on investments, was $1,235.5 million for the year ended December 31, 2022 compared to $1,120.0 million for the same period in 2021.

Operating Costs and Expenses

Losses and Loss Adjustment Expenses

Losses and LAE, net of reinsurance recoveries was $938.4 million for the year ended December 31, 2022, resulting in a net loss ratio of 83.2%, compared to $779.2 million, and 75.3%, respectively, for the year ended December 31, 2021.

Hurricane Ian resulted in $111.0 million of net losses and LAE for the 2022 accident year, or 9.9 net loss ratio points, compared to $28.0 million of weather above plan in 2021, or 2.7 net loss ratio points.

Prior year development includes changes in estimated losses and LAE for all events occurring in prior years including hurricanes and other weather. Prior year development was $25.0 million, or 2.2 net loss ratio points for the year ended December 31, 2022, compared to $54.5 million for 2021, or 5.3 net loss ratio points.

Excluding Hurricane Ian and prior year development recorded in 2022, all other losses and LAE, net for the current accident year are estimated to be $802.4 million or 71.1 net loss ratio points for the year ended December 31, 2022, compared to $696.7 million, or 67.3 net loss ratio points estimated in 2021. Throughout 2022, management increased its current accident year loss pick (plan) primarily to reduce volatility in weather above plan. This category also reflects savings from activities performed by affiliates within our holding company system on behalf of our Insurance Entities and our reinsurers when losses and LAE are ceded under our reinsurance contracts. When claims are adjusted by our claims team and files handled by our legal group in this litigious environment, there are synergies achieved by having these two functions within the same consolidated group that could not be achieved through third parties. This synergistic relationship results in more efficient handling and coordination of claims including represented claims handled by our legal group of close to 500 employees. By choosing not to outsource these activities, we also save money for the consolidated group by generating a potential profit margin outside of the Insurance Entities that serves to offset LAE at the consolidated level (contra LAE). During 2022 these claims related activities generated a profit margin of $62.4 million compared to $11.9 million during 2021.

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Losses and LAE experience over the past several years including both 2022 and 2021, reflects an adverse litigation environment and other market conditions in Florida that the Florida Legislature has been attempting to address with the passage of legislation spanning several years with the most significant changes made during a special session held in December 2022.

General and Administrative Expenses

For the year ended December 31, 2022, general and administrative expenses were $304.9 million, compared to $313.6 million during the same period in 2021, as follows (dollars in thousands):

[[GREPCENT_TABLE]]
[["","","For the Years Ended December 31,","","Change"],["","","2022","","2021","","$","","%"],["","","$","","Ratio","","$","","Ratio"],["Premiums earned, net","","$","1,128,626","","","","","$","1,035,463","","","","","$","93,163","","","9.0","%"],["General and administrative expenses:"],["Policy acquisition costs","","214,259","","","19.0","%","","226,167","","","21.8","%","","(11,908)","","","(5.3)","%"],["Other operating costs","","90,638","","","8.0","%","","87,428","","","8.4","%","","3,210","","","3.7","%"],["Total general and administrative expenses","","$","304,897","","","27.0","%","","$","313,595","","","30.2","%","","$","(8,698)","","","(2.8)","%"]]
[[/GREPCENT_TABLE]]

General and administrative expenses decreased by $8.7 million, which was the result of decreases in policy acquisition costs of $11.9 million offset by an increase in other operating costs of $3.2 million. The total general and administrative expense ratio was 27.0% for the year ended December 31, 2022 compared to 30.2% for the year ended December 31, 2021.

•The decrease in policy acquisition costs of $11.9 million reflects a reduction in the commission rate paid to agents on the renewal of Florida policies which was reduced by two percentage points to 10% effective April 1, 2021, which also reduced the ratio of policy acquisition to net premiums earned. The commission rate paid to agents on the renewal of Florida policies was reduced by an additional two percentage points to 8% effective May 1, 2022, which will benefit future periods as the new rate structure applies prospectively.

•The increase in other operating costs of $3.2 million primarily reflects an increase in performance bonuses partially offset by a decrease in share-based compensation. The other operating cost ratio was 8.0% for the year ended December 31, 2022 compared to 8.4% in the year ended December 31, 2021. This reduction reflects several factors including economies of scale as we continue to grow premium and spending discipline.

As a result of the above, the combined ratio for the year ended December 31, 2022 was 110.2% compared to 105.5% for the same period in 2021. The increase was the result of the impact of Hurricane Ian and higher core losses.

Interest and Amortization of Debt Issuance Costs

Interest and amortization of debt issuance costs for the year ended December 31, 2022 was $6.6 million compared to $0.6 million for the same period in 2021. The increase of $6.0 million, or 935.9%, in interest and amortization of debt issuance costs is the result of the issuance of additional debt in the fourth quarter of 2021. See “Part II—Item 8—Note 7 (Long-term debt)” for additional details.

Income Tax Expense (Benefit)

Income tax benefit was $5.0 million for the year ended December 31, 2022, compared to income tax expense of $8.0 million for the year ended December 31, 2021. Our effective tax rate decreased to 18.3% for the year ended December 31, 2022, as compared to 28.2% for the year ended December 31, 2021. See “Part II—Item 8—Note 12 (Income Taxes)” for a table of items reconciling statutory rates to the effective rate for years 2022 and 2021.

Comprehensive Income (Loss)

Other comprehensive loss, net of taxes for the year ended December 31, 2022 was $88.2 million compared to other comprehensive loss of $18.9 million for the same period in 2021, reflecting after-tax changes in fair value of available-for-sale debt securities held in our investment portfolio and reclassifications out of accumulated other comprehensive income for available-for-sale debt securities sold. We saw increased market yields on securities purchased in late 2021 and 2022 and increased unrealized losses on our portfolio, reflected after-tax in the equity section of our balance sheet as increased interest rates negatively impacted the fair value on much of our available-for-sale debt securities. See discussion above and “Part II—Item 8—Note 14 (Other Comprehensive Income (Loss))” for additional information about the amounts comprising other comprehensive income (loss), net of taxes for these periods.

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Non-GAAP

Adjusted operating income (loss) represents GAAP operating income (loss), excluding net realized gains (losses) on investments and net changes in unrealized gains (losses) on investments. Adjusted operating loss was $7.8 million for the year ended December 31, 2022 compared to adjusted operating income of $27.2 million for the same period in 2021.

Adjusted operating income (loss) margin represents adjusted operating income (loss) divided by core revenue. Adjusted operating loss margin was 0.6% for the year ended December 31, 2022 compared to adjusted operating income margin of 2.4% for the same period in 2021.

Adjusted net income (loss) attributable to common stockholders represents GAAP net income (loss) attributable to common stockholders, excluding net realized gains (losses) on investments and net changes in unrealized gains (losses) on investments, net of tax. Adjusted net loss attributable to common stockholders was $12.6 million for the year ended December 31, 2022 compared to adjusted net income attributable to common stockholders of $19.0 million for the same period in 2021.

Diluted adjusted earnings (loss) per common share represents adjusted net income (loss) available to common stockholders divided by weighted average diluted common shares outstanding. Diluted adjusted loss per common share was $0.41 for the year ended December 31, 2022 compared to diluted adjusted earnings per share of $0.61 for the same period in 2021.

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ANALYSIS OF FINANCIAL CONDITION AS OF DECEMBER 31, 2023 COMPARED TO DECEMBER 31, 2022

We believe that cash flows generated from operations will be sufficient to meet our working capital requirements for at least the next 12 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):

[[GREPCENT_TABLE]]
[["","","As of December 31,"],["Type of Investment","","2023","","2022"],["Available-for-sale debt securities","","$","1,064,330","","","$","1,014,626"],["Equity securities","","80,495","","","85,469"],["Other investments, at fair value","","10,434","","","\u2014"],["Investment real estate, net","","5,525","","","5,711"],["Total","","$","1,160,784","","","$","1,105,806"]]
[[/GREPCENT_TABLE]]

See “Part II—Item 8—Consolidated Statements of Cash Flows” and “Item 8—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 $46.2 million to $236.3 million as of December 31, 2023 was primarily due to decreased reinsurance costs relating to our 2023-2024 catastrophe reinsurance program beginning June 1, 2023, less amortization of ceded written premium for the reinsurance costs earned since the beginning of the new program. See “Part II— Item7— “Reinsurance Program” regarding the Company’s reinsurance placement and participation in the Florida RAP program.

Reinsurance recoverable represents the estimated amount of paid and unpaid losses, LAE, and other expenses that are expected to be recovered from reinsurers. The decrease of $589.7 million to $219.1 million as of December 31, 2023 was primarily due to the settlement and collection of Hurricane Ian claims and amounts recoverable from reinsurers relating to other ceded events. In addition commutations concluded during the year reduced reinsurance recoverable.

Premiums receivable, net represents amounts receivable from policyholders. The increase in premiums receivable, net of $7.5 million to $77.1 million as of December 31, 2023 is consistent with premium trends including seasonality and consumer payment behaviors.

Property, plant, and equipment, net represents long-term assets held and used in the operations of the business. The decrease in property, plant, and equipment, net of $3.8 million to $47.6 million as of December 31, 2023 is a result of disposals and depreciation of assets held.

Deferred policy acquisition costs (“DPAC”) increased by $6.3 million to $110.0 million as of December 31, 2023, and is consistent with written premium trends and changes in commissions paid to agents. In 2023, DPAC was impacted by the reductions to Florida renewal commissions implemented during 2022 and other changes to the Company’s commission structure. See “Item 1—Note 5 (Insurance Operations)” for a roll-forward in the balance of our DPAC.

Income taxes payable represents the difference between estimated tax obligations and tax payments made to taxing authorities. As of December 31, 2023, the balance payable was $5.9 million, representing amounts due to taxing authorities at that date, compared to a balance recoverable of $1.5 million as of December 31, 2022.

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 year ended December 31, 2023, deferred income tax asset, net decreased by $14.1 million to $43.2 million, primarily due to a decrease in unrealized losses on investments, and deferred acquisition costs, and an increase in unearned premiums. Deferred income taxes reverse in future years as the temporary differences between book and tax reverse.

See “Part II—Item 8—Note 17 (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 $528.7 million to $510.1 million as of December 31, 2023. The majority of the increase in 2022 was a result of losses recorded in the third quarter of 2022 for Hurricane Ian and in the fourth quarter of 2022 for Hurricane Nicole. Overall, unpaid losses and LAE decreased, as a result of payment of current and prior year claims especially the settlement of Hurricane Ian claims. Unpaid losses and LAE are net of estimated subrogation recoveries of $144.1 million as of December 31, 2023 compared to $134.4 million as of December 31, 2022.

Unearned premiums represent the portion of direct premiums written that will be earned pro-rata in the future. The increase of $46.7 million from December 31, 2022 to $990.6 million as of December 31, 2023 reflects the increases in written premiums as the result of rate increases.

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Advance premium represents premium payments made by policyholders ahead of the effective date of the policies. The decrease of $6.3 million from December 31, 2022 to $48.7 million as of December 31, 2023 reflects customer payment behavior and the payment behavior of mortgage escrow service providers as well as premium trends.

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 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 $14.6 million book overdrafts as of December 31, 2023, none as of December 31, 2022. The increase of $14.6 million is the result of lower cash balances available for offset as of December 31, 2023 compared to December 31, 2022. See “—Liquidity and Capital Resources” for more information.

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 decreased by $192.7 million to $191.9 million as of December 31, 2023 as a result of timing of the above items and decline in costs of reinsurance expense for the current treaty period in 2023 and the reduction in cash advances received in 2022 after Hurricane Ian which have been utilized during the claim settlement process in 2023 of Ian claims. See “—Liquidity and Capital Resources” for more information about timing of reinsurance premium installment payments.

Other liabilities and accrued expenses increased by $31.8 million to $90.6 million as of December 31, 2023, primarily driven by an increase in amounts payable for securities resulting from trades executed that had not settled as of December 31, 2023.

Capital resources, net increased by $52.6 million for the year ended December 31, 2023, reflecting a net increase in total stockholders’ equity, partially offset by a decline in long-term debt. The change in stockholders’ equity was the result of our 2023 net income offset by treasury share purchases and dividends to shareholders. See “Part II—Item 8—Consolidated Statements of Stockholders’ Equity” and “Item 8—Note 8 (Stockholders’ Equity)” for an explanation of changes in treasury stock. The reduction in long-term debt was primarily the result of principal payments on long-term debt of $1.5 million offset by amortization of debt issuance costs of $0.7 million on our 5.625% Senior Unsecured Notes due 2026 during 2023 . See “—Liquidity and Capital Resources” for more information.

Additional paid-in-capital increased by $2.6 million primarily from share-based compensation expense of $5.0 million for the year ended December 31, 2023. This was largely offset by $2.1 million in connection with the settlement of certain restricted stock units.

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.

The balance of cash and cash equivalents, excluding restricted cash, as of December 31, 2023 was $397.3 million, compared to $388.7 million at December 31, 2022. See “Part II—Item 8—Consolidated Statements of Cash Flows” for a reconciliation of the balance of cash and cash equivalents between December 31, 2023 and 2022. This increase was driven by cash flows generated from operating activities in excess of cash flows used in investing and financing activities. 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 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 “Part II—Item 8—Note 15 (Commitments and Contingencies)” and additional discussion below under the caption “—Material Cash Requirements” for more information.

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During 2023, there was one significant hurricane, Hurricane Idalia, which was below the Company’s reinsurance attachment point. The Company’s reinsurance program provides sufficient liquidity in the form of cash advances for paid losses ceded to the reinsurers in the case of weather events with losses above the Company’s reinsurance attachment point. During 2022, Hurricane Ian generated $1.0 billion in gross losses, or $111 million net after the benefit of reinsurance. The Company routinely collected amounts ceded to reinsurers and, as in the past did not have to use funds in the Company’s investment portfolio. See “—Results of Operations” for more information.

The balance of restricted cash and cash equivalents as of December 31, 2023 and 2022 represents cash equivalents on deposit with certain regulatory agencies in the various states in which our Insurance Entities do business.

Liquidity is required at the holding company for us to cover the payment of holding company 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 our tax obligations to taxing authorities, settlement of taxes between subsidiaries in accordance with our tax sharing agreement, capital contributions to subsidiaries or surplus note contributions to the Insurance Entities, if needed, and interest and principal payments on outstanding debt obligations of the holding company. Effective in 2021 for UPCIC and 2022 for APPCIC, the holding company has put in place an ongoing surplus note arrangement with the Insurance Entities, which has been approved by the FLOIR as the Insurance Entities’ domestic regulator. Surplus notes are unsecured debt issued by the Insurance Entities that are subordinated to all claims by policyholders and creditors, with interest and principal payments on the surplus notes to the holding company being made only upon the FLOIR’s express approval. Surplus notes are considered bonds in function and payout structure, but are accounted for as equity in the statutory reporting of the Insurance Entities. The holding company has outstanding with the Insurance Entities $134.0 million in surplus notes. Under the arrangement, interest accrues at a variable rate (currently 10.54%) on the outstanding surplus note balances and, if approved by the FLOIR, is payable annually to the holding company. 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. New regulations or changes to existing regulations imposed on the Company and its affiliates may also impact the amount and timing of future dividend payments to the parent. 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 we earn from third-party reinsurers on reinsurance contracts placed by our wholly-owned subsidiary, BARC 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 8—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).

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 8—Note 5 (Insurance Operations).” Dividends from the Insurance Entities can only be paid from accumulated unassigned funds derived from net operating profits and net realized capital gains. Subject to such accumulated unassigned funds, the maximum dividend that may be paid by the Insurance Entities to PSI without prior approval (an “ordinary dividend”) is further 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 years ended December 31, 2023 and 2022 the Insurance Entities did not pay dividends to PSI. As of December 31, 2023, the Insurance Entities did not have the capacity to pay ordinary dividends.

On November 23, 2021, we issued $100 million of 5.625% Senior Unsecured Notes due 2026. We used the net proceeds to support the Insurance Entities’ statutory capital requirements and for general corporate purposes. If necessary, the Company also has amounts available under our unsecured revolving loan as discussed in “Part II—Item 8—Note 7 (Long-term debt).”

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 December 31, 2023 and December 31, 2022. 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 3.7 years as of December 31, 2023 compared to 4.0 years at December 31, 2022. 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.

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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 or 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):

[[GREPCENT_TABLE]]
[["","","As of December 31,"],["","","2023","","2022"],["Stockholders\u2019 equity","","$","341,297","","","$","287,896"],["Total long-term debt","","102,006","","","102,769"],["Total capital resources","","$","443,303","","","$","390,665"],["Debt-to-total capital ratio","","23.0","%","","26.3","%"],["Debt-to-equity ratio","","29.9","%","","35.7","%"]]
[[/GREPCENT_TABLE]]

Capital resources, net increased by $52.6 million for the year ended December 31, 2023, reflecting a net increase in total stockholders’ equity. The change in stockholders’ equity was the result of our 2023 net income offset by treasury share purchases and dividends to shareholders.

The debt-to-total capital ratio is total long-term debt divided by total capital resources, whereas the 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.

Adjusted common stockholders’ equity, representing GAAP common stockholders’ equity, excluding accumulated other comprehensive income (loss), was $415.4 million as of December 31, 2023 and $391.6 million as of December 31, 2022.

Adjusted book value per share common share, representing adjusted common stockholders’ equity divided by outstanding common shares at the end of the reporting period, was $14.34 as of December 31, 2023 and $12.89 as of December 31, 2022.

Adjusted return on common equity representing actual or annualized adjusted net income (loss) attributable to common stockholders divided by average adjusted common stockholders' equity, with the denominator excluding current period income statement net realized gains (losses) on investments and net changes in unrealized gains (losses) on investments, net of tax, was 14.7% as of December 31, 2023 and (3.0)% as of December 31, 2022.

The Insurance Entities are required annually to comply with the NAIC RBC requirements. RBC requirements prescribe a method of measuring the amount of capital appropriate for an insurance company to support its overall business operations in light of its size and risk profile. NAIC’s RBC requirements are used by regulators to determine appropriate regulatory actions relating to insurers who show signs of weak or deteriorating condition. As of December 31, 2023, based on calculations using the appropriate NAIC RBC formula, the Insurance Entities reported respective total adjusted capital in excess of the requirements. Failure by the Insurance Entities to maintain the required level of statutory capital and surplus could result in the suspension of their authority to write new or renewal business, other regulatory actions, or ultimately, in the revocation of their certificate of authority by the FLOIR.

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, with quarterly payments of interest based on the 10-year Constant Maturity Treasury Index. As of December 31, 2023, UPCIC’s net written premium to surplus ratio and gross written premium to surplus ratio were in excess of the required minimums and, therefore, UPCIC is not subject to increases in interest rates. See “Part II—Item 8—Note 7 (Long-term debt)” for additional details. At December 31, 2023, UPCIC was in compliance with the terms of the surplus note and with each of the loan’s covenants as implemented by rules promulgated by the SBA. Total adjusted capital and surplus, which includes the surplus note, was in excess of regulatory requirements for both UPCIC and APPCIC.

Revolving Loan

As discussed in “Part II—Item 8—Note 7 (Long-term Debt),” the Company entered into a committed and unsecured $40.0 million revolving credit line with JP Morgan Chase Bank N.A. This agreement succeeded the previous $37.5 million revolving credit line with J.P. Morgan Chase, N.A. As of December 31, 2023, the Company has not borrowed any amount under this revolving loan. The Company must pay an annual commitment of 0.50% of the unused portion of the commitment. Borrowings mature on June 29, 2024, 364 days after the inception date and carries an interest rate of prime rate plus a margin of

56

2%. The credit line is subject to annual renewals. The credit line contains customary financial and other covenants, with which the Company is in compliance.

Long-term Debt

In November 2021, we issued and sold $100 million of 5.625% Senior Unsecured Notes due 2026 (the “Notes”) to certain institutional accredited investors and qualified institutional buyers. The Notes mature on November 26, 2026, at which time the entire $100.0 million of principal is due and payable. At any time on or after November 23, 2023, the Company may redeem all or part of the Notes. See “Part II—Item 8—Note 7 (Long-term debt)” for additional details. As of December 31, 2023, we were in compliance with all applicable covenants.

We will also continue to evaluate opportunities to access the debt capital markets to raise additional capital. We anticipate any proceeds would be used for general corporate purposes, including investing in the capital and surplus of the Insurance Entities.

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.

Looking Forward

We continue to monitor a range of financial metrics related to our business. Although we have not experienced material adverse impacts on our business or liquidity, conditions are subject to change depending on the extent of the economic outcomes, and the pace and extent of an economic recovery. Uncertainties regarding the impact of the COVID-19 pandemic tapered in 2023, including mitigated assessed risk by the Federal Reserve regarding the economic concerns of inflation, employment, and recession. We will continue to monitor the broader lasting economic impacts of the COVID-19 pandemic.

Common Stock Repurchases

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 2023, there were two authorized repurchase plans in effect:

•On December 15, 2022, our Board of Directors authorized a successor share repurchase program under which the Company is authorized to repurchase up to $8.0 million of shares of our common stock through December 15, 2024 (the “December 2024 Share Repurchase Program”), which represents the unused portion of a previous share repurchase program authorization from November 2022. Under the December 2024 Share Repurchase Program, we repurchased 587,126 shares of our common stock at an aggregate cost of approximately $8.0 million. As of December 31, 2023, all amounts authorized under the December 2024 Program were repurchased.

•On June 12, 2023, our Board of Directors authorized the repurchase of up to $20.0 million of our common stock through June 10, 2025 (“The June 2025 Share Repurchase Program”) pursuant to which we repurchased 1,112,953 shares of our common stock at an aggregate cost of approximately $15.9 million. As of December 31, 2023, we have the ability to purchase up to approximately $4.1 million of our common stock under the June 2025 Share Repurchase Program.

In total, during the year ended December 31, 2023, we repurchased an aggregate of 1,513,644 shares of our common stock in the open market at an aggregate purchase price of $22.0 million. Also see “Part II—Item 5—Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities—Registrant Purchases of Equity Securities” for share repurchase activity during the three months ended December 31, 2023.

Cash Dividends

The following table summarizes the dividends declared and paid by the Company during the year ended December 31, 2023:

[[GREPCENT_TABLE]]
[["","","Dividend","","Shareholders","","Dividend","","Cash Dividend"],["2023","","Declared Date","","Record Date","","Payable Date","","Per Share Amount"],["First Quarter","","February 9, 2023","","March 9, 2023","","March 16, 2023","","$","0.16"],["Second Quarter","","April 12, 2023","","May 12, 2023","","May 19, 2023","","$","0.16"],["Third Quarter","","July 20, 2023","","August 4, 2023","","August 11, 2023","","$","0.16"],["Fourth Quarter","","November 15, 2023","","December 8, 2023","","December 15, 2023","","$","0.29"]]
[[/GREPCENT_TABLE]]

57

Reinsurance Recoverable

The following table provides total unpaid loss and LAE, net of related reinsurance recoverable for the dates presented (in thousands):

[[GREPCENT_TABLE]]
[["","","Years Ended December 31,"],["","","2023","","2022"],["Unpaid loss and LAE, net","","$","44,508","","","$","44,164"],["IBNR loss and LAE, net","","282,174","","","195,946"],["Total unpaid loss and LAE, net","","$","326,682","","","$","240,110"],["Reinsurance recoverable on unpaid loss and LAE","","$","49,249","","","$","156,683"],["Reinsurance recoverable on IBNR loss and LAE","","134,185","","","641,997"],["Total reinsurance recoverable on unpaid loss and LAE","","$","183,434","","","$","798,680"]]
[[/GREPCENT_TABLE]]

Statutory Loss Ratios

Underwriting results of insurance companies are frequently measured by their combined ratios, which is the sum of the loss and expense ratios described in the following paragraph. However, investment income, federal income taxes and other non-underwriting income or expense are not reflected in the combined ratio. The profitability of property and casualty insurance companies depends on income from underwriting, investment and service operations. Underwriting results are considered profitable when the combined ratio is under 100% and unprofitable when the combined ratio is over 100%.

The following table provides the statutory loss ratios, expense ratios and combined ratios for the periods indicated for the Insurance Entities:

[[GREPCENT_TABLE]]
[["","","Years Ended December 31,"],["","","2023","","2022"],["Loss and LAE Ratio (1)"],["UPCIC","","86","%","","85","%"],["APPCIC","","58","%","","57","%"],["Expense Ratio (1)"],["UPCIC","","25","%","","33","%"],["APPCIC","","33","%","","28","%"],["Combined Ratio (1)"],["UPCIC","","111","%","","118","%"],["APPCIC","","91","%","","85","%"]]
[[/GREPCENT_TABLE]]

(1)The ratios are net of ceded premiums and losses and LAE, including premiums ceded to our catastrophe reinsurers which comprise a significant cost, and losses and LAE ceded to reinsurers. The expense ratio includes management fees and commissions, which are based on market rates, paid to an affiliate of the Insurance Entities in the amount of $122.0 million and $135.8 million for UPCIC for the years ended December 31, 2023 and 2022, respectively, and $2.8 million and $1.7 million for APPCIC for the years ended December 31, 2023 and 2022, respectively. The management fees and commissions paid to the affiliate are eliminated in consolidation.

Ratings

The Insurance Entities’ financial strength and stability are rated by certain independent insurance rating agencies to measure the Insurance Entities’ ability to meet their financial obligations to its policyholders. For the Insurance Entities’ policies to be considered acceptable to the secondary mortgage market, the Insurance Entities must maintain a specified rating level with at least one independent insurance rating agency recognized by each of the Federal Home Loan Mortgage Corporation (“Freddie Mac”) and the Federal National Mortgage Association (“Fannie Mae”) or alternatively must qualify for an exception to the rating requirement. The Insurance Entities currently maintain acceptable ratings from two rating agencies recognized by Freddie Mac and Fannie Mae.

In 2023, Demotech, Inc. affirmed the Financial Stability Rating® of “A” for the Insurance Entities and Kroll affirmed its insurer financial strength ratings of “A-”. According to Demotech, Inc., the assigned rating represents a company’s continued positive surplus related to policyholders, liquidity of invested assets, an acceptable level of financial leverage, reasonable loss and LAE reserves, and realistic pricing. According to Kroll, its category of “A” ratings, inclusive of A+, A, and A- ratings,

58

indicates an insurer’s financial condition is strong and it is very likely to meet its policy obligations under difficult economic, financial, and business conditions. The ratings of the Insurance Entities are subject to at least annual review by the respective rating agencies, and may be revised upward or downward or revoked at the sole discretion of the rating agencies. Insurer financial stability or financial strength ratings primarily directed towards policyholders, and are not evaluations directed toward the protection of investors in a company, including holders of a company’s common stock, and are not recommendations to buy, sell, or hold securities.

The “A” rating on the 5.625% Senior Unsecured Notes due 2026 was reaffirmed by Egan-Jones Ratings Company in 2023. There are three notches in the rating categories assigned by Egan-Jones Ratings Company (e.g., A-, A, and A+), except for AAA and those deep into speculative grade, i.e., CC, C, and D, which do not have notches. According to Egan-Jones Ratings Company, the assigned rating pertains solely to their view of current and prospective credit quality. Their rating does not address pricing, liquidity, or other risks associated with holding investments in the issuer (UVE). Their rating is dependent on numerous factors including the reliability, accuracy, and quality of the data used in determining the credit rating.

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 “Part II—Item 8—Note 15 (Commitments and Contingencies)” for more information.

Material Cash Requirements

The following table represents our material cash requirements for which cash flows are fixed or determinable as of December 31, 2023 (in thousands):

[[GREPCENT_TABLE]]
[["","","Total","","Next 12 months","","Beyond 12 months"],["Reinsurance payable and multi-year commitments (1)","","$","317,197","","","$","264,551","","","$","52,646"],["Unpaid losses and LAE, direct (2)","","510,117","","","287,030","","","223,087"],["Long-term debt (3)","","121,198","","","7,256","","","113,942"],["Total material cash requirements","","$","948,512","","","$","558,837","","","$","389,675"]]
[[/GREPCENT_TABLE]]

(1)Amount represents the payment of reinsurance premiums payable under multi-year commitments. See “Part II—Item 8—Note 15 (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 December 31, 2023. Unpaid losses and LAE are net of estimated subrogation recoveries. In addition, these balances exclude amounts recoverable from our reinsurance program. See “Part II—Item 8—Note 4 (Reinsurance).” and Note 17 (Liability for Unpaid Losses and Loss Adjustment Expenses).”

(3)Long-term debt consists of a Surplus note and 5.625% Senior unsecured notes. See “Part II—Item 8—Note 7 (Long-term debt).”

Impact of Inflation and Changing Prices

The financial statements and related data presented herein have been prepared in accordance with GAAP, which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. Our primary assets are monetary in nature. As a result, interest rates have a more significant impact on our performance than the effects of the general levels of inflation. Interest rates do not necessarily move in the same direction or with the same magnitude as the cost of paying losses and LAE.

Insurance premiums are established before we know the amount of loss and LAE and the extent to which inflation may affect such expenses. Consequently, we attempt to anticipate the future impact of inflation when establishing rate levels. While we attempt to charge adequate rates, we may be limited in raising premium levels for competitive and regulatory reasons. Inflation also affects the market value of our investment portfolio and the investment rate of return. Any future economic changes which result in prolonged and increasing levels of inflation could cause increases in the dollar amount of incurred loss and LAE and thereby materially adversely affect future liability requirements.

59

Arrangements with Variable Interest Entities

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

For a further discussion of our involvement with the VIE, see “Part II—Item 8—Note 2 (Summary of Significant Accounting Policies)” and “Item 8—Note 18 (Variable Interest Entities).”

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.

Liability for Unpaid Losses and LAE

A liability, net of estimated subrogation, is established to provide for the estimated costs of paying losses and LAE under insurance policies the Insurance Entities have issued. Underwriting results are significantly influenced by an estimate of a liability for unpaid losses and LAE. The liability is an estimate of amounts necessary to settle all outstanding claims, including claims that have been incurred, but not yet reported as of the financial statement date. The process of estimating loss reserves requires significant judgment due to a number of variables, such as the type, severity and jurisdiction of loss, economic conditions including inflation, social attitudes, judicial decisions and legislative development, and changes in claims handling procedures. These variables will inherently result in an ultimate liability that will differ from initial estimates. We revise our reserve for unpaid losses as additional information becomes available, and reflect adjustments, if any, in our earnings in the periods in which we determine the adjustments are necessary. We estimate and accrue our right to subrogate reported or estimated claims against other parties. Subrogated claims are recorded at amounts estimated to be received from the subrogated parties, net of expenses and netted against unpaid losses and LAE.

See “Part II—Item 8—Note 17 (Liability for Unpaid Losses and Loss Adjustment Expenses)” for a discussion of the Company’s basis and methodologies used to establish its liability for unpaid losses and LAE along with the following quantitative disclosures:

•Five-year accident year table on incurred claim and allocated claim adjustment expenses, net of reinsurance including columns of:

◦IBNR—Total of Incurred-but-not-reported liabilities plus expected development (redundancy) on reported claims by accident year, and

◦Claim counts—cumulative number of reported claims by accident year.

•Five-year accident year table on cumulative paid claims and allocated claim adjustment expenses, net of reinsurance,

•Reconciliation of net incurred and paid claims development tables to the liability for unpaid losses and LAE in the consolidated balance sheet,

•Duration—a table of the average historical claims duration for the past five years, and

•Reconciliation of the change in liability for unpaid losses and LAE presented in the consolidated financial statements.

We utilize independent actuaries to help establish liabilities for unpaid losses, anticipated loss recoveries, and LAE. We do not discount the liability for unpaid losses and LAE for financial statement purposes. In establishing the liability for unpaid losses and LAE, actuarial judgment is relied upon in order to make appropriate assumptions to estimate a best estimate of ultimate losses. There are inherent uncertainties associated with this estimation process, especially when a company is undergoing changes in its claims settlement practices, when a company has limited experience in a certain area or when behaviors of policyholders are influenced by external factors and/or market dynamics. As an example, a dramatic change occurred during calendar year 2015 when we realigned our adjusting teams as well as launched our Fast Track initiative, reducing settlement costs and strengthening case reserve adequacy for claims reported during the year. These changes have had a meaningful influence on development pattern selections applied to 2013 through 2017 accident year claims in the reserving estimates for each of the methods described in “Item 8—Note 17 (Liability for Unpaid Losses and Loss Adjustment Expenses).” More recently, since 2016 there has been a significant increase in efforts to pursue subrogation against third parties responsible for property damage losses to our insureds. As a result, anticipated subrogation recoveries are reviewed and estimated on a stand-alone basis in the Company’s reserve analysis. Market dynamics in Florida include the use of assignments of benefits (“AOB”) and the resulting increase in litigation against the Company. As a result of the use of AOBs, as well as the continued overall increase in represented claims and claims-related abuses in Florida, we have increased our estimates of ultimate losses for the most recent and prior accident years.

60

Factors Affecting Reserve Estimates

Reserve estimates are developed based on the processes and historical development trends discussed in “Item 8—Note 17 (Liability for Unpaid Losses and Loss Adjustment Expenses)” to the consolidated financial statements. These estimates are considered in conjunction with known facts and interpretations of circumstances and factors including our experience with similar cases, actual claims paid, differing payment patterns and pending levels of unpaid claims, loss management programs, product mix and contractual terms, changes in law and regulation, judicial decisions, and economic conditions. When these types of changes are experienced, actuarial judgment is applied in the determination and selection of development factors in order to better reflect new trends or expectations. For example, if a change in law is expected to have a significant impact on the development of claim severity, actuarial judgment is applied to determine appropriate development factors that will most accurately reflect the expected impact on that specific estimate. As an example, the Company considered and included the effects of the enacted legislation in developing its ultimate loss projections and reserve estimates as of December 31, 2023, as noted in “Item 8—Note 17 (Liability for Unpaid Losses and Loss Adjustment Expenses)” to the consolidated financial statements. Another example would be when a change in economic conditions is expected to affect the cost of repairs to property; actuarial judgment is applied to determine appropriate development factors to use in the reserve estimate that will most accurately reflect the expected impacts on severity development.

Changes in homeowners current year claim severity are generally influenced by inflation in the cost of building materials, the cost of construction and property repair services, the cost of replacing home furnishings and other contents, the types of claims that qualify for coverage, the presence of third party representation, such as legal or repair contractors (which serve to inflate claim expenses), and other economic and environmental factors. We employ various loss management programs to mitigate the effects of these factors.

Key assumptions that may materially affect the estimate of the reserve for loss and LAE relate to the effects of emerging claim and coverage issues. As industry practices and legal, judicial, social and other environmental conditions change, unexpected and unintended issues related to claims and coverages may emerge. These issues may adversely affect our business by either extending coverage beyond our underwriting intent, lengthening the time to final settlement, or by increasing the number or size of claims. Key assumptions that are premised on future emergence that are inconsistent with historical loss reserve development patterns include but are not limited to:

•Adverse changes in loss cost trends, including inflationary pressures in home repair costs;

•Judicial expansion of policy coverage and the impact of new theories of liability; and

•Plaintiffs targeting property and casualty insurers in purported class action or other litigation related to claims-handling and other practices.

As loss experience for the current year develops for each type of loss, the reserves for loss and LAE are monitored relative to initial assumptions until they are judged to have sufficient statistical credibility. From that point in time and forward, reserves are re-estimated using statistical actuarial processes to reflect the impact loss trends have on development factors incorporated into the actuarial estimation processes.

Causes of Reserve Estimate Uncertainty

Since reserves are estimates of the unpaid portions of claims and claims expenses that have occurred, the establishment of appropriate reserves, including reserves for catastrophes, requires regular reevaluation and refinement of estimates to determine ultimate loss and LAE estimates.

At each reporting date, the highest degree of uncertainty in reserve estimates arises from claims remaining to be settled for the current accident year and the most recent preceding accident year, and claims that have occurred but have not been reported. The estimate for the current accident year contains the greatest degree of uncertainty because it contains the greatest proportion of losses that have not been reported or settled but must be estimated as of the current reporting date. During the first year after the end of an accident year, a large portion of the total losses for that accident year are settled. When accident year losses paid through the end of the first year following the initial accident year are incorporated into updated actuarial estimates, the trends inherent in the settlement of claims emerge more clearly. Consequently, this is the point in time at which the largest re-estimates of losses for an accident year can occur. After the second year, the losses paid for the accident year typically relate to claims that are more difficult to settle, such as those involving litigation.

Reserves for Catastrophe Losses

Loss and LAE reserves also include reserves for catastrophe losses. Catastrophe losses are an inherent risk of the property-casualty insurance industry that have contributed, and will continue to contribute, to potentially material year-to-year fluctuations in results of operations and financial position. A catastrophe is an event that produces significant insured losses before reinsurance and involves multiple first party policyholders, or an event that produces a number of claims in excess of a preset, per-event threshold of average claims in a specific area, occurring within a certain amount of time following the event. Catastrophes are commonly caused by various natural events including high winds, tornadoes, wildfires, winter storms, tropical storms and hurricanes.

61

The estimation of claims and claims expense reserves for catastrophes also comprises estimates of losses from reported and unreported claims, primarily for damage to property. In general, estimates for catastrophe reserves are based on claim adjuster inspections and the application of historical loss development factors as described previously and in “Item 8—Note 17 (Liability for Unpaid Losses and Loss Adjustment Expenses)” to the consolidated financial statements. However, depending on the nature of the catastrophe, as noted above, the estimation process can be further complicated. For example, for hurricanes, complications could include the inability of insureds to be able to promptly report losses, a prevalence of solicited and late-reported claims creating or compounding challenges with determining the cause and amount of loss, limitations placed on claims adjusting staff affecting their ability to inspect losses, determining whether losses are covered by our homeowners policy (generally for damage caused by wind or wind driven rain) or are specifically excluded from coverage such as losses caused by flood, estimating additional living expenses or assessing the impact of demand surge and exposure to mold damage. The effects of numerous other considerations, include the timing of a catastrophe in relation to other events, such as at or near the end of a financial reporting period, which can affect the availability of information needed to estimate reserves for that reporting period. In these situations, practices are adapted to accommodate these circumstances in order to determine a best estimate of losses from a catastrophe.

Key Actuarial Assumptions That Affect the Loss and LAE Estimate

The aggregation of estimates for reported losses and IBNR forms the reserve liability recorded in the Consolidated Balance Sheets.

At any given point in time, the recorded loss and LAE reserves represent our best estimate of the ultimate settlement and administration cost of insured claims incurred and unpaid. Since the process of estimating loss and LAE reserves requires significant judgment due to a number of variables, such as fluctuations in inflation, judicial decisions, legislative changes and changes in claims handling procedures, ultimate liability may exceed or be less than these estimates. Reserves for losses and LAE are revised as additional information becomes available, and adjustments, if any, are reflected in earnings in the periods in which they are determined.

In selecting development factors and averages described in “Item 8—Note 17 (Liability for Unpaid Losses and Loss Adjustment Expenses)” to the consolidated financial statements, due consideration is given to how the historical experience patterns change from one year to the next over the course of several consecutive years of recent history. Predictions surrounding these patterns drive the estimates that are produced by each method, and are based on statistical techniques that follow standard actuarial practices.

In compliance with annual statutory reporting requirements, our appointed independent actuary provides a Statement of Actuarial Opinion (“SAO”) indicating that carried loss and LAE reserves recorded at each annual balance sheet date make a reasonable provision for all of the Insurance Entities’ unpaid loss and LAE obligations under the terms of contracts and agreements with our policyholders. Recorded reserves are compared to the indicated range provided in the actuary’s report accompanying the SAO. At December 31, 2023, the recorded amount for net loss and LAE falls within the range determined by the Company’s appointed independent actuary.

Potential Reserve Estimate Variability

The methods employed by actuaries include a range of estimated unpaid losses, each reflecting a level of uncertainty. Projections of loss and LAE liabilities are subject to potentially large variability in the estimation process since the ultimate disposition of claims incurred prior to the financial statement date, whether reported or not, is subject to the outcome of events that have not yet occurred. Examples of these events include jury decisions, court interpretations, legislative changes, public attitudes, and social/economic conditions such as inflation. Any estimate of future costs is subject to the inherent limitation on one’s ability to predict the aggregate course of future events. It should therefore be expected that the actual emergence of losses and LAE will vary, perhaps materially, from any estimate.

In selecting the range of reasonable estimates, the range of indications produced by the various methods is evaluated, the relative strengths and weaknesses of each method are considered, and from those inputs a range of estimates can be selected. For reasons cited above, this range of estimated ultimate losses is typically smaller for older, more mature accident periods and greater for more recent, less mature accident periods. The greatest level of uncertainty is associated with the most recent accident years, and particularly years during which catastrophe events occurred.

The inherent uncertainty associated with our loss and LAE liability is magnified due to our concentration of property business in catastrophe-exposed and litigious states, primarily Florida. In 2018, for example, loss and expense payments for Hurricane Irma claims exceeded initial liability estimates that were established at year-end 2017, which was shortly after the event occurred. This unexpected development was partially due to the influence of plaintiff attorneys in the claim filing process; both at initial contact prior to coverage validation or damage assessment, and after claims were settled and closed which resulted in a large number of claims being reopened during the year. In 2019, UPCIC continued to experience unanticipated unfavorable development on losses from claims being reopened and new claims being opened due to public adjusters encouraging policyholders to file new claims. Due to the relatively low frequency and inherent uncertainty of catastrophe events, the parameters utilized in loss estimation methodologies are updated whenever new information emerges.

62

The following table summarizes the effect on net loss and LAE reserves and net loss, net of tax in the event of reasonably likely changes in the severity of claims considered in establishing loss and LAE reserves. The range of reasonably likely changes in the severity of our claims was established based on a review of changes in loss year development and applied loss and LAE reserves as a whole. The selected range of changes does not indicate what could be the potential best or worst case or likely scenarios (dollars in thousands):

[[GREPCENT_TABLE]]
[["Year ended December 31, 2023"],["","","","","Percent Change in"],["Change in Reserves","","Reserves","","Net Income"],["-20.0%","","$","408,094","","","(115)","%"],["-15.0%","","433,599","","","(87)","%"],["-10.0%","","459,105","","","(58)","%"],["-5.0%","","484,611","","","(29)","%"],["Base","","510,117","","","\u2014"],["5.0%","","535,623","","","29","%"],["10.0%","","561,129","","","58","%"],["15.0%","","586,635","","","87","%"],["20.0%","","612,140","","","115","%"]]
[[/GREPCENT_TABLE]]

Adequacy of Reserve Estimates

We believe our net loss and LAE reserves are appropriately established based on available methodology, facts, technology, laws, and regulations. We calculate and record a single best reserve estimate, in conformance with generally accepted actuarial standards, for reported and unreported losses and LAE losses and as a result we believe no other estimate is better than our recorded amount.

Due to the uncertainties involved, the ultimate cost of losses and LAE may vary materially from recorded amounts, which are based on our best estimates. The liability for unpaid losses and LAE at December 31, 2023 is $510.1 million.

Recent Accounting Pronouncements Not Yet Adopted

In December 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2023-09, Income Taxes (Topic 740), which will require that public business entities on an annual basis (1) disclose specific categories in the rate reconciliation and (2) provide additional information for reconciling items that meet a quantitative threshold (if the effect of those reconciling items is equal to or greater than 5 percent of the amount computed by multiplying pretax income [or loss] by the applicable statutory income tax rate). The impact to our consolidated financial statements, if any, will be dependent on the timing and terms of any future modifications related to a change in effective tax rate. The amendments in this ASU are effective for annual periods beginning after December 15, 2024.

NON-GAAP FINANCIAL MEASURES

Non-GAAP financial measures should be considered in addition to, and not as a substitute for or superior to, financial measures presented in accordance with GAAP. For more information regarding our key performance indicators, please refer to the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Key Performance Indicators.”

The following table presents the reconciliation of GAAP revenue (total premiums earned and other revenues) to core revenue, which is a non-GAAP measure (in thousands):

[[GREPCENT_TABLE]]
[["","Years Ended December 31,"],["","2023","","2022","","2021"],["GAAP revenue","$","1,391,582","","","$","1,222,658","","","$","1,121,851"],["less: Net realized gains (losses) on investments","(1,229)","","","348","","","5,892"],["less: Net change in unrealized gains (losses) on investments","12,046","","","(13,145)","","","(4,032)"],["Core Revenue","$","1,380,765","","","$","1,235,455","","","$","1,119,991"]]
[[/GREPCENT_TABLE]]

63

The following table presents the reconciliation of GAAP operating income (loss) to adjusted operating income (loss), which is a non-GAAP measure (in thousands):

[[GREPCENT_TABLE]]
[["","Years Ended December 31,"],["","2023","","2022","","2021"],["GAAP income (loss) before income tax expense (benefit)","$","88,349","","","$","(27,247)","","","$","28,413"],["add: Interest and amortization of debt issuance costs","6,531","","","6,609","","","638"],["GAAP operating income (loss)","94,880","","","(20,638)","","","29,051"],["less: Net realized gains (losses) on investments","(1,229)","","","348","","","5,892"],["less: Net changes in unrealized gains (losses) on investments","12,046","","","(13,145)","","","(4,032)"],["Adjusted operating income (loss)","$","84,063","","","$","(7,841)","","","$","27,191"]]
[[/GREPCENT_TABLE]]

The following table presents the reconciliation of operating income (loss) margin to adjusted operation income (loss) margin, which is a non-GAAP measure (in thousands):

[[GREPCENT_TABLE]]
[["","Years Ended December 31,"],["","2023","","2022","","2021"],["GAAP operating income (loss)","$","94,880","","","$","(20,638)","","","$","29,051"],["GAAP revenue","1,391,582","","","1,222,658","","","1,121,851"],["GAAP operating income (loss) margin","6.8","%","","(1.7)","%","","2.6","%"],["Adjusted operating income (loss)","84,063","","","(7,841)","","","27,191"],["Core revenue","1,380,765","","","1,235,455","","","1,119,991"],["Adjusted operating income (loss) margin","6.1","%","","(0.6)","%","","2.4","%"]]
[[/GREPCENT_TABLE]]

The following table presents the reconciliation of GAAP net income (loss) available to common stockholders to adjusted net income (loss) available to common stockholders, which is a non-GAAP measure (in thousands):

[[GREPCENT_TABLE]]
[["","Years Ended December 31,"],["","2023","","2022","","2021"],["GAAP net income (loss)","$","66,823","","","$","(22,257)","","","$","20,407"],["less: Preferred dividends","10","","","10","","","10"],["GAAP net income (loss) available to common stockholders","66,813","","","(22,267)","","","20,397"],["less: Net realized gains (losses) on investments","(1,229)","","","348","","","5,892"],["less: Net changes in unrealized gains (losses) on investments","12,046","","","(13,145)","","","(4,032)"],["add: Income tax effect on above adjustments","2,661","","","(3,148)","","","422"],["Adjusted net income (loss) available to common stockholders","$","58,657","","","$","(12,618)","","","$","18,959"],["Weighted average common shares outstanding - Diluted","30,147","","","30,751","","","31,307"],["Diluted earnings (loss) per common share","$","2.22","","","$","(0.72)","","","$","0.65"],["Diluted adjusted earnings (loss) per common share","$","1.95","","","$","(0.41)","","","$","0.61"]]
[[/GREPCENT_TABLE]]

64

The following table presents the reconciliation of GAAP stockholders’ equity to adjusted stockholders’ equity and book value per common share to adjusted book value per common share, which is a non-GAAP measure (in thousands):

[[GREPCENT_TABLE]]
[["","As of"],["","December 31,","","December 31,","","December 31,"],["","2023","","2022","","2021"],["GAAP Stockholders' equity","$","341,297","","","$","287,896","","","$","429,702"],["less: Preferred equity","100","","","100","","","100"],["Common stockholders' equity","341,197","","","287,796","","","429,602"],["less: Accumulated other comprehensive income (loss), net of taxes","(74,172)","","","(103,782)","","","(15,568)"],["Adjusted common stockholders' equity","$","415,369","","","$","391,578","","","$","445,170"],["Common shares outstanding","28,966","","","30,389","","","31,221"],["Book value per common share","$","11.78","","","$","9.47","","","$","13.76"],["Adjusted book value per common share","$","14.34","","","$","12.89","","","$","14.26"]]
[[/GREPCENT_TABLE]]

The following table presents the reconciliation of GAAP ROCE to adjusted ROCE, which is a non-GAAP measure (in thousands):

[[GREPCENT_TABLE]]
[["","Years Ended December 31,"],["","2023","","2022","","2021"],["Actual net income (loss) available to common stockholders'","66,813","","","(22,267)","","","20,397"],["Average common stockholders' equity","314,497","","","358,699","","","439,382"],["ROCE","21.2","%","","(6.2)","%","","4.6","%"],["Adjusted net income (loss) available to common stockholders","$","58,657","","","$","(12,618)","","","$","18,959"],["Adjusted average common stockholders' equity*","$","399,396","","","$","423,199","","","$","444,776"],["Adjusted ROCE","14.7","%","","(3.0)","%","","4.3","%"]]
[[/GREPCENT_TABLE]]

*Adjusted average common stockholders’ equity excludes current period after-tax net realized gains (losses) on investments and net change in unrealized gains (losses) on investments.