UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2011March 31, 2012
or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period fromto
Commission File Number 001-33251
UNIVERSAL INSURANCE HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware | 65-0231984 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
1110 W. Commercial Blvd., Fort Lauderdale, Florida 33309
(Address of principal executive offices)
(954) 958-1200
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See the definitions of “large accelerated filer” and “accelerated filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ¨ | Accelerated filer | x | |||||
Non-accelerated filer | ¨ | (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ¨ No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 39,992,76940,171,028 shares of common stock, par value $0.01 per share, outstanding on NovemberMay 2, 2011.2012.
UNIVERSAL INSURANCE HOLDINGS, INC.
PART I – FINANCIAL INFORMATION
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To The Board of Directors and Stockholders of
Universal Insurance Holdings, Inc. and Subsidiaries
Fort Lauderdale, Florida
We have reviewed the accompanying condensed consolidated balance sheet ofUniversal Insurance Holdings, Inc. (the “Company”) and its Subsidiaries as of September 30, 2011March 31, 2012 and the related condensed consolidated statements of income for the three and nine-monththree-month periods ended September 30,March 31, 2012 and 2011 and 2010 and cash flows for the nine-monththree-month periods ended September 30, 2011March 31, 2012 and 2010.2011. These interim financial statements are the responsibility of the Company’s management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the accompanying interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
/s/ Blackman Kallick, LLP
Chicago, Illinois
November 8, 2011May 9, 2012
PART I — FINANCIAL INFORMATION
UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETSCONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
(in thousands, except per share data)
As of | ||||||||||||||||
As of September 30, 2011 | As of December 31, 2010 | March 31, 2012 | December 31, 2011 | |||||||||||||
ASSETS: | ||||||||||||||||
Cash and cash equivalents | $ | 328,838 | $ | 147,585 | $ | 325,968 | $ | 229,685 | ||||||||
Investment securities, at fair value | 153,476 | 224,532 | ||||||||||||||
Restricted cash and cash equivalents | 48,178 | 78,312 | ||||||||||||||
Fixed maturities, at fair value | 3,800 | 3,801 | ||||||||||||||
Equity securities, at fair value | 96,996 | 95,345 | ||||||||||||||
Prepaid reinsurance premiums | 251,342 | 221,086 | 276,365 | 243,095 | ||||||||||||
Reinsurance recoverables | 77,545 | 79,552 | 77,049 | 85,706 | ||||||||||||
Reinsurance receivable, net | 49,816 | 37,607 | 15,794 | 55,205 | ||||||||||||
Premiums receivable, net | 50,580 | 43,622 | 45,628 | 45,828 | ||||||||||||
Receivable from securities | 5,585 | 17,556 | ||||||||||||||
Receivable from securities sold | 4,117 | 9,737 | ||||||||||||||
Other receivables | 2,910 | 2,864 | 2,207 | 2,732 | ||||||||||||
Property and equipment, net | 6,597 | 5,407 | 8,441 | 7,116 | ||||||||||||
Deferred policy acquisition costs, net | 13,013 | 9,446 | 11,798 | 12,996 | ||||||||||||
Income taxes recoverable | 1,070 | — | ||||||||||||||
Deferred income taxes | 24,120 | 13,448 | 17,409 | 22,991 | ||||||||||||
Other assets | 3,126 | 1,132 | 1,836 | 1,477 | ||||||||||||
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Total assets | $ | 966,948 | $ | 803,837 | $ | 936,656 | $ | 894,026 | ||||||||
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LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||
LIABILITIES: | ||||||||||||||||
Unpaid losses and loss adjustment expenses | $ | 162,954 | $ | 158,929 | $ | 172,300 | $ | 187,215 | ||||||||
Unearned premiums | 375,779 | 328,334 | 371,041 | 359,842 | ||||||||||||
Advance premium | 21,639 | 19,840 | 31,101 | 19,390 | ||||||||||||
Accounts payable | 4,287 | 3,767 | 5,064 | 4,314 | ||||||||||||
Bank overdraft | 34,914 | 23,030 | 28,690 | 25,485 | ||||||||||||
Payable for securities | 17,667 | — | ||||||||||||||
Reinsurance payable, net | 128,804 | 75,553 | ||||||||||||||
Payable for securities purchased | 8,017 | 1,067 | ||||||||||||||
Reinsurance payable | 114,477 | 87,497 | ||||||||||||||
Income taxes payable | 16,378 | 8,282 | 551 | 12,740 | ||||||||||||
Dividends payable to shareholders | 3,199 | — | 4,012 | — | ||||||||||||
Other accrued expenses | 22,322 | 23,150 | 23,506 | 24,780 | ||||||||||||
Long-term debt | 22,059 | 23,162 | 21,324 | 21,691 | ||||||||||||
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Total liabilities | 810,002 | 664,047 | 780,083 | 744,021 | ||||||||||||
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Commitments and Contingencies (Note 12) | ||||||||||||||||
Commitments and Contingencies (Note 11) | ||||||||||||||||
STOCKHOLDERS’ EQUITY: | ||||||||||||||||
Cumulative convertible preferred stock, $.01 par value | 1 | 1 | 1 | 1 | ||||||||||||
Authorized shares - 1,000 | ||||||||||||||||
Issued shares - 108 | ||||||||||||||||
Outstanding shares - 108 | ||||||||||||||||
Authorized shares—1,000 | ||||||||||||||||
Issued shares—108 | ||||||||||||||||
Outstanding shares—108 | ||||||||||||||||
Minimum liquidation preference, $2.66 per share | ||||||||||||||||
Common stock, $.01 par value | 410 | 404 | 411 | 411 | ||||||||||||
Authorized shares - 55,000 | ||||||||||||||||
Issued shares - 41,010 and 40,407 | ||||||||||||||||
Outstanding shares - 39,993 and 39,388 | ||||||||||||||||
Treasury shares, at cost - 1,018 and 1,019 | (3,102 | ) | (3,109 | ) | ||||||||||||
Authorized shares—55,000 | ||||||||||||||||
Issued shares—41,135 and 41,100 | ||||||||||||||||
Outstanding shares—40,117 and 40,082 | ||||||||||||||||
Treasury shares, at cost—1,018 | (3,101 | ) | (3,101 | ) | ||||||||||||
Additional paid-in capital | 35,549 | 33,675 | 37,497 | 36,536 | ||||||||||||
Retained earnings | 124,088 | 108,819 | 121,765 | 116,158 | ||||||||||||
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Total stockholders’ equity | 156,946 | 139,790 | 156,573 | 150,005 | ||||||||||||
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Total liabilities and stockholders’ equity | $ | 966,948 | $ | 803,837 | $ | 936,656 | $ | 894,026 | ||||||||
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The accompanying notes to condensed consolidated financial statements are an integral part of these statements.
UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOMECONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited)
(in thousands, except per share data)
0000000 | 0000000 | 0000000 | 0000000 | |||||||||||||
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
PREMIUMS EARNED AND OTHER REVENUES | ||||||||||||||||
Direct premiums written | $ | 171,370 | $ | 152,662 | $ | 558,024 | $ | 520,782 | ||||||||
Ceded premiums written | (123,984 | ) | (108,539 | ) | (393,673 | ) | (357,411 | ) | ||||||||
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Net premiums written | 47,386 | 44,123 | 164,351 | 163,371 | ||||||||||||
Decrease (increase) in net unearned premium | 2,248 | 4,708 | (17,189 | ) | (39,865 | ) | ||||||||||
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Premiums earned, net | 49,634 | 48,831 | 147,162 | 123,506 | ||||||||||||
Net investment income | 122 | 66 | 358 | 377 | ||||||||||||
Net realized gains on investments | 5,884 | 6,149 | 12,496 | 11,893 | ||||||||||||
Net unrealized (losses) gains on investments | (15,985 | ) | 6,281 | (23,037 | ) | 6,281 | ||||||||||
Net foreign currency (losses) gains on investments | (455 | ) | (8 | ) | (384 | ) | 801 | |||||||||
Commission revenue | 5,192 | 4,423 | 14,313 | 13,469 | ||||||||||||
Policy fees | 3,535 | 3,525 | 12,110 | 12,000 | ||||||||||||
Other revenue | 1,486 | 1,468 | 4,400 | 3,489 | ||||||||||||
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Total premiums earned and other revenues | 49,413 | 70,735 | 167,418 | 171,816 | ||||||||||||
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OPERATING COSTS AND EXPENSES | ||||||||||||||||
Losses and loss adjustment expenses | 29,343 | 29,370 | 81,380 | 77,857 | ||||||||||||
General and administrative expenses | 18,827 | 20,053 | 48,598 | 43,631 | ||||||||||||
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Total operating costs and expenses | 48,170 | 49,423 | 129,978 | 121,488 | ||||||||||||
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INCOME BEFORE INCOME TAXES | 1,243 | 21,312 | 37,440 | 50,328 | ||||||||||||
Income taxes, current | 7,331 | 7,359 | 25,690 | 19,016 | ||||||||||||
Income taxes, deferred | (7,063 | ) | 876 | (10,672 | ) | 524 | ||||||||||
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Income taxes, net | 268 | 8,235 | 15,018 | 19,540 | ||||||||||||
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NET INCOME | $ | 975 | $ | 13,077 | $ | 22,422 | $ | 30,788 | ||||||||
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Basic earnings per common share | $ | 0.02 | $ | 0.33 | $ | 0.57 | $ | 0.78 | ||||||||
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Weighted average of common shares outstanding - Basic | 39,190 | 39,167 | 39,177 | 39,076 | ||||||||||||
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Fully diluted earnings per common share | $ | 0.02 | $ | 0.32 | $ | 0.55 | $ | 0.76 | ||||||||
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Weighted average of common shares outstanding - Diluted | 40,330 | 40,276 | 40,536 | 40,386 | ||||||||||||
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Cash dividend declared per common share | $ | 0.08 | $ | — | $ | 0.18 | $ | 0.22 | ||||||||
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00000000 | 00000000 | 00000000 | 00000000 | |||||||||||||
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Comprehensive Income: | ||||||||||||||||
Net income | $ | 975 | $ | 13,077 | $ | 22,422 | $ | 30,788 | ||||||||
Change in net unrealized gains (losses) on investments, net of tax | — | 409 | — | (558 | ) | |||||||||||
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Comprehensive Income | $ | 975 | $ | 13,486 | $ | 22,422 | $ | 30,230 | ||||||||
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Three Months Ended March 31, | ||||||||
2012 | 2011 | |||||||
PREMIUMS EARNED AND OTHER REVENUES | ||||||||
Direct premiums written | $ | 190,003 | $ | 173,175 | ||||
Ceded premiums written | (163,434 | ) | (123,891 | ) | ||||
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Net premiums written | 26,569 | 49,284 | ||||||
Decrease (increase) in net unearned premium | 22,071 | (1,280 | ) | |||||
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Premiums earned, net | 48,640 | 48,004 | ||||||
Net investment (expense) income | (36 | ) | 257 | |||||
Net realized (losses) gains on investments | (7,449 | ) | 3,652 | |||||
Net unrealized gains on investments | 9,187 | 2,588 | ||||||
Net foreign currency gains on investments | 23 | 71 | ||||||
Commission revenue | 4,541 | 4,180 | ||||||
Policy fees | 3,901 | 4,173 | ||||||
Other revenue | 1,440 | 1,408 | ||||||
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Total premiums earned and other revenues | 60,247 | 64,333 | ||||||
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OPERATING COSTS AND EXPENSES | ||||||||
Losses and loss adjustment expenses | 26,174 | 26,185 | ||||||
General and administrative expenses | 17,844 | 15,072 | ||||||
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Total operating costs and expenses | 44,018 | 41,257 | ||||||
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INCOME BEFORE INCOME TAXES | 16,229 | 23,076 | ||||||
Income taxes, current | 774 | 8,737 | ||||||
Income taxes, deferred | 5,582 | 441 | ||||||
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Income taxes, net | 6,356 | 9,178 | ||||||
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NET INCOME AND COMPREHENSIVE INCOME | $ | 9,873 | $ | 13,898 | ||||
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Basic earnings per common share | $ | 0.24 | $ | 0.35 | ||||
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Weighted average of common shares outstanding—Basic | 39,388 | 39,388 | ||||||
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Fully diluted earnings per common share | $ | 0.24 | $ | 0.34 | ||||
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Weighted average of common shares outstanding—Diluted | 40,544 | 40,838 | ||||||
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Cash dividend declared per common share | $ | 0.10 | $ | 0.10 | ||||
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The accompanying notes to condensed consolidated financial statements are an integral part of these statements.
UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)(unaudited)
(in thousands)
Nine Months Ended September 30, | Three Months Ended March 31, | |||||||||||||||
2011 | 2010 | 2012 | 2011 | |||||||||||||
Cash flows from operating activities: | ||||||||||||||||
Net Income | $ | 22,422 | $ | 30,788 | $ | 9,873 | $ | 13,898 | ||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||
Bad debt expense | 622 | 1,666 | ||||||||||||||
Bad debt (recovery) expense | (80 | ) | 164 | |||||||||||||
Depreciation | 379 | 732 | 199 | 182 | ||||||||||||
Amortization of cost of stock options | 957 | 1,766 | ||||||||||||||
Amortization of non-vested shares | 931 | 690 | ||||||||||||||
Net realized gains on investments | (12,496 | ) | (11,893 | ) | ||||||||||||
Net unrealized losses (gains) on investments | 23,037 | (6,281 | ) | |||||||||||||
Net foreign currency losses (gains) on investments | 384 | (835 | ) | |||||||||||||
Amortization of stock-based compensation | 1,012 | 398 | ||||||||||||||
Net realized losses (gains) on investments | 7,449 | (3,652 | ) | |||||||||||||
Net unrealized (gains) losses on investments | (9,187 | ) | (2,588 | ) | ||||||||||||
Net foreign currency (gains) on investments | (23 | ) | (71 | ) | ||||||||||||
Amortization of premium / accretion of discount, net | 185 | 405 | 3 | 157 | ||||||||||||
Deferred income taxes | (10,672 | ) | 885 | 5,582 | 442 | |||||||||||
Excess tax (benefits) shortfall from stock-based compensation | 142 | — | ||||||||||||||
Other | (21 | ) | (21 | ) | — | 838 | ||||||||||
Net change in assets and liabilities relating to operating activities: | ||||||||||||||||
Restricted cash and cash equivalents | 30,134 | (10,291 | ) | |||||||||||||
Prepaid reinsurance premiums | (30,256 | ) | (28,069 | ) | (33,270 | ) | (7,309 | ) | ||||||||
Reinsurance recoverables | 2,007 | 24,480 | 8,657 | 426 | ||||||||||||
Reinsurance receivable, net | (12,209 | ) | (9,608 | ) | 39,411 | 5,375 | ||||||||||
Premiums receivable, net | (7,578 | ) | (12,819 | ) | 303 | 43 | ||||||||||
Accrued investment income | 580 | — | 40 | — | ||||||||||||
Other receivables | (629 | ) | 2,035 | 463 | (228 | ) | ||||||||||
Income taxes recoverable | — | 3,212 | (1,070 | ) | — | |||||||||||
Deferred policy acquisition costs, net | (3,567 | ) | (3,388 | ) | 1,198 | (694 | ) | |||||||||
Proceeds from sale of trading securities | 661,809 | 395,288 | 119,686 | 119,582 | ||||||||||||
Purchases of trading securities | (572,790 | ) | (348,111 | ) | (107,313 | ) | (48,350 | ) | ||||||||
Other assets | (1,428 | ) | (150 | ) | (55 | ) | (1,234 | ) | ||||||||
Unpaid losses and loss adjustment expenses | 4,025 | 9,660 | (14,915 | ) | (679 | ) | ||||||||||
Unearned premiums | 47,445 | 67,934 | 11,199 | 8,588 | ||||||||||||
Accounts payable | 519 | 323 | 750 | 1,504 | ||||||||||||
Reinsurance payable, net | 53,251 | 4,436 | 26,980 | 30,158 | ||||||||||||
Income taxes payable | 8,096 | 3,130 | (12,331 | ) | 2,612 | |||||||||||
Other accrued expenses | (828 | ) | 1,732 | (1,274 | ) | 319 | ||||||||||
Advance premium | 1,799 | 3,879 | 11,711 | 10,218 | ||||||||||||
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Net cash provided by operating activities | 175,974 | 131,866 | 95,274 | 119,808 | ||||||||||||
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Cash flows from investing activities: | ||||||||||||||||
Proceeds from sale of property, plant and equipment | 63 | 33 | 18 | — | ||||||||||||
Purchases of property, plant and equipment | (1,611 | ) | (1,589 | ) | (1,542 | ) | (399 | ) | ||||||||
Purchases of fixed maturities, available for sale | — | (129,141 | ) | |||||||||||||
Proceeds from sales of fixed maturities, available for sale | — | 116,238 | ||||||||||||||
Purchases of equity securities, available for sale | — | (80,730 | ) | |||||||||||||
Proceeds from sales of equity securities, available for sale | — | 70,681 | ||||||||||||||
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Net cash used in investing activities | (1,548 | ) | (24,508 | ) | (1,524 | ) | (399 | ) | ||||||||
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Cash flows from financing activities: | ||||||||||||||||
Bank overdraft | 11,884 | 4,482 | 3,205 | 3,833 | ||||||||||||
Preferred stock dividend | (15 | ) | (15 | ) | (254 | ) | (5 | ) | ||||||||
Common stock dividend | (3,939 | ) | (8,617 | ) | ||||||||||||
Issuance of common stock | — | 7 | 91 | — | ||||||||||||
Purchase of treasury shares | — | (3,724 | ) | |||||||||||||
Excess tax benefits from stock-based compensation | — | 3,660 | ||||||||||||||
Excess tax benefits (shortfall) from stock-based compensation | (142 | ) | — | |||||||||||||
Repayment of debt | (1,103 | ) | (1,103 | ) | (367 | ) | — | |||||||||
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Net cash provided by (used in) financing activities | 6,827 | (5,310 | ) | |||||||||||||
Net cash provided by financing activities | 2,533 | 3,828 | ||||||||||||||
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Net increase in cash and cash equivalents | 181,253 | 102,048 | 96,283 | 123,237 | ||||||||||||
Cash and cash equivalents at beginning of period | 147,585 | 192,924 | 229,685 | 133,645 | ||||||||||||
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Cash and cash equivalents at end of period | $ | 328,838 | $ | 294,972 | $ | 325,968 | $ | 256,882 | ||||||||
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Supplemental cash flow disclosure | ||||||||||||||||
Dividends accrued | $ | 3,199 | $ | — | $ | 4,012 | $ | — | ||||||||
Interest | $ | 744 | $ | 711 | $ | 105 | $ | — | ||||||||
Income taxes | $ | 13,513 | $ | 7,923 | $ | 14,170 | $ | 6,050 |
The accompanying notes to condensed consolidated financial statements are an integral part of these statements.
UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Nature of Operations and Basis of Presentation
Nature of Operations
Universal Insurance Holdings, Inc. (“UIH”) is a Delaware corporation originally incorporated as Universal Heights, Inc. in November 1990. UIH, andwith its wholly-owned subsidiaries (the “Company”) is a vertically integrated insurance company performing all aspects of insurance underwriting, distribution and claims. Through its wholly-owned subsidiaries, including Universal Property & Casualty Insurance Company (“UPCIC”) and American Platinum Property and Casualty Insurance Company (“APPCIC”), collectively referred to as the (“Insurance Entities”), the Company is principally engaged in the property and casualty insurance business offered primarily through a network of independent agents. Risk from catastrophic losses is managed through the use of reinsurance agreements. The Company’s primary product is homeowners’ insurance currently offered in fourfive states, including Florida where awhich comprises the vast majority of the Company’s policies are in force.in-force policies. SeeNote 5, Insurance Operations, for more information regarding the Company’s insurance operations.
The Company generates revenues primarily from the collection of premiums and the investment of available funds in excess of those premiums.retained for claims-paying obligations and insurance operations. Other significant sources of revenue include commissions collected from reinsurers and policy fees.
Basis of Presentation
The Company has prepared the accompanying unaudited Condensed Consolidated Financial Statements (“Financial Statements”) in accordance with the rules and regulations of the United States Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by United States Generally Accepted Accounting Principles (“GAAP”) for complete financial statements. Therefore, the Financial Statements should be read in conjunction with the audited Consolidated Financial Statements contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010,2011, filed with the SEC on March 31, 2011.26, 2012. The condensed consolidated balance sheet at December 31, 2010,2011, was derived from audited financial statements, but does not include all disclosures required by GAAP. In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation have been included in the Financial Statements. The results for interim periods do not necessarily indicate the results that may be expected for any other interim period or for the full year.
The Financial Statements include the accounts of the CompanyUIH and its wholly owned subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation.
Management must make estimates and assumptions that affect amounts reported in the Company’s Financial Statements and in disclosures of contingent assets and liabilities. Actual results could differ from those estimates.
To conform to the current period presentation, certain amounts in the prior periods’ consolidated financial statements and notes have been reclassified. Such reclassifications were of an immaterial amount and had no effect on net income or stockholders’ equity. The Company reclassified $37.6 millionhas adjusted its Condensed Consolidated Statement of Cash Flows for the three months ended March 31, 2011 to reflect the effect of a reclassification made to its reinsurance payable, netCondensed Consolidated Balance Sheet as of DecemberMarch 31, 2010,2011 related to reinsurance receivable, netpayables. This reclassification was made upon discovery that the Company was offsetting receivables and payables with separatenon-affiliated reinsurers. This correction represents a change in the presentation only of the Company’s Condensed Consolidated Balance Sheet as of December 31, 2010 and Condensed Consolidated Statement of Cash Flows for the Nine Months ended September 30, 2010, and had no impact on earnings, equity or cash flows from operating, investing and financing activities. The following line items were adjusted (in thousands):
Net change in assets and liabilities relating to operating activities: Reinsurance receivable, net Reinsurance payable, netCondensed Consolidated Statement of Cash Flows: Three Months Ended March 31, 2011 As Reported Reclassification Adjusted $ — $ 5,375 $ 5,375 $ 35,533 $ (5,375 ) $ 30,158
Condensed Consolidated Balance Sheet as of December 31, 2010
As Reported | Reclassification | Adjusted | ||||||||||
Receivable from reinsurers, net | $ | — | $ | 37,607 | $ | 37,607 | ||||||
Total assets | $ | 766,230 | $ | 37,607 | $ | 803,837 | ||||||
Payable to reinsurers, net | $ | 37,946 | $ | 37,607 | $ | 75,553 | ||||||
Total liabilities | $ | 626,440 | $ | 37,607 | $ | 664,047 |
An adjustment has been made to the Company’s Condensed Consolidated Statement of Cash Flows for the Nine Months
Ended September 30, 2010three months ended March 31, 2011 to reflect the effect of a reclassification made to the Company’s Condensed Balance Sheet as of March 31, 2011 related to restricted cash and cash equivalents. The Company reclassified amounts out of cash and cash equivalents that were restricted in terms of their use and withdrawal and has presented those amounts of restricted cash and cash equivalents as a separate line item on the face of the Condensed Consolidated Balance Sheets. The following line items were adjusted (in thousands):
Net change in assets and liabilities relating to operating activities: | As Reported | Reclassification | Adjusted | |||||||||
Reinsurance receivable, net | $ | — | $ | (9,608 | ) | $ | (9,608 | ) | ||||
Reinsurance payable, net | $ | (5,172 | ) | $ | 9,608 | $ | 4,436 |
Condensed Consolidated Statements of Cash Flows: | Three Months Ended March 31, 2011 | |||||||||||
As Reported | Reclassification | Adjusted | ||||||||||
Net change in assets and liabilities relating to operating activities: | ||||||||||||
Restricted cash and cash equivalents | $ | — | $ | (10,291 | ) | $ | (10,291 | ) | ||||
Net cash flows provided by (used in) operating activities | $ | 130,099 | $ | (10,291 | ) | $ | 119,808 | |||||
Net increase in cash and cash equivalents | $ | 133,528 | $ | (10,291 | ) | $ | 123,237 | |||||
Cash and cash equivalents at beginning of period | $ | 147,585 | $ | (13,940 | ) | $ | 133,645 | |||||
Cash and cash equivalents at end of period | $ | 281,113 | $ | (24,231 | ) | $ | 256,882 |
2. Significant Accounting Policies
The Company reported Significant Accounting Policies in its Annual Report on Form 10-K for the year ended December 31, 2010.2011. The following are new or revised disclosures or disclosures required on a quarterly basis.
Concentrations of Credit Risk.The Company is exposed to concentrations of credit risk, consisting principally of cash and cash equivalents, restricted cash and cash equivalents, debt securities, premiums receivable, reinsurance receivable and reinsurance recoverables.
Concentrations of credit risk with respect to cash on deposit are limited by the Company’s policy of investing excess cash with custodial institutions who invest primarily in money market accounts backed by the United States Government and United States Government agency securities with major national banks. These accounts are held by the Institutional Trust & Custody division of U.S. Bank and the Trust Department of SunTrust Bank and Bank of New York Trust Fund.Bank.
The Company maintains depository relationships with SunTrust Bank and Wells Fargo Bank N.A. It is the Company’s policy not to have a balance of more than $250 thousand for any of its affiliates at either institution on any given day to minimize exposure to a bank failure. Cash balances in excess of $250 thousand are transferred daily into custodial accounts with SunTrust Bank where cash is immediately invested into shares of Money Market Funds.
Cash
The following table presents the amount of cash and cash equivalents consistand restricted cash and cash equivalents as of checking, repurchase and money market accounts with carrying values as followsthe periods presented (in thousands):
As of March 31, 2012 | ||||||||||||||||||||||||||||||||
Cash and cash equivalents | Restricted cash and cash equivalents | |||||||||||||||||||||||||||||||
Institution | Cash | Money Market Funds | Total | % by institution | Funds held in Trust (1) | State Deposits (2) | Total | % by institution | ||||||||||||||||||||||||
U. S. Bank IT&C | $ | — | $ | 40,476 | $ | 40,476 | 12.4 | % | $ | — | $ | 800 | $ | 800 | 1.7 | % | ||||||||||||||||
SunTrust Bank | 1,130 | — | 1,130 | 0.4 | % | — | — | — | 0.0 | % | ||||||||||||||||||||||
SunTrust Bank Institutional Asset Services | — | 279,229 | 279,229 | 85.7 | % | — | — | — | 0.0 | % | ||||||||||||||||||||||
Wells Fargo Bank N.A. | 1,396 | 3 | 1,399 | 0.4 | % | — | — | — | 0.0 | % | ||||||||||||||||||||||
Bank of New York Mellon Trust Co. (1) | — | — | — | 0.0 | % | 50 | — | 50 | 0.1 | % | ||||||||||||||||||||||
Florida Department of Financial Services | — | — | — | 0.0 | % | — | 47,293 | 47,293 | 98.1 | % | ||||||||||||||||||||||
All Other Banking Institutions/States | 2,813 | 921 | 3,734 | 1.1 | % | — | 35 | 35 | 0.1 | % | ||||||||||||||||||||||
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Total | $ | 5,339 | $ | 320,629 | $ | 325,968 | 100.0 | % | $ | 50 | $ | 48,128 | $ | 48,178 | 100.0 | % | ||||||||||||||||
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As of September 30, 2011 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Institution | Cash | Money Market Funds | State Deposits | Total | % | |||||||||||||||||||||||||||||||||||||||||||||||
U. S. Bank IT&C | $ | — | $ | 41,275 | $ | — | $ | 41,275 | 12.6 | % | ||||||||||||||||||||||||||||||||||||||||||
SunTrust Bank | 580 | — | — | 580 | 0.2 | % | ||||||||||||||||||||||||||||||||||||||||||||||
SunTrust Bank Institutional Asset Services | — | 219,525 | — | 219,525 | 66.8 | % | ||||||||||||||||||||||||||||||||||||||||||||||
Wells Fargo Bank N.A. | 772 | — | — | 772 | �� | 0.2 | % | |||||||||||||||||||||||||||||||||||||||||||||
Bank of New York Trust Fund (1) | — | 62,873 | — | 62,873 | 19.1 | % | ||||||||||||||||||||||||||||||||||||||||||||||
All Other Banking Institutions | 1,210 | 3 | 2,600 | 3,813 | 1.2 | % | ||||||||||||||||||||||||||||||||||||||||||||||
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$ | 2,562 | $ | 323,676 | $ | 2,600 | $ | 328,838 | 100.0 | % | |||||||||||||||||||||||||||||||||||||||||||
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As of December 31, 2011 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
As of December 31, 2010 | Cash and cash equivalents | Restricted cash and cash equivalents | ||||||||||||||||||||||||||||||||||||||||||||||||||
Institution | Cash | Money Market Funds | State Deposits | Total | % | Cash | Money Market Funds | Total | % by institution | Funds held in Trust (1) | State Deposits (2) | Total | % by institution | |||||||||||||||||||||||||||||||||||||||
U. S. Bank IT&C | $ | — | $ | 41,454 | $ | — | $ | 41,454 | 28.1 | % | $ | — | $ | 40,474 | $ | 40,474 | 17.6 | % | $ | — | $ | 800 | $ | 800 | 1.0 | % | ||||||||||||||||||||||||||
SunTrust Bank | 1,241 | — | — | 1,241 | 0.8 | % | 1,629 | — | 1,629 | 0.7 | % | — | — | — | 0.0 | % | ||||||||||||||||||||||||||||||||||||
SunTrust Bank Institutional Asset Services | — | 89,724 | — | 89,724 | 60.8 | % | — | 182,701 | 182,701 | 79.5 | % | — | — | — | 0.0 | % | ||||||||||||||||||||||||||||||||||||
Wells Fargo Bank N.A. | 780 | — | — | 780 | 0.5 | % | 1,244 | 14 | 1,258 | 0.5 | % | — | — | — | 0.0 | % | ||||||||||||||||||||||||||||||||||||
Bank of New York Trust Fund (1) | — | 11,340 | — | 11,340 | 7.7 | % | ||||||||||||||||||||||||||||||||||||||||||||||
Bank of New York Mellon Trust Co. (1) | — | — | — | 0.0 | % | 30,220 | — | 30,220 | 38.6 | % | ||||||||||||||||||||||||||||||||||||||||||
Florida Department of Financial Services | — | 47,292 | 47,292 | 60.4 | % | |||||||||||||||||||||||||||||||||||||||||||||||
All Other Banking Institutions | 443 | 3 | 2,600 | 3,046 | 2.1 | % | 1,739 | 1,884 | 3,623 | 1.6 | % | — | — | — | 0.0 | % | ||||||||||||||||||||||||||||||||||||
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Total | $ | 4,612 | $ | 225,073 | $ | 229,685 | 100.0 | % | $ | 30,220 | $ | 48,092 | $ | 78,312 | 100.0 | % | ||||||||||||||||||||||||||||||||||||
$ | 2,464 | $ | 142,521 | $ | 2,600 | $ | 147,585 | 100.0 | % |
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(1) | Amounts held in trust include collateral contributed by |
(2) | State deposits represent amounts held with regulatory agencies in the various states in which our Insurance Entities do business. Applicable laws and regulations govern not only the amount, but also the type of securities that are eligible for deposit. State deposits also include amounts that UPCIC has voluntarily placed on deposit in connection with the T25 arrangement. |
See Note 4—Reinsurance for information about this arrangement.
All debt securities included in cash and cash equivalents and restricted cash and cash equivalents as of September 30, 2011,March 31, 2012, and December 31, 2010,2011, are direct obligations of the United States Treasury or money-market accounts that invest in direct obligations of the United States Treasury.
Concentrations of credit risk with respect to premiums receivable are limited due to the large number of individuals comprising the Company’s customer base. However, the majority of the Company’s revenues are currently derived from products and services offered to customers in Florida, which could be adversely affected by economic downturns, an increase in competition or other environmental changes.weather-related events.
In order to reduce credit risk for amounts due from reinsurers, UPCIC seeksthe Insurance Entities seek to do business with financially sound reinsurance companies and regularly evaluate the financial strength of all reinsurers used. Everest Reinsurance Company, the reinsurer to which UPCIC cedes the largest volume of premium,Insurance Entities cede the most risk, has the following ratings from each of the rating agencies: A+ from A.M. Best Company, A+ from Standard and Poor’s Rating Services and Aa3 from Moody’s Investors Service, Inc. UPCIC’s reinsurance portfolio contained
The following table presents the following authorizedunsecured amounts due from the Company’s reinsurers that had reinsurance receivables, unsecured recoverables for paid and unpaid losses, including incurred but not reported (“IBNR”) reserves, loss adjustment expenses and unearned premiums whose aggregate balance exceededexceeds 3% of UPCIC’s statutory surplusthe Company’s stockholders’ equity (in thousands):
As of | ||||||||
Reinsurer | March 31, 2012 | December 31, 2011 | ||||||
Everest Reinsurance Company | $ | 250,985 | $ | 264,997 | ||||
Florida Hurricane Catastrophe Fund | 10,756 | 30,422 | ||||||
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Total (1) | $ | 261,741 | $ | 295,419 | ||||
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Reinsurer Everest Reinsurance Company Florida Hurricane Catastrophe Fund Total As of September 30, As of December 31, 2011 2010 $ 308,384 $ 265,549 — 32,849 $ 308,384 $ 298,398
(1) | Amounts represent prepaid reinsurance premiums, reinsurance receivables, and recoverables for paid and unpaid losses, including incurred but not reported ("IBNR") reserves, and loss adjustment expenses. |
Recently AdoptedIssued Accounting Pronouncements
In January 2010,December 2011, the Financial Accounting Standards Board (“FASB”) updated its guidance to the Balance Sheet Topic 210 of the FASB “) issued new accountingAccounting Standards Codification (“ASC”). This updated guidance which expandsrequires entities that have financial instruments and derivative instruments that are offset, to disclose information about offsetting and related arrangements to enable users of financial statements to understand the effect of those arrangements on an entity’s financial position. This guidance is to be applied for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. Disclosure is required retrospectively for all comparative periods presented. The additional disclosures required by the updated guidance will not have an impact on the Company’s operating results, cash flows, or financial position.
In June 2011, the FASB updated its guidance related to the Comprehensive Income Topic 220 of the FASB ASC. This updated guidance increases the prominence of items reported in other comprehensive income by eliminating the option of presenting components of other comprehensive income as part of the statement of changes in stockholders’ equity. The guidance requires that total comprehensive income (including both the net income components and other comprehensive income components) be reported in either a single continuous statement of comprehensive income, or two separate but consecutive statements (the approach currently used in the Company’s financial statements). This guidance is to be applied retrospectively to fiscal years (and interim periods within those years) beginning after December 15, 2011. The Company adopted this guidance effective January 1, 2012. This guidance did not have an impact on the presentation of the Company’s financial statements and notes herein, as the Company did not have any amounts of other comprehensive income during the periods presented.
In May 2011, the FASB updated its guidance related to the Fair Value Measurement, Topic 820 of the ASC, to achieve common fair value measurement and disclosure requirements relatingwith International Financial Reporting Standards. The amendments change the wording used to describe many of the requirements in United States generally accepted accounting principles, to clarify the intent of application of existing fair value measurement and disclosure requirements, and to change particular principles or requirements for measuring and disclosing fair value measurements. The guidance adds requirements for disclosing amounts ofamendments are to be applied prospectively to interim and reasons for significant transfers into and out of Levels 1 and 2 and requires gross rather than net disclosures about purchases, sales, issuances and settlements relating to Level 3 measurements. The guidance also provides clarification that fair value measurement disclosures are required for each class of assets and liabilities. Disclosures about the valuation techniques and inputs used to measure fair value for measurements that fall in either Level 2 or Level 3 are also required.annual reporting periods beginning after December 15, 2011. The Company adopted the provisions of the newthis guidance as of March 31, 2010, except for disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements, which were adopted as ofeffective January 1, 2011. Disclosures are2012. The adoption of this guidance resulted in additional disclosure but did not required for earlier periods presented for comparative purposes. The new guidance affects disclosures only; therefore, the adoption had no impact on the Company’s results of operations, cash flows or financial position.
In September 2010, the FASB issued guidance related to accounting for costs associated with acquiring or renewing insurance contracts. This guidance defines allowable deferred acquisition costs as costs incurred by insurance entities for the successful acquisition of new and renewal contracts. Such costs result directly from and are essential to the contract transaction(s) and would not have been incurred by the insurance entity had the contract(s) not occurred. This guidance is effective for periods beginning after December 15, 2011, with early adoption permitted. The Company adopted this guidance prospectively effective January 1, 2012. Under the new guidance, the Company’s net deferred policy acquisition costs were reduced from $13.0 million to $11.4 million, a difference of 13%. The resulting $1.6 million difference was charged directly to earnings during the three months ended March 31, 2012. This charge represents a charge-off of capitalized costs existing at December 31, 2011, which would have been amortized to earnings within a twelve-month period under the old guidance.
3. Investments
The following table providespresents the Company’s investment holdings by type of instrument as of the periods presented (in thousands):
As of September 30, 2011 | As of December 31, 2010 | As of March 31, 2012 | As of December 31, 2011 | |||||||||||||||||||||||||||||||||||||||||||||
Cost or Amortized Cost | Fair Value | Carrying Value | Cost or Amortized Cost | Fair Value | Carrying Value | Cost or Amortized Cost | Fair Value | Carrying Value | Cost or Amortized Cost | Fair Value | Carrying Value | |||||||||||||||||||||||||||||||||||||
Cash equivalents(1) (2) | $ | 326,276 | $ | 326,276 | $ | 326,276 | $ | 145,121 | $ | 145,121 | $ | 145,121 | ||||||||||||||||||||||||||||||||||||
Cash equivalents (1) | $ | 325,968 | $ | 325,968 | $ | 325,968 | $ | 229,685 | $ | 229,685 | $ | 229,685 | ||||||||||||||||||||||||||||||||||||
Restricted cash and cash equivalents (1) | 48,178 | 48,178 | 48,178 | 78,312 | 78,312 | 78,312 | ||||||||||||||||||||||||||||||||||||||||||
Trading portfolio: | ||||||||||||||||||||||||||||||||||||||||||||||||
Debt securities: | ||||||||||||||||||||||||||||||||||||||||||||||||
U.S. government securities obligations and agencies(2) | 3,182 | 3,711 | 3,711 | 138,086 | 130,116 | 130,116 | 3,294 | 3,800 | 3,800 | 3,179 | 3,801 | 3,801 | ||||||||||||||||||||||||||||||||||||
Foreign government bonds | 54,353 | 54,352 | 54,352 | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
Equity securities: | ||||||||||||||||||||||||||||||||||||||||||||||||
Common stock: | ||||||||||||||||||||||||||||||||||||||||||||||||
Metals and mining | 42,344 | 30,829 | 30,829 | 22,638 | 25,752 | 25,752 | 38,211 | 34,460 | 34,460 | 50,121 | 38,816 | 38,816 | ||||||||||||||||||||||||||||||||||||
Energy | 7,364 | 7,203 | 7,203 | 6,077 | 4,999 | 4,999 | ||||||||||||||||||||||||||||||||||||||||||
Other | 20,749 | 16,173 | 16,173 | 344 | 362 | 362 | 2,235 | 2,145 | 2,145 | 8,044 | 6,945 | 6,945 | ||||||||||||||||||||||||||||||||||||
Exchange-traded and mutual funds: | ||||||||||||||||||||||||||||||||||||||||||||||||
Metals and mining | 26,534 | 23,295 | 23,295 | 32,736 | 42,209 | 42,209 | 15,197 | 15,174 | 15,174 | 28,311 | 25,997 | 25,997 | ||||||||||||||||||||||||||||||||||||
Agriculture | 17,699 | 15,411 | 15,411 | 10,961 | 14,877 | 14,877 | 20,609 | 19,811 | 19,811 | 17,781 | 16,878 | 16,878 | ||||||||||||||||||||||||||||||||||||
Energy | 9,206 | 8,333 | 8,333 | 5,798 | 5,559 | 5,559 | ||||||||||||||||||||||||||||||||||||||||||
Indices | 1,483 | 1,372 | 1,372 | 11,047 | 4,613 | 4,613 | 21,373 | 18,203 | 18,203 | 2,006 | 1,710 | 1,710 | ||||||||||||||||||||||||||||||||||||
Other | — | — | — | 1,029 | 1,044 | 1,044 | ||||||||||||||||||||||||||||||||||||||||||
Derivatives: (3) | ||||||||||||||||||||||||||||||||||||||||||||||||
Non-hedging instruments | 768 | 1,545 | 1,545 | 419 | 182 | 182 | 147 | 60 | 60 | 357 | 123 | 123 | ||||||||||||||||||||||||||||||||||||
Other investments (3) (4) | 413 | 366 | 366 | — | — | — | 517 | 385 | 385 | 517 | 371 | 371 | ||||||||||||||||||||||||||||||||||||
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Total trading portfolio investments | 176,731 | 155,387 | 155,387 | 223,058 | 224,714 | 224,714 | 108,947 | 101,241 | 101,241 | 116,393 | 99,640 | 99,640 | ||||||||||||||||||||||||||||||||||||
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Total investments | $ | 503,007 | $ | 481,663 | $ | 481,663 | $ | 368,179 | $ | 369,835 | $ | 369,835 | $ | 483,093 | $ | 475,387 | $ | 475,387 | $ | 424,390 | $ | 407,637 | $ | 407,637 | ||||||||||||||||||||||||
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(1) | Cash equivalents include short-term debt securities consisting of direct obligations of the U.S. Treasury or money-market accounts that invest in direct obligations of the U.S. Treasury. |
(2) | The Company is required by various state laws and regulations to maintain certain securities on deposit in depositary accounts with the states in which we do business. As of |
(3) | Derivatives and other investments are |
(4) | Other investments represent physical metals held by the Company. |
The Company has made an assessment of its invested assets for fair value measurement as further described in Note 1312 – Fair Value Measurements.
The following table providespresents investment income comprised primarily of interest and dividends (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||
2011 | 2010 | 2011 | 2010 | 2012 | 2011 | |||||||||||||||||||
Cash and equivalents | $ | 203 | $ | 58 | $ | 253 | $ | 109 | ||||||||||||||||
Cash and cash equivalents (1) | $ | 179 | $ | 14 | ||||||||||||||||||||
Debt securities | 13 | 164 | 481 | 710 | 13 | 401 | ||||||||||||||||||
Equity securities | 76 | 17 | 136 | 37 | 56 | 26 | ||||||||||||||||||
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Total investment income | 292 | 239 | 870 | 856 | 248 | 441 | ||||||||||||||||||
Less: Investment expenses | (170 | ) | (173 | ) | (512 | ) | (479 | ) | ||||||||||||||||
Less investment expenses | (284 | ) | (184 | ) | ||||||||||||||||||||
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Net investment income | $ | 122 | $ | 66 | $ | 358 | $ | 377 | ||||||||||||||||
Net investment (expense) income | $ | (36 | ) | $ | 257 | |||||||||||||||||||
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(1) | Includes interest earned on restricted cash and cash equivalents. |
Trading Portfolio
The following table providespresents the effect of trading activities on the Company’s results of operations by type of instrument and by line item in the condensed consolidated statements of income (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Realized gains(losses) on investments | ||||||||||||||||
Debt securities | $ | — | $ | 2,521 | $ | (3,616 | ) | $ | 2,521 | |||||||
Equity securities | 5,669 | 3,726 | 16,535 | 3,726 | ||||||||||||
Derivatives (non-hedging instruments) | 215 | (98 | ) | (423 | ) | (98 | ) | |||||||||
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Total realized gains on trading portfolio | 5,884 | 6,149 | 12,496 | 6,149 | ||||||||||||
Unrealized gains (losses) on investments | ||||||||||||||||
Debt securities | 112 | 423 | 8,372 | 423 | ||||||||||||
Equity securities | (17,504 | ) | 6,497 | (32,398 | ) | 6,497 | ||||||||||
Derivatives (non-hedging instruments) | 1,454 | 17 | 1,036 | 17 | ||||||||||||
Other | (47 | ) | — | (47 | ) | — | ||||||||||
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Total unrealized gains (losses) on trading portfolio | (15,985 | ) | 6,937 | (23,037 | ) | 6,937 | ||||||||||
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Net (losses) gains recognized on trading securities | $ | (10,101 | ) | $ | 13,086 | $ | (10,541 | ) | $ | 13,086 | ||||||
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The preceding table represents alternative quantitative disclosures permitted for derivatives that are not used as hedging instruments and are included in a trading portfolio.
Securities Available-for-sale
The following table provides information related available-for-sale securities (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Sales proceeds (fair value) | n/a | n/a | n/a | $ | 195,329 | |||||||||||
Gross realized gains | n/a | n/a | n/a | $ | 9,090 | |||||||||||
Gross realized losses | n/a | n/a | n/a | $ | (938 | ) | ||||||||||
Other than temporary losses | n/a | n/a | n/a | $ | (2,408 | ) |
During the three-month period ended September 30, 2010, the Company evaluated the trading activity in its investment portfolio, its investing strategy, and its overall investment program. As a result of this evaluation, the Company reclassified its available-for-sale portfolio as a trading portfolio effective July 1, 2010. Net unrealized losses of $656 thousand were reflected as a transfer as of July 1, 2010, and recognized in earnings and included under the caption “Unrealized Gains on Investments” in the Consolidated Statement of Income. The net unrealized loss of $656 thousand was comprised of $1.2 million in unrealized losses, offset by $573 thousand of unrealized gains.
Three Months Ended March 31, | ||||||||
2012 | 2011 | |||||||
Realized gains (losses) on investments: | ||||||||
Debt securities | $ | — | $ | (4,140 | ) | |||
Equity securities | (7,593 | ) | 8,185 | |||||
Derivatives (non-hedging instruments) (1) | 144 | (393 | ) | |||||
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|
| |||||
Total realized (losses) gains on trading portfolio | (7,449 | ) | 3,652 | |||||
Unrealized gains (losses) on investments: | ||||||||
Debt securities | 37 | 5,519 | ||||||
Equity securities | 8,989 | (3,195 | ) | |||||
Derivatives (non-hedging instruments) (1) | 147 | 264 | ||||||
Other | 14 | — | ||||||
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| |||||
Total unrealized gains on trading portfolio | 9,187 | 2,588 | ||||||
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| |||||
Net gains recognized on trading securities | $ | 1,738 | $ | 6,240 | ||||
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4. Reinsurance
UPCIC seeks to reduce its risk of loss by reinsuring certain levels of risk in various areas of exposure with other insurance enterprises or reinsurers, generally, as of the beginning of the hurricane season on June 1 of each year. UPCIC’s reinsurance program consists of excess of loss, quota share and catastrophe reinsurance, subject to the terms and conditions of the applicable agreements. UPCIC is responsible for insured losses related to catastrophes and other events in excess of coverage provided by its reinsurance program. UPCIC also remains responsible for the settlement of insured losses notwithstanding the failure of any of its reinsurers to make payments otherwise due to UPCIC.
UPCIC’s in-force policyholder coverage for windstorm exposures as of September 30, 2011,March 31, 2012 was approximately $129.2$127.5 billion.
Amounts recoverable from reinsurers are estimated in a manner consistent with the reinsurance contracts. Reinsurance premiums, losses and loss adjustment expenses (“LAE”) are accounted for on a basis consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. ReinsuranceDeferred ceding commissions received are deferred and netted against policy acquisition costs and amortized over the effective period of the related insurance policies.
The Company’s reinsurance arrangements had the following effect on certain items in the Condensed Consolidated Statements of Income (in thousands):
Three Months Ended September 30, 2011 | Three Months Ended September 30, 2010 | |||||||||||||||||||||||
Premiums Written | Premiums Earned | Loss and Loss Adjustment Expenses | Premiums Written | Premiums Earned | Loss and Loss Adjustment Expenses | |||||||||||||||||||
Direct | $ | 171,370 | $ | 175,858 | $ | 59,789 | $ | 152,662 | $ | 162,093 | $ | 59,512 | ||||||||||||
Ceded | (123,984 | ) | (126,224 | ) | (30,446 | ) | (108,539 | ) | (113,262 | ) | (30,142 | ) | ||||||||||||
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Net | $ | 47,386 | $ | 49,634 | $ | 29,343 | $ | 44,123 | $ | 48,831 | $ | 29,370 | ||||||||||||
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Nine Months Ended September 30, 2011 | Nine Months Ended September 30, 2010 | |||||||||||||||||||||||
Premiums Written | Premiums Earned | Loss and Loss Adjustment Expenses | Premiums Written | Premiums Earned | Loss and Loss Adjustment Expenses | |||||||||||||||||||
Direct | $ | 558,024 | $ | 510,579 | $ | 166,280 | $ | 520,782 | $ | 452,848 | $ | 156,537 | ||||||||||||
Ceded | (393,673 | ) | (363,417 | ) | (84,900 | ) | (357,411 | ) | (329,342 | ) | (78,680 | ) | ||||||||||||
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Net | $ | 164,351 | $ | 147,162 | $ | 81,380 | $ | 163,371 | $ | 123,506 | $ | 77,857 | ||||||||||||
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Direct Ceded Net Direct Ceded Net Three Months Ended March 31, 2012 Premiums
Written Premiums
Earned Loss and Loss
Adjustment
Expenses $ 190,003 $ 178,804 $ 52,607 (163,434 ) (130,164 ) (26,433 ) $ 26,569 $ 48,640 $ 26,174 Three Months Ended March 31, 2011 Premiums
Written Premiums
Earned Loss and Loss
Adjustment
Expenses $ 173,175 $ 164,587 $ 53,131 (123,891 ) (116,583 ) (26,946 ) $ 49,284 $ 48,004 $ 26,185
The following prepaid reinsurance premiums and reinsurance recoverables are reflected in the Condensed Consolidated Balance Sheets (in thousands):
As of September 30, 2011 | As of December 31, 2010 | As of March 31, 2012 | As of December 31, 2011 | |||||||||||||
Prepaid reinsurance premiums | $ | 251,342 | $ | 221,086 | $ | 276,365 | $ | 243,095 | ||||||||
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Reinsurance recoverable on unpaid losses and LAE | $ | 76,659 | $ | 79,114 | $ | 79,285 | $ | 88,002 | ||||||||
Reinsurance recoverable on paid losses | 886 | 438 | (2,236 | ) | (2,296 | ) | ||||||||||
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Reinsurance recoverables | $ | 77,545 | $ | 79,552 | $ | 77,049 | $ | 85,706 | ||||||||
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Termination of Agreements With Segregated Account T25
The Company ownsEffective January 1, 2012, the agreement between the Insurance Entities and maintains a segregated account,UIH’s Segregated Account T25 -– Universal Insurance Holdings of White Rock Insurance (SAC) Ltd. (“T25”) established by awas replaced at identical limits and retentions as the prior agreement with an unaffiliated third-party reinsurer in accordance with Bermuda law. T25 enters into underlyingas an open market purchase. Effective January 1, 2012 through May 31, 2012, under an excess catastrophe contracts with UPCIC forcontract, the purposeInsurance Entities obtained catastrophe coverage of assuming the risk$140.2 million in excess of certain policies issued by UPCIC,$44.8 million covering certain loss occurrences including hurricanes. The Company secures the obligationstotal cost of T25 to UPCIC under these contracts by contributing the amount of T25’s liability for losses, net of UPCIC’s required premium payments, to a trust account as collateral. The collateral will be used to pay any claims that may arise inthis reinsurance coverage is $4.4 million. In the event of the occurrence of covered events. Transactions relateda non-hurricane loss subject to this arrangement are eliminated in consolidation, however, andcontract, the amount of collateral is held in trust forInsurance Entities will pay to the benefit of UPCIC until the occurrence of a covered event, expiration or terminationreinsurer 20.0% of the agreement between T25 and UPCIC.
On May 31, 2011, T25 and UPCIC mutually agreed to a Commutation and Settlement Agreement relatedultimate net loss ceded to the underlying Property Catastrophe Excessreinsurer arising out of Loss Reinsurance Contract that was effective January 1, 2011. A replacement contract was entered into between the parties on June 1, 2011, as part of UPCIC’s reinsurance program in effect for the period June 1, 2011, through May 31, 2012. In conjunction with entering into the replacement contract, the Company contributed additional funds to T25 due to the increased reinsurance coverage and collateral requirements. The amount of collateral in the trust account at September 30, 2011, was $63.0 million.such non-hurricane loss.
5. Insurance Operations
The Company’s primary product is homeowners’ insurance currently offered by APPIC in one state (Florida) and by UPCIC in fourfive states, including Florida, which represented 98% of the Insurance Entities’ policies-in-force as of September 30, 2011,March 31, 2012 and December 31, 2010. As2011. Approximately 98% of September 30, 2011the Insurance Entities’ policies-in-force as of March 31, 2012 and December 31, 2010,2011 included coverage for wind. As of March 31, 2012 and December 31, 2011, 30% and 32%, respectively, of the Insurance Entities’ policies-in-force arewith wind coverage were for insured properties located in Miami-Dade, Broward and Palm Beach counties.
Deferred Policy Acquisition Costs
The Company defers commissions and state premium taxes on policies written, called Deferred Policy Acquisition Costs (“DPAC”), net of corresponding amounts of ceded reinsurance commissions, called Deferred Reinsurance Ceding Commissions (“DRCC”). Net DPAC is amortized over the effective period of the related insurance policies. The following table providespresents the beginning and ending balances and the changes in deferred policy acquisition costs (“DPAC”),DPAC, net of deferred ceding commission (“DCC”),DRCC, for the periods presented (in thousands):
DPAC, beginning of period Capitalized costs during the period Amortization of DPAC during the period (1) DPAC, end of period DCC, beginning of period Ceding commissions written during the period Earned Ceding Commissions during the period DCC, end of period DPAC (DCC), net, beginning of period Capitalized costs, net during the period Amortization of DPAC (DCC), net during the period (1) DPAC (DCC), net, end of period DPAC, beginning of year (1) Capitalized costs Amortization of DPAC DPAC, end of period DRCC, beginning of year (1) Ceding commissions written Earned ceding commissions DRCC, end of period DPAC (DRCC), net, beginning of year (1) Capitalized costs, net Amortization of DPAC (DRCC), net DPAC (DRCC), net, end of period For the Three Months Ended September 30, For the Nine Months Ended September 30, 2011 2010 2011 2010 $ 59,129 $ 58,151 $ 50,128 $ 43,971 30,759 27,742 87,551 78,703 (30,332 ) (30,112 ) (78,123 ) (66,893 ) $ 59,556 $ 55,781 $ 59,556 $ 55,781 $ (47,103 ) $ (44,109 ) $ (40,682 ) $ (34,506 ) (21,220 ) (18,912 ) (69,109 ) (64,554 ) 21,780 20,093 63,248 56,132 $ (46,543 ) $ (42,928 ) $ (46,543 ) $ (42,928 ) $ 12,026 $ 14,042 $ 9,446 $ 9,465 9,539 8,830 18,442 14,149 (8,552 ) (10,019 ) (14,875 ) (10,761 ) $ 13,013 $ 12,853 $ 13,013 $ 12,853 Three Months Ended March 31, 2012 2011 $ 50,200 $ 50,128 26,144 26,285 (24,472 ) (24,553 ) $ 51,872 $ 51,860 $ 38,845 $ 40,682 20,506 21,431 (19,277 ) (20,392 ) $ 40,074 $ 41,721 $ 11,355 $ 9,446 5,638 4,854 (5,195 ) (4,161 ) $ 11,798 $ 10,139
(1) |
As discussed in Note 2 – Significant Accounting Policies, the Company prospectively adopted new accounting guidance effective January 1, 2012 related to accounting for costs associated with acquiring or renewing insurance contracts. This guidance resulted in a reduction of our net deferred policy acquisition costs as of December 31, 2011 by 13%, and a corresponding charge of $1.6 million, before taxes of $617 thousand, against earnings during the first quarter of 2012. This charge represents an acceleration of capitalized costs existing at December 31, 2011, which would have been amortized to earnings within a twelve-month period under the old guidance. Approximately $9 million of net costs would have been deferred during the three months ended March 31, 2012 under the old guidance compared to the $5.6 million under the new guidance. Future expenses will be higher with the adoption of this guidance, as the amounts being deferred have decreased, partially offset by less amortization. The effect of this change in future periods on income and per share amounts is not determinable as the historical methodology will have been discontinued after adoption.
Liability for Unpaid Losses and Loss Adjustment Expenses
Set forth in the following table is the change in liability for unpaid losses and LAE for the periods presented (in thousands):
Balance at beginning of period Less reinsurance recoverable Net balance at beginning of period Incurred related to: Current year Prior years Total incurred Paid related to: Current year Prior years Total paid Net balance at end of period Plus reinsurance recoverable Balance at end of period For the Three Months Ended September 30, For the Nine Months Ended September 30, 2011 2010 2011 2010 $ 155,375 $ 128,903 $ 158,929 $ 127,198 76,307 63,451 79,114 62,901 $ 79,068 $ 65,452 $ 79,815 $ 64,297 $ 24,975 $ 29,063 $ 76,897 $ 77,905 4,368 307 4,483 (48 ) $ 29,343 $ 29,370 $ 81,380 $ 77,857 $ 15,244 $ 17,091 $ 30,119 $ 34,614 9,587 8,095 47,496 37,903 $ 24,831 $ 25,186 $ 77,615 $ 72,517 83,580 69,636 83,580 69,636 79,374 67,221 79,374 67,221 $ 162,954 $ 136,857 $ 162,954 $ 136,857
As a result of changes in estimates of insured events in prior years, the provision of losses and LAE, net of related reinsurance recoverables increased principally as a result of actual loss development on prior year non-catastrophe losses. The Company has created a proprietary claims analysis tool (P2P) to analyze and calculate reserves. P2P is a custom built application by UPCIC that aggregates, analyzes and forecasts reserves based on historical data that spans more than a decade. It identifies historical claims data using the same “like kind and quality” variables that exist in present claims and sets forth appropriate, more accurate reserves on current claims. P2P is reviewed by UPCIC management on a weekly basis in reviewing the topography of existing and incoming claims. P2P will be analyzed at each quarter’s end and adjustments to reserves are made at an aggregate level when appropriate.
Three Months Ended March 31, | ||||||||
2012 | 2011 | |||||||
Balance at beginning of period | $ | 187,215 | $ | 158,929 | ||||
Less reinsurance recoverable | 88,002 | 79,114 | ||||||
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|
| |||||
Net balance at beginning of period | 99,213 | 79,815 | ||||||
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| |||||
Incurred related to: | ||||||||
Current year | 26,350 | 26,335 | ||||||
Prior years | (176 | ) | (150 | ) | ||||
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| |||||
Total incurred | 26,174 | 26,185 | ||||||
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| |||||
Paid related to: | ||||||||
Current year | 953 | 2,059 | ||||||
Prior years | 31,419 | 24,302 | ||||||
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| |||||
Total paid | 32,372 | 26,361 | ||||||
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| |||||
Net balance at end of period | 93,015 | 79,639 | ||||||
Plus reinsurance recoverables | 79,285 | 78,611 | ||||||
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| |||||
Balance at end of period | $ | 172,300 | $ | 158,250 | ||||
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Regulatory Requirements
The Company’s regulated subsidiaries, UPCIC and American Platinum Property and Casualty Insurance Company (“APPCIC”),Entities are subject to regulations and standards of the Florida Office of Insurance Regulation (“OIR”). TheseUPCIC is also subject to the laws of other states in which it operates. The OIR standards require the subsidiariesInsurance Entities to maintain specified levels of statutory capital and restrict the timing and amount of dividends and other distributions that may be paid to the parent company. Except in the case of extraordinary dividends, these standards generally permit dividendsthe Insurance Entities to be paidpay dividends from statutory unassigned surplus of the regulated subsidiary andsurplus. The dividends are limited based on the regulated subsidiary’sInsurance Entities’ level of statutory net income and statutory capital and surplus. These dividends are referred to as “ordinary dividends” and generally can be paid without prior regulatory approval. If the dividend, together with other dividends paid within the preceding twelve months, exceeds a specified statutory limit or is paid from sources other than earned surplus, the entire dividend is generally considered an “extraordinary dividend” and must receive prior regulatory approval.
In 2011, basedBased on the 20102011 statutory net income and statutory capital and surplus levels, UPCIC and APPCIC do not have the maximum amount ofcapacity to pay ordinary dividends which could be paid is $2.5 million from UPCIC and $1.2 million from APPCIC.during 2012. For the ninethree months ended September 30, 2011,March 31, 2012, no dividends were paid from UPCIC or APPCIC to theirthe parent company.
The Florida Insurance Code requires companies to maintain capitalization equivalent to the greater of ten percent of the insurer’s total liabilities or $5.0 million. Ten percentThe following table presents the amount of UPCIC’s total liabilities were $42.9 million and $32.9 million at September 30, 2011, and December 31, 2010, respectively. Ten percent of APPCIC’s total liabilities were $64 thousand and $83 thousand at September 30, 2011 and December 31, 2010, respectively. UPCIC’s statutory capital and surplus, was $95.6 million and $115.9 million at September 30, 2011,an amount representing ten percent of total liabilities for both UPCIC and December 31, 2010, respectively. APPCIC’s statutory capital and surplus was $9.4 million and $11.3 million at September 30, 2011, and December 31, 2010, respectively. APPCIC as of the periods presented (in thousands):
As of March 31, 2012 | As of December 31, 2011 | |||||||
Ten percent of total liabilities | ||||||||
UPCIC | $ | 39,039 | $ | 37,063 | ||||
APPCIC | $ | 141 | $ | 97 |
At such dates, both UPCIC and APPCIC met the Florida capitalization requirement. UPCIC and APPCIC are also required to adhere to prescribed premium-to-capital surplus ratioratios and have met those requirements at such dates.
Through Universal Insurance Holdings Company of Florida, UPCIC’s parent company, UIH made capital contributions of $5.0 million and $12.0 million to UPCIC in June 2011, and September 2011, respectively.
6. Share-Based Compensation |
Stock Options
The Company recognized stock-based compensation expense as follows (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Compensation expense: | ||||||||||||||||
Stock options | $ | 501 | $ | 314 | $ | 957 | $ | 1,767 | ||||||||
Non-vested shares | 468 | 234 | 931 | 690 | ||||||||||||
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Total | $ | 969 | $ | 548 | $ | 1,888 | $ | 2,457 | ||||||||
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Deferred tax benefits: | ||||||||||||||||
Stock options | $ | 193 | $ | 121 | $ | 369 | $ | 682 | ||||||||
Non-vested shares | — | 90 | — | 266 | ||||||||||||
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Total | $ | 193 | $ | 211 | $ | 369 | $ | 948 | ||||||||
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Total unrecognized compensation expense related to stock options was $2.1 million at September 30, 2011, to be recognized over a weighted-average period of approximately 1.6 years. Total unrecognized compensation expense related to non-vested shares of Company common stock was $1.4 million at September 30, 2011, to be recognized over a weighted-average period of approximately 1 year.
The following table providespresents certain information related to stock options and non-vested shares (in thousands, except per share data):
Three Months Ended March 31, 2012 | ||||||||||||||||||||||||
Stock Options | Non-vested Shares | |||||||||||||||||||||||
Number of Shares | Weighted Average Exercise Price | Aggregate Intrinsic Value | Weighted Average Remaining Term | Number of Shares | Weighted Average Grant Date Fair Value | |||||||||||||||||||
Outstanding as of December 31, 2011 | 6,720 | $ | 4.78 | 801 | $ | 5.67 | ||||||||||||||||||
Granted | — | — | — | — | ||||||||||||||||||||
Forfeited | — | — | — | — | ||||||||||||||||||||
Exercised (1) | (35 | ) | 2.60 | — | — | |||||||||||||||||||
Vested | — | — | (299 | ) | 5.69 | |||||||||||||||||||
Expired | — | — | — | — | ||||||||||||||||||||
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Outstanding as of March 31, 2012 (2) | 6,685 | $ | 4.79 | $ | 1,264 | 2.6 | 502 | $ | 5.66 | |||||||||||||||
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Exercisable as of March 31, 2012 | 5,613 | $ | 4.81 | $ | 1,264 | 1.9 | ||||||||||||||||||
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(1) | Unless otherwise specified, such as in the case of the exercise of stock options, the per share prices were determined using the closing price of the Company’s Common Stock as quoted on the NYSE Amex Equities. Shares issued upon exercise of options represent original issuances in private transactions pursuant to Section 4(2) of the Securities Act of 1933, as amended. |
(2) | All shares outstanding as of March 31, 2012 are expected to vest. |
Outstanding as of June 30, 2011 Granted Forfeited Exercised Vested Expired Outstanding as of September 30, 2011 Exercisable as of September 30, 2011 Outstanding as of December 31, 2010 Granted Forfeited Exercised Vested Expired Outstanding as of September 30, 2011 Exercisable as of September 30, 2011 Three Months Ended September 30, 2011 Stock Options Non-vested Shares Number of
Shares Weighted
Average
Exercise
Price Aggregate
Intrinsic
Value Weighted
Average
Remaining
Term Number of
Shares Weighted
Average
Grant Date
Fair Value 6,880 $ 4.68 801 $ 5.67 — — — — — — — — — — — — — — — — — — — — 6,880 $ 4.68 $ 1,797 3.0 801 $ 5.67 5,285 $ 4.66 $ 1,797 2.0 Nine Months Ended September 30, 2011 Stock Options Non-vested Shares Number of
Shares Weighted
Average
Exercise
Price Aggregate
Intrinsic
Value Weighted
Average
Remaining
Term Number of
Shares Weighted
Average
Grant Date
Fair Value 5,385 $ 4.68 300 $ 5.84 1,495 4.70 600 5.61 — — — — — — — — — — (99 ) 5.84 — — — — 6,880 $ 4.68 $ 1,797 3.0 801 $ 5.67 5,285 $ 4.66 $ 1,797 2.0
On June 23, 2011, the Company granted options to purchase an aggregate of 1,495 thousand shares of common stock toThe following table presents certain information regarding the Company’s directors (225 thousand shares), executive officers (675 thousand shares) and management (595 thousand shares). Options granted to directors vest in full onstock-based compensation for the earlierperiods presented (in thousands):
Three Months Ended March 31, | ||||||||
2012 | 2011 | |||||||
Compensation expense: | ||||||||
Stock options | $ | 337 | $ | 254 | ||||
Restricted stock | 675 | 144 | ||||||
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| |||||
Total | $ | 1,012 | $ | 398 | ||||
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| |||||
Deferred tax benefits: | ||||||||
Stock options | $ | 130 | $ | 98 | ||||
Restricted stock | 204 | — | ||||||
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| |||||
Total | $ | 334 | $ | 98 | ||||
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| |||||
Realized tax benefits: | ||||||||
Stock options | $ | 14 | $ | — | ||||
Restricted stock | 291 | — | ||||||
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| |||||
Total | $ | 305 | $ | — | ||||
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| |||||
Excess tax benefits(shortfall): | ||||||||
Stock options | $ | — | $ | — | ||||
Restricted stock | (142 | ) | — | |||||
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| |||||
Total | $ | (142 | ) | $ | — | |||
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Weighted avg grant date fair value for grants: | ||||||||
Stock options | $ | — | $ | — | ||||
Restricted stock | — | — | ||||||
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| |||||
Total | $ | — | $ | — | ||||
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Intrinsic value of options exercised | $ | 35 | $ | — | ||||
Fair value of restricted stock vested | $ | 1,164 | $ | 540 | ||||
Cash received for strike price and tax withholdings | $ | 518 | $ | 199 |
The following table presents the amount of (i) the first anniversaryunrecognized compensation expense as of the most recent balance sheet date of grant, and (ii) the first annual meeting of the Company’s shareholders, following the date of grant, atweighted average period over which the shareholders elect or reelect any directors to the Board. Options granted to executive officersthose expenses will be recorded for both stock options and management vest as follows: (i) one third on the six (6) month anniversary of the date of grant, (ii) one third on the one (1) year anniversary of the date of grant, and (iii) one third on the two (2) year anniversary of the date of grant. The options have an exercise price of $4.70 per share and expire on June 23, 2016 for directors and June 23, 2018 for executive officers and management.restricted stock (dollars in thousands):
Effective May 11, 2011, the Company issued 600 thousand shares of performance-based restricted common stock at a price of $5.61 per share to its Senior Vice President and Chief Operating Officer. Shares of 200 thousand vest on each of the first, second and third anniversary of the grant date which is March 28, 2011.
As of March 31, 2012 | ||||||||
Stock Options | Restricted Stock | |||||||
Unrecognized expense | $ | 1,273 | $ | 2,513 | ||||
Weighted average remaining years | 1.18 | 1.41 |
7. Stockholders’ Equity
Dividends
On January 6, 2011,February 23, 2012, the Company declared a dividend of $0.10 per share on its outstanding common stockstock. The dividend was paid on April 7, 2011,6, 2012 to the Company’s shareholders of record at the close of business on March 11, 2011.28, 2012.
On August 15, 2011, the Company declared a dividend of $0.08 per share on its outstanding common stock paid on October 6, 2011, to the Company’s shareholders of record at the close of business on September 16, 2011.
8. Related Party Transactions
Downes and Associates, a multi-line insurance adjustment corporation based in Deerfield Beach, Florida performs certain claims adjusting work for UPCIC. Downes and Associates is owned by Dennis Downes, who is the father of Sean P. Downes, Senior Vice President and Chief Operating Officer of the Company.
The following table presents payments made by the Company expensed claims adjusting feesto Downes and Associates for the periods presented (in thousands):
Three Months Ended | ||||||||
March 31, | ||||||||
2012 | 2011 | |||||||
Claims adjusting fees | $ | 130 | $ | 260 |
There were no amounts due to Downes and Associates as follows (in thousands):of March 31, 2012 and December 31, 2011.
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Claims adjusting fees | $ | 91 | $ | 120 | $ | 521 | $ | 360 |
9. Income Taxes
Deferred income taxes represent the temporary differences between the GAAP and tax basis of the Company’s assets and liabilities. The tax effects of temporary differences are as follows for the periods presented (in thousands):
As of March 31, | As of December 31, | |||||||
2012 | 2011 | |||||||
Deferred income tax assets: | ||||||||
Unearned premiums | $ | 7,305 | $ | 9,007 | ||||
Advance premiums | 2,345 | 1,451 | ||||||
Unpaid losses | 2,977 | 3,139 | ||||||
Stock option expense | 4,142 | 4,026 | ||||||
Accrued wages | 993 | 958 | ||||||
Allowance for uncollectible receivables | 236 | 276 | ||||||
Additional tax basis of securities | 995 | 2,407 | ||||||
Restricted stock grant | 86 | 315 | ||||||
Unrealized losses on investments | 2,881 | 6,425 | ||||||
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|
| |||||
Total deferred income tax assets | 21,960 | 28,004 | ||||||
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| |||||
Deferred income tax liabilities: | ||||||||
Deferred policy acquisition costs, net | (4,551 | ) | (5,013 | ) | ||||
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|
| |||||
Total deferred income tax liabilities | (4,551 | ) | (5,013 | ) | ||||
|
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| |||||
Net deferred income tax asset | $ | 17,409 | $ | 22,991 | ||||
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Deferred income tax assets: Unearned premiums Advanced premiums Unpaid losses Regulatory assessments Executive compensation Stock option expense Accrued wages Allowance for uncollectible receivables Additional tax basis of securities Recognition of OTTI Market value losses on trading securities Total deferred income tax assets Deferred income tax liabilities: Deferred policy acquisition costs, net Market value gains on trading securities Total deferred income tax liabilities Net deferred income tax asset A valuation allowance is deemed unnecessary as of March 31, 2012 and December 31, 2011, because management believes it is probable that the Company will generate taxable income sufficient to realize the tax benefits associated with the net deferred income tax asset shown above in the near future. As of September 30, As of December 31, 2011 2010 $ 9,600 $ 8,274 1,620 1,460 2,379 2,194 — 182 1,211 1,312 3,836 3,467 906 357 60 43 1,106 172 — 307 8,422 — 29,140 17,768 (5,020 ) (3,644 ) — (676 ) (5,020 ) (4,320 ) $ 24,120 $ 13,448
Tax years that remain open for purposes of examination of the Company’s income tax liability due to taxby taxing authorities include the years ended December 31, 2010, 2009 and 2008. The Company’s 2009 consolidated federal income tax return is currently under examination by the Internal Revenue Service.
The following table reconciles the statutory federal income tax rate to the Company’s effective tax rate:rate for the periods presented:
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||
2011 | 2010 | 2011 | 2010 | 2012 | 2011 | |||||||||||||||||||
Statutory federal income tax rate | 35.0 | % | 35.0 | % | 35.0 | % | 35.0 | % | 35.0 | % | 35.0 | % | ||||||||||||
Increases resulting from: | ||||||||||||||||||||||||
Disallowed meals & entertainment | 1.3 | % | 0.1 | % | 0.1 | % | 0.3 | % | 0.3 | % | 0.1 | % | ||||||||||||
Disallowed compensation | 25.4 | % | 0.4 | % | 2.0 | % | 0.5 | % | 0.3 | % | 0.6 | % | ||||||||||||
True-up to prior year tax returns | -43.2 | % | — | -1.3 | % | — | ||||||||||||||||||
State income tax, net of federal tax benefit (1) | 3.6 | % | 3.6 | % | 3.6 | % | 3.6 | % | 3.6 | % | 3.6 | % | ||||||||||||
Other, net | -0.5 | % | -0.5 | % | 0.6 | % | -0.6 | % | 0.0 | % | 0.5 | % | ||||||||||||
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Effective tax rate | 21.6 | % | 38.6 | % | 40.0 | % | 38.8 | % | 39.2 | % | 39.8 | % | ||||||||||||
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(1) | Included in income tax is State of Florida income tax at a statutory tax rate of 5.5%. |
10. Earnings Per Share
Basic earnings per share (“EPS”) is based on the weighted average number of shares outstanding for the period, excluding any dilutive common share equivalents. Diluted EPS reflects the potential dilution that could occur if securities to issue common stock were exercised.exercised or restricted stock vests.
The following tables reconciletable reconciles the numerator (i.e., income) and denominator (i.e., shares) of the basic and diluted earnings per share computations for net income for the three and nine-month periods ended September 30, 2011, and 2010presented (in thousands, except per share data):
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||
2011 | 2010 | 2011 | 2010 | 2012 | 2011 | |||||||||||||||||||
Numerator for EPS: | ||||||||||||||||||||||||
Net income | $ | 975 | $ | 13,077 | $ | 22,422 | $ | 30,788 | $ | 9,873 | $ | 13,898 | ||||||||||||
Less: Preferred stock dividends | (5 | ) | (5 | ) | (15 | ) | (15 | ) | (254 | ) | (5 | ) | ||||||||||||
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Income available to common stockholders | $ | 970 | $ | 13,072 | $ | 22,407 | $ | 30,773 | $ | 9,619 | $ | 13,893 | ||||||||||||
Denominator for EPS: | ||||||||||||||||||||||||
Weighted average common shares outstanding | 39,190 | 39,167 | 39,177 | 39,076 | 39,388 | 39,388 | ||||||||||||||||||
Plus: Assumed conversion of stock-based compensation | 651 | 949 | 871 | 1,150 | ||||||||||||||||||||
Assumed conversion of preferred stock | 489 | 160 | 489 | 160 | ||||||||||||||||||||
Plus: Assumed conversion of stock-based compensation (1) | 668 | 962 | ||||||||||||||||||||||
Assumed conversion of preferred stock (2) | 488 | 488 | ||||||||||||||||||||||
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Weighted average diluted common shares outstanding | 40,330 | 40,276 | 40,536 | 40,386 | 40,544 | 40,838 | ||||||||||||||||||
Basic earnings per common share | $ | 0.02 | $ | 0.33 | $ | 0.57 | $ | 0.78 | $ | 0.24 | $ | 0.35 | ||||||||||||
Diluted earnings per common share | $ | 0.02 | $ | 0.32 | $ | 0.55 | $ | 0.76 | $ | 0.24 | $ | 0.34 |
The components of other comprehensive income on a pre-tax and after-tax basis are as follows (in thousands):
For the Three Months Ended September 30, 2010 Net unrealized gains on available-for-sale investments arising during the periods Less: realized gains on investments Less: reclassification of unrealized losses relating to the reclassification of investment portfolio to trading from available-for-sale Less: realized foreign currency gains on investments Less: other Change in net unrealized gains on available-for-sale investments Other comprehensive (loss) income For the Nine Months Ended September 30, 2011 For the Nine Months Ended September 30, 2010 Net unrealized gains on available-for-sale investments arising during the periods Less: realized gains on investments Less: reclassification of unrealized losses relating to the reclassification of investment portfolio to trading from available-for-sale Less: realized foreign currency gains on investments Less: other Change in net unrealized gains on available-for-sale investments Other comprehensive (loss) income For the Three Months
Ended September 30, 2011 Pretax Tax After-tax Pretax Tax After-tax $ — $ — $ — $ — $ — $ — — — — — — — — — — (656 ) 253 (403 ) — — — — — — — — — (9 ) 3 (6 ) — — — (665 ) 257 (408 ) $ — $ — $ — $ (665 ) $ 257 $ (408 ) Pretax Tax After-tax Pretax Tax After-tax $ — $ — $ — $ 4,979 $ (1,921 ) $ 3,058 — — — 5,744 (2,216 ) 3,528 — — — (656 ) 253 (403 ) — — — 809 (312 ) 497 — — — (9 ) 3 (6 ) — — — (909 ) 351 (558 ) $ — $ — $ — $ (909 ) $ 351 $ (558 )
There were no amounts of other comprehensive income for the three and nine month periods ended September 30, 2011.
11. Commitments and Contingencies
Employment Agreements
The Company has employment agreements with certain employees which are in effect as of September 30, 2011.March 31, 2012. The agreements provide for minimum salaries, which may be subject to annual percentage increases, and non-equity incentive compensation for certain executives based on pre-tax, or net income levels attained by the Company. The agreements also provide for payments contingent upon the occurrence of certain events.
The following table providespresents the amount of commitments and estimated contingent payments the Company is obligated to pay in the form of salaries and non-equity incentive compensation under thesethe agreements with named executive officers (in thousands):
Commitments Contingent payments upon certain events: Termination Change in control Death Disability As of September 30, 2011 Salaries Non-equity
incentive
compensation $ 15,282 $ 11,836 $ 6,291 $ 5,302 $ 14,316 $ 9,354 $ 8,046 $ 8,003 $ 4,938 $ 2,582
Operating Leases
The Company has leases for certain computer equipment, software and office space. The Company reported in its Annual Report on Form 10-K for the year ended December 31, 2010, a schedule of future minimum rental payments required under the non-cancelable operating leases.
As of March 31, 2012 | ||||||||||||
Salaries | Non-equity incentive compensation | Equity compensation | ||||||||||
Commitments | $ | 8,221 | $ | 4,397 | — | |||||||
Contingent payments upon certain events: | ||||||||||||
Termination | $ | 4,449 | $ | 2,823 | — | |||||||
Change in control | $ | 13,634 | $ | 5,016 | $ | 319 | ||||||
Death | $ | 6,249 | $ | 3,571 | — | |||||||
Disability | $ | 4,036 | $ | 2,277 | — |
Litigation
Certain lawsuits have been filed against the Company. These lawsuits involve matters that are routine litigation incidental to the claims aspect of the Company’s business for which estimated losses are included in Unpaid Losses and Loss Adjustment Expenses in the Company’s Condensed Consolidated Financial Statements. In the opinion of management, these lawsuits are not material individually or in the aggregate to the Company’s financial position or results of operations. Accruals made or assessments of materiality of disclosure related to probable or possible losses do not consider any anticipated insurance proceeds.
12. Fair Value Measurements
GAAP defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. GAAP describes three approaches to measuring the fair value of assets and liabilities: the market approach, the income approach and the cost approach. Each approach includes multiple valuation techniques. GAAP does not prescribe which valuation technique should be used when measuring fair value, but does establish a fair value hierarchy that prioritizes the inputs used in applying the various techniques. Inputs broadly refer to the assumptions that market participants use to make pricing decisions, including assumptions about risk. Level 1inputs are given the highest priority in the hierarchy while Level 3 inputs are given the lowest priority. Assets and liabilities carried at fair value are classified in one of the following three categories based on the nature of the inputs to the valuation technique used:
Level 1 — 1—Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities in active markets as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2 — 2—Observable market-based inputs or unobservable inputs that are corroborated by market data.
Level 3 — 3—Unobservable inputs that are not corroborated by market data. These inputs reflect management’s best estimate of fair value using its own assumptions about the assumptions a market participant would use in pricing the asset or liability.
Summary of significant valuation techniques for assets measured at fair value on a recurring basis
Level 1
Cash and cash equivalents: CompriseCash equivalents comprise actively traded money market funds that have daily quoted net asset values for identical assets that the Company can access. The carrying value of cash and cash equivalents approximates fair value due to its liquid nature.
U.S. government obligations and agencies:Comprise U.S. Treasury Bills or Notes. Valuation is based on unadjusted quoted prices for identical assets in active markets that the Company can access.
Foreign government bonds:Comprise actively traded fixed-rate bonds of foreign governments rated AAA. Valuation is based on unadjusted quoted prices for identical assets in active markets that the Company can access.
Common stock:Comprise actively traded, exchange-listed U.S. and international equity securities. Valuation is based on unadjusted quoted prices for identical assets in active markets that the Company can access.
Exchange tradedExchange-traded and mutual funds:Comprise actively traded funds. Valuation is based on daily quoted net asset values for identical assets in active markets that the Company can access.
Other investments:Currently comprise physical metal positions held by the Company.Valuation is based on unadjusted quoted prices for identical assets in active markets that the Company can access.
Level 2
U.S. government obligations and agencies:Comprise U.S. Treasury Bills or Notes or U.S. Treasury Inflation Protected Securities (TIPS). The primary inputs to the valuation include quoted prices for identical assets in inactive markets or similar assets in active or inactive markets, contractual cash flows, benchmark yields and credit spreads.
Derivatives: The primary inputs to the valuation include quoted prices or quoted net asset values for identical or similar assets in markets that are not active or highly active.
As required by GAAP, assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect their placement within the fair value hierarchy levels.
The following tables set forth by level within the fair value hierarchy the Company’s assets that were accounted for at fair value on a recurring basis as of September 30, 2011 and December 31, 2010the periods presented (in thousands):
Fair Value Measurements As of March 31, 2012 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Cash and cash equivalents | $ | 325,968 | $ | — | $ | — | $ | 325,968 | ||||||||
Restricted cash and cash equivalents | 48,178 | — | — | 48,178 | ||||||||||||
Trading portfolio: | ||||||||||||||||
Debt securities: | ||||||||||||||||
U.S. government securities obligations and agencies | — | 3,800 | — | 3,800 | ||||||||||||
Equity securities: | ||||||||||||||||
Common stock: | ||||||||||||||||
Metals and mining | 34,460 | — | — | 34,460 | ||||||||||||
Energy | 7,203 | — | — | 7,203 | ||||||||||||
Other | 2,145 | — | — | 2,145 | ||||||||||||
Exchange-traded and mutual funds: | ||||||||||||||||
Metals and mining | 15,174 | — | — | 15,174 | ||||||||||||
Agriculture | 19,811 | — | — | 19,811 | ||||||||||||
Indices | 18,203 | — | — | 18,203 | ||||||||||||
Derivatives (non-hedging) | — | 60 | — | 60 | ||||||||||||
Other investments | 385 | — | — | 385 | ||||||||||||
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Total trading portfolio investments | 97,381 | 3,860 | — | 101,241 | ||||||||||||
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Total investments | $ | 471,527 | $ | 3,860 | $ | — | $ | 475,387 | ||||||||
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Fair Value Measurements As of September 30, 2011 | Fair Value Measurements As of December 31, 2011 | |||||||||||||||||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||||
Cash equivalents | $ | 326,276 | $ | — | $ | — | $ | 326,276 | ||||||||||||||||||||||||
Cash and cash equivalents | $ | 229,685 | $ | — | $ | — | $ | 229,685 | ||||||||||||||||||||||||
Restricted cash and cash equivalents | 78,312 | — | — | 78,312 | ||||||||||||||||||||||||||||
Trading portfolio: | ||||||||||||||||||||||||||||||||
Debt securities: | ||||||||||||||||||||||||||||||||
U.S. government securities obligations and agencies | 175 | 3,536 | — | 3,711 | 174 | 3,627 | — | 3,801 | ||||||||||||||||||||||||
Foreign government bonds | 54,352 | — | — | 54,352 | ||||||||||||||||||||||||||||
Equity securities: | ||||||||||||||||||||||||||||||||
Common stock: | ||||||||||||||||||||||||||||||||
Metals and mining | 30,829 | — | — | 30,829 | 38,816 | — | — | 38,816 | ||||||||||||||||||||||||
Energy | 4,999 | — | — | 4,999 | ||||||||||||||||||||||||||||
Other | 16,173 | — | — | 16,173 | 6,927 | 18 | — | 6,945 | ||||||||||||||||||||||||
Exchange-traded and mutual funds: | ||||||||||||||||||||||||||||||||
Metals and mining | 23,295 | — | — | 23,295 | 25,997 | — | — | 25,997 | ||||||||||||||||||||||||
Agriculture | 15,411 | — | — | 15,411 | 16,878 | — | — | 16,878 | ||||||||||||||||||||||||
Energy | 8,333 | — | — | 8,333 | ||||||||||||||||||||||||||||
Indices | 1,372 | — | — | 1,372 | 1,710 | — | — | 1,710 | ||||||||||||||||||||||||
Derivatives: | ||||||||||||||||||||||||||||||||
Non-hedging instruments | — | 1,545 | — | 1,545 | ||||||||||||||||||||||||||||
Derivatives (non-hedging) | — | 123 | — | 123 | ||||||||||||||||||||||||||||
Other investments | 366 | — | — | 366 | 371 | — | — | 371 | ||||||||||||||||||||||||
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Total trading portfolio investments | 150,306 | 5,081 | — | 155,387 | 95,872 | 3,768 | — | 99,640 | ||||||||||||||||||||||||
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Total investments | $ | 476,582 | $ | 5,081 | $ | — | $ | 481,663 | $ | 403,869 | $ | 3,768 | $ | — | $ | 407,637 | ||||||||||||||||
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Fair Value Measurements As of December 31, 2010 | ||||||||||||||||||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||||||||
Cash equivalents | $ | 145,121 | $ | — | $ | — | $ | 145,121 | ||||||||||||||||||||||||
Trading portfolio: | ||||||||||||||||||||||||||||||||
Debt securities: | ||||||||||||||||||||||||||||||||
U.S. government securities obligations and agencies | 179 | 129,937 | — | 130,116 | ||||||||||||||||||||||||||||
Equity securities: | ||||||||||||||||||||||||||||||||
Common stock: | ||||||||||||||||||||||||||||||||
Metals and mining | 25,752 | — | — | 25,752 | ||||||||||||||||||||||||||||
Other | 362 | — | — | 362 | ||||||||||||||||||||||||||||
Exchange-traded and mutual funds: | ||||||||||||||||||||||||||||||||
Metals and mining | 42,209 | — | — | 42,209 | ||||||||||||||||||||||||||||
Agriculture | 14,877 | — | — | 14,877 | ||||||||||||||||||||||||||||
Energy | 5,559 | — | — | 5,559 | ||||||||||||||||||||||||||||
Indices | 4,613 | — | — | 4,613 | ||||||||||||||||||||||||||||
Other | 1,044 | — | — | 1,044 | ||||||||||||||||||||||||||||
Derivatives: | ||||||||||||||||||||||||||||||||
Non-hedging instruments | — | 182 | — | 182 | ||||||||||||||||||||||||||||
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Total trading portfolio investments | 94,595 | 130,119 | — | 224,714 | ||||||||||||||||||||||||||||
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Total investments | $ | 239,716 | $ | 130,119 | $ | — | $ | 369,835 | ||||||||||||||||||||||||
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The Company utilizes third-party independent pricing services that provide a price quote for each debt security, equity security and derivatives. Management reviews the methodology used by the pricing services. If management believes that the price used by the pricing service does not reflect an orderly transaction between participants, management will use an alternative valuation methodology. There were no adjustments made by the Company to the prices obtained from the independent pricing source for any debt securities, equity securities or derivatives included in the tables above.
The Company did not have any transfers between Level 1 and Level 2 for the nine-monththree-month periods ended September 30,March 31, 2012 and 2011 and 2010.
The following table summarizes the carrying value net unrealized gains (losses) and estimated fair values of the Company’s financial instruments that are not carried at fair value (in thousands):
As of September 30, 2011 Fair Value Measurements | ||||||||||||||||||||
Carrying value | Net unrealized Gains/(Losses) | Estimated Fair Value | ||||||||||||||||||
Assets: | ||||||||||||||||||||
Cash | $ | 2,562 | $ | — | $ | 2,562 | ||||||||||||||
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$ | 2,562 | $ | — | $ | 2,562 | As of March 31, 2012 | ||||||||||||||
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Liabilities: | ||||||||||||||||||||
Long-term debt | $ | 22,059 | $ | (4,481 | ) | $ | 17,578 | $ | 21,324 | $ | 18,602 | |||||||||
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$ | 22,059 | $ | (4,481 | ) | $ | 17,578 | As of December 31, 2011 | |||||||||||||
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| Carrying value | (Level 3) Estimated Fair Value | ||||||||||||||||
As of December 31, 2010 Fair Value Measurements | ||||||||||||||||||||
Carrying value | Net unrealized Gains/(Losses) | Estimated Fair Value | ||||||||||||||||||
Assets: | ||||||||||||||||||||
Cash | $ | 2,464 | $ | — | $ | 2,464 | ||||||||||||||
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$ | 2,464 | $ | — | $ | 2,464 | |||||||||||||||
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Liabilities: | ||||||||||||||||||||
Long-term debt | $ | 23,162 | $ | (4,063 | ) | $ | 19,099 | $ | 21,691 | $ | 18,775 | |||||||||
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$ | 23,162 | $ | (4,063 | ) | $ | 19,099 | ||||||||||||||
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The carrying value of cash approximates fair value due to its liquid nature.Level 3
Long-term debt:The carrying value of long-term debt was determined by management from the expected cash flows discounted using the interest rate quoted by the issuer of the note, the State Board of Administration of Florida (“SBA”) which is below prevailing rates quoted by private lending institutions. However, as the Company’s use of funds from the surplus note is limited by the terms of the agreement, the Company has determined the interest rate quoted by the SBA to be appropriate for purposes of establishing the fair value of the note.
13. Subsequent Events
The Company performed an evaluation of subsequent events through the date the Financial Statements were issued and determined there were no recognized or unrecognized subsequent events that would require an adjustment or additional disclosure in the Financial Statements as of September 30, 2011March 31, 2012, except the following.
In consultation withOn April 23, 2012, the OIR, UPCIC has offered to segregate fromCompany declared a dividend of $0.08 per share on its general operating funds an amount equivalent to its anticipated future reinsurance premiums under the arrangement with T25 and UPCIC described in Note 4 “Reinsurance.” On October 28, 2011, UPCIC remitted $45.5 million as a deposit with the Florida Department of Financial Services. Accordingoutstanding common stock, payable on July 9, 2012, to the termsCompany’s shareholders of record at the reinsurance contract, UPCIC will pay approximately halfclose of the deposited amount to T25business on or about January 1, 2012 and the remaining amount on or about April 1,June 26, 2012. Alternatively, UPCIC anticipates that it will propose to commute the existing contract in December 2011. The commutation would result in the entire deposit being returned to UPCIC in December or being used to support a replacement contract.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Unless the context otherwise requires, all references to “we,” “us,” “our,” and “Company” refer to Universal Insurance Holdings, Inc. and its subsidiaries. You should read the following discussion together with our unaudited condensed consolidated financial statements and the related notes thereto included in Part I, Item 1 “Financial1”Financial Statements.” Operating results for any one quarter are not necessarily indicative of results to be expected for any other quarter or for the year.
Forward-Looking Statements
In addition to historical information, the following discussion may contain “forward-looking statements” within the meaning of the Private Securities Reform Litigation Act of 1995. The words “expect,” “estimate,” “anticipate,” “believe,” “intend,” “project,” “plan” and similar expressions and variations thereof-,thereof, speak only as of the date the statement was made and are intended to identify forward-looking statements. Forward-looking statements are based on various factors and assumptions that include known and unknown risks and uncertainties. Such statements may include, but not be limited to, projections of revenues, income or loss, expenses, plans, as well as assumptions relating to the foregoing.
Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. Future results could differ materially from those in the following discussion and those described in forward-looking statements as a result of the risks set forth below.
Risk Factors Summary
We operate in a rapidly changing environment that involves a number of uncertainties, some of which are beyond our control. Certain statements made in this report that reflect management’s expectations regarding future events are forward-looking in nature and, accordingly are subject to risks and uncertainties. These forward-looking statements are only current expectations about future events. Actual results could differ materially from those set forth in or implied by any forward-looking statement. Factors that could cause or contribute to such differences include, but are not limited to, risk factors set forth in filings with the Securities and Exchange Commission, including our annual and quarterly reports. The following is a summary of uncertainties which were disclosed in greater detail in “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2011:
Risks Relating to the Property-Casualty business
As a property and casualty insurer, we may face significant losses from catastrophes and severe weather events
Unanticipated increases in the section below entitled “Cautionary Note Regarding Forward-Looking Statements.”severity or frequency of claims may adversely affect our profitability and financial condition
Actual claims incurred may exceed current reserves established for claims and may adversely affect our operating results and financial condition
Predicting claim expense relating to environmental liabilities is inherently uncertain and may have a material adverse effect on our operating results and financial condition
The failure of the risk mitigation strategies we utilize could have a material adverse effect on our financial condition or results of operations
Reinsurance may be unavailable at current levels and prices, which may limit our ability to write new business
Regulation limiting rate increases and requiring us to participate in loss sharing may decrease our profitability
The potential benefits of implementing our profitability model may not be fully realized
Our financial condition and operating results and the financial condition and operating results of the Insurance Entities may be adversely affected by the cyclical nature of the property and casualty business
Continued weakness in the Florida real estate market could adversely affect our loss results
Risks Relating to Investments
We have periodically experienced, and may experience further reductions in returns or losses on our investments especially during periods of heightened volatility, which could have a material adverse effect on our results of operations or financial condition
We are subject to market risk which may adversely impact investment income
Concentration of our investment portfolios in any particular segment of the economy may have adverse effects on our operating results and financial condition
Our overall financial performance is significantly dependent on the returns on our investment portfolio, which may have a material adverse effect on our results of operations or cause such results to be volatile
Risks Relating to the Insurance Industry and Other Factors
Our future results are dependent in part on our ability to successfully operate in an insurance industry that is highly competitive
Difficult conditions in the economy generally could adversely affect our business and operating results
There can be no assurance that actions of the U.S. federal government, Federal Reserve and other governmental and regulatory bodies for the purpose of stabilizing the financial markets and stimulating the economy will achieve the intended effect
We are subject to extensive regulation and potential further restrictive regulation may increase our operating costs and limit our growth
Reinsurance subjects us to the credit risk of our reinsurers and may not be adequate to protect us against losses arising from ceded risks, which could have a material adverse effect on our operating results and financial condition
The continued threat of terrorism and ongoing military actions may adversely affect the level of claim losses we incur and the value of our investment portfolio
• | A downgrade in our Financial Stability Rating® may have an adverse effect on our competitive position, the marketability of our product offerings, and our liquidity, operating results and financial condition |
Adverse capital and credit market conditions may significantly affect our ability to meet liquidity needs or our ability to obtain credit on acceptable terms
Changing climate conditions may adversely affect our financial condition, profitability or cash flows
Loss of key executives could affect our operations
Overview
Universal Insurance Holdings, Inc. (“UIH”) is a vertically integrated insurance holding company performing all aspects of insurance underwriting, distribution and claims. Through our wholly-owned subsidiaries, including Universal Property & Casualty Insurance Company (“UPCIC”) and American Platinum Property and Casualty Insurance Company (“APPCIC”), collectively referred to as the (“Insurance Entities”), we are principally engaged in the property and casualty insurance business offered primarily through a network of independent agents. Our primary product is homeowners’ insurance currently offered in fourfive states, including the State of Florida, which represented 98% of the 595 thousand policies-in-force as of September 30, 2011, and 98% of the 584 thousand policies-in-force as of March 31, 2012, and 98% of the 593 thousand policies-in-force as of December 31, 2010.2011. As for the geographic distribution of business within Florida as of September 30, 2011,March 31, 2012, and December 31, 2010,2011, 30% and 32%, respectively, of the policies-in-force are in Miami-Dade, Broward and Palm Beach Counties. Risk from catastrophic losses is managed through the use of reinsurance agreements.
We generate revenues primarily from the collection of premiums and the investment of funds in excess of those premiums.retained for claims-paying obligations and insurance operations. Other significant sources of revenue include commissions collected from reinsurers and policy fees.
20112012 Developments
On October 28, 2011,January 11, 2012, we announced that UPCIC remitted $45.5 million as a deposit with the Florida Department of Financial Services. In consultation with the Florida Office of Insurance Regulation (“OIR”), UPCIC has offered to segregate from its general operating funds an amount equivalent to its anticipated future reinsurance premiums under the arrangement with T25 and UPCIC, as described below under2011-2012 Reinsurance Program. See Liquidity and Capital resourcesreceived OIR approval for further discussion regarding this arrangement.
UPCIC filed a premium rate changeincreases for its homeowners and Dwelling Fire insuranceprograms within Florida. The premium rate increases will average approximately 14.9% statewide for its homeowners program with the OIR on September 23, 2011. The rate increase, which will result in an average rate increase of approximatelyand 8.8% statewide is still pending approval by OIR. Also included infor its dwelling fire program. The effective dates for both of the filing was a proposal to remove sinkhole coverage from the base policy. The sinkhole coveragepremium rate increases are January 9, 2012 for new business and form changes filedFebruary 28, 2012 for Dwelling Fire are similar in nature to those filed for Homeowners described below. An effective date of December 22, 2011 was requested in the filing.renewal business.
UPCIC filedmade a premium rate change for its Homeowners insurance program with the OIR on September 21, 2011. The rate increase, which will result in an average rate increase of approximately 14.8% statewide, is still pending approval by OIR. UPCIC also filed to remove Sinkhole from the standard HO3 & HO8 policy and offer the coverage via endorsement for an additional surcharge, and a mandatory 10% deductible, to those policyholders that meet the proposed eligibility standards. An effective date of December 21, 2011 was requested for new and renewal business, although notification requirements for the sinkhole coverage change will dictate the effective date for renewal business depending on the date of approval. A forms filing was made immediately after the rate filing to segregate the sinkhole coverage and to include updated policy language as a result of the property insurance bill which became law in May 2011 (Senate Bill 408). The OIR approved the forms filing with effective dates of April 1, 2012 for new business and May 21, 2012 for renewals. With the approval of this forms filing, sinkhole coverage will be removed from certain base homeowners policies and the coverage will be offered via endorsement for an additional surcharge, and a mandatory 10% deductible, to those policyholders that meet the proposed eligibility standards. Revised inspection and eligibility requirements will not be imposed upon existing policyholders who elect to continue sinkhole coverage at their policy renewal. Form changes for sinkhole coverage on dwelling fire policies, which are similar in nature to those filed for homeowners policies, were approved by the OIR with effective dates of May 1, 2012 for new business and June 8, 2012 for renewal business. Coverage for catastrophic ground cover collapse will remain a covered peril under all standard policy forms.
On August 17, 2011, we announced that the Georgia department of insurance approved the homeowners’ rates and forms of its wholly-owned subsidiary, UPCIC. UPCIC expects to begin to write homeowners’ insurance in Georgia in the near future.
On August 15, 2011,February 22, 2012, we declared a cash dividend of $0.08 per share on our outstanding common stock, payable on October 6, 2011, to shareholders of record at the close of business on September 16, 2011.
During the second quarter, UPCIC completed its 2011-2012 reinsurance program effective June 1, 2011. See2011-2012 Reinsurance Programbelow for a description of that program.
During the second quarter, American Platinum Property and Casualty Insurance Company (“APPCIC,”) received approval of its rate filing from the OIR. APPCIC intends to write homeowners’ multi-peril and inland marine insurance on Florida homes valued in excess of $1 million, which are limits and coverages currently not targeted by UPCIC.
On January 6, 2011, we declared a cash dividend of $0.10 per share on our outstanding common stock payable on April 7, 2011,6, 2012, to shareholders of record at the close of business on March 11, 2011.28, 2012.
On April 17, 2012, Demotech, Inc. affirmed UPCIC’s Financial Stability Rating® of A. A Financial Stability Rating® of A is the third highest of six possible rating levels. According to Demotech, Inc., A ratings are assigned to insurers that have “…exceptional ability to maintain liquidity of invested assets, quality reinsurance, acceptable financial leverage and realistic pricing while simultaneously establishing loss and loss adjustment expense reserves at reasonable levels.” The rating of UPCIC filedis subject to at least annual review by, and may be revised upward or downward or revoked at the sole discretion of Demotech, Inc.
On April 23, 2012, we declared a premium rate changedividend of $0.08 per share on our outstanding common stock payable on July 9, 2012, to shareholders of record at the close of business on June 26, 2012. We expect to declare additional quarterly dividends in the same amount to shareholders of record in the third and fourth quarters of 2012. Declaration and payment of future dividends is subject to the discretion of UIH’s board of directors and will be dependent on future earnings, cash flows, financial requirements and other factors.
Impact of new accounting pronouncement
We prospectively adopted new accounting guidance related to accounting for its Homeowners’costs associated with acquiring or renewing insurance programs withcontracts effective January 1, 2012. The overall impact under the Florida Officenew guidance, which was adopted on January 1, 2012, was a reduction in earnings of Insurance Regulation (“OIR”) on November 5, 2010.$2.7 million ($1.7 million after tax or $0.04 per diluted share). The rate increase,$2.7 million pre-tax reduction in earnings during the three months ended March 31, 2012, includes an acceleration of capitalized costs existing as of December 31, 2011, which willwould have been amortized to earnings within a twelve-month period, and the immediate recognition of costs which otherwise would have been deferred, partially offset by a lesser amount of amortization expense due to the reduction in capitalized costs. The new guidance does not result in an average rate increaseincremental charges to earnings, but rather affects the timing of approximately 14.9 percent statewide, was approved by the OIR on February 3, 2011. The effective dates forrecognition of those charges in the rate increase are February 7, 2011 for new business and March 28, 2011 for renewal business. We expect the approved premium rate increases to have a positive effect on premiums written and earned in future months as new and renewal policies are written at the higher rates.income statement.
2011-2012 Reinsurance Program
In the normal course of business, we limit the maximum net loss that can arise from large risks, risks in concentrated areas of exposure and catastrophes, such as hurricanes or other similar loss occurrences, by reinsuring certain levels of risk in various areas of exposure with other insurers or reinsurers under our reinsurance agreements. Our intention is to limit our exposure and the Insurance Entities’ exposure thereby protecting stockholders’ equity and the Insurance Entities’ capital and surplus, even in the event of catastrophic occurrences, through reinsurance agreements. Without these reinsurance agreements, the Insurance Entities would be more substantially exposed to catastrophic losses with a greater likelihood that those losses could exceed their statutory capital and surplus. Any such catastrophic event, or multiple catastrophes, could have a material adverse effect on the Insurance Entities’ solvency and our results of operations, financial condition and liquidity.
Quota Share
Effective June 1, 2011 through May 31, 2012, UPCIC entered into a quota share reinsurance contract with Everest Re. Everest Re has the following ratings from each of the rating agencies: A+ from A.M. Best
Company, A+ from Standard and Poor’s Rating Services and Aa3 from Moody’s Investors Service, Inc. Under the quota share contract, UPCIC cedes 50% of its gross written premiums, losses and loss adjustment expenses (“LAE”)LAE for policies with coverage for wind risk with a ceding commission equal to 25% of ceded gross written premiums. In addition, the quota share contract has a limitation for any one occurrence not to exceed $34.8 million (of which UPCIC’s net liability on the first $34.8 million of losses in a first event scenario is $17.4 million, in a second event scenario is $17.4 million and in a third event scenario is $30 million) and a limitation from losses arising out of events that are assigned a catastrophe serial number by the Property Claims Services (“PCS”) office not to exceed $69.6 million. The contract requires UPCIC to reassume 100% of the attritional loss and LAE activity from 30% to 37.5% of gross written premium and has a limitation for LAE not to exceed 30% of indemnity losses paid during the contract period. Further, the contract requires UPCIC to purchase and maintain certain inuring reinsurance agreements. The contract limits the amount of premium which can be deducted forreinsurance premiums inuring reinsuranceto the contract to $288 million excluding reinstatement premiums, orand limits the total reinsurance premiums inuring to the contract to $326 million including any reinstatement premiums if any.and all ancillary payments under the inuring reinsurance agreements.
Excess Per Risk
Effective June 1, 2011 through May 31, 2012, UPCIC entered into a multiple line excess per risk contract with various reinsurers. Under the multiple line excess per risk contract, UPCIC obtained coverage of $1.4 million in excess of $600 thousand ultimate net loss for each risk and each property loss, and $1 million in excess of $300 thousand for each casualty loss. A $7 million aggregate limit applies to the term of the contract.
Effective June 1, 2011 through May 31, 2012, UPCIC entered into a property per risk excess contract covering ex-wind only policies. Under the property per risk excess contract, UPCIC obtained coverage of $400 thousand in excess of $200 thousand for each property loss. A $2 million aggregate limit applies to the term of the contract.
The total cost of our multiple line excess reinsurance program effective June 1, 2011 through May 31, 2012 is $4 million of which our cost is 50%, or $2 million and the quota share reinsurers’ cost is the remaining 50%. The total cost of our property per risk reinsurance program effective June 1, 2011 through May 31, 2012 is $575 thousand.
Effective October 1, 2011 through May 31, 2012, APPCIC entered into a multiple line excess per risk contract with various reinsurers. Under the multiple line excess per risk contract, APPCIC obtained coverage of $8.4 million in excess of $600 thousand ultimate net loss for each risk and each property loss, and $1 million in excess of $300 thousand for each casualty loss. A $21 million aggregate limit applies to the term of the contract.
The total cost of the APPCIC multiple line excess reinsurance program effective October 1, 2011 through May 31, 2012 is a minimum premium of $31,475, of which our cost is 50% or $15,737 and the quota share reinsurers’ cost is the remaining 50%, which is equated as follows: $25,000 minimum premium on 87.5% of the contract, $75,000 minimum premium on 10% of the contract and $84,000 minimum premium on 2.5% of the contract. The final premium will be determined based upon APPCIC’s volume of business during the contract term and a predetermined pricing algorithm.
Excess Catastrophe
Effective June 1, 2011 through May 31, 2012, under excess catastrophe contracts, UPCIC obtained catastrophe coverage of $541.3 million in excess of $185 million covering certain loss occurrences including hurricanes. The coverage of $541.3 million in excess of $185 million has a second full limit available to UPCIC. Additional premium is calculated pro rata as to amount and 100% as to time, as applicable.
Effective June 1, 2011 through May 31, 2012, UPCIC purchased reinstatement premium protection which reimburses UPCIC for its cost to reinstate the catastrophe coverage of the first $399.3 million (part of $541.3 million) in excess of $185 million.
Effective June 1, 2011 through May 31, 2012, under an excess catastrophe contract specifically covering risks located in Georgia, North Carolina and South Carolina, UPCIC obtained catastrophe coverage of 50% of $24.8 million in excess of $10 million and 100% of $20 million in excess of $34.8 million covering certain loss occurrences including hurricanes. Both coverages have a second full limit available to UPCIC. Additional premium is calculated pro rata as to amount and 100% as to time, as applicable.
The cost of UPCIC’s excess catastrophe contracts specifically covering risks in Georgia, North Carolina and South Carolina is $3.9 million.
Effective June 1, 2011 through May 31, 2012, UPCIC also obtained subsequent catastrophe event excess of loss reinsurance to cover certain levels of UPCIC’s net retention through three catastrophe events including hurricanes, as follows:
2nd Event | 3rd Event | |||||||||||
2nd Event | 3rd Event | |||||||||||
Coverage | | $140.2 million in excess of $44.8 million each loss occurrence subject to an otherwise recoverable amount of $140.2 million (placed 100%) | | | $155.0 million in excess of $30.0 million each loss occurrence subject to an otherwise recoverable amount of $310.0 million (placed 100%) | | $140.2 million in excess of $44.8 million each loss occurrence subject to an otherwise recoverable amount of $140.2 million (placed 100%) | $155.0 million in excess of $30.0 million each loss occurrence subject to an otherwise recoverable amount of $310.0 million (placed 100%) | ||||
Deposit premium (100%) | $ | 27.8 million | $ | 11.9 million | $27.8 million | $11.9 million | ||||||
Minimum premium (100%) | $ | 22.2 million | $ | 9.5 million | $22.2 million | $9.5 million | ||||||
Premium rate -% of total insured value | 0.021863 | % | 0.009400 | % | 0.021863 % | 0.009400 % |
UPCIC also obtained coverage from the Florida Hurricane Catastrophe Fund (“FHCF”), which is administered by the Florida State Board of Administration (“SBA”).SBA. Under the reimbursement agreement, the FHCF would reimburse UPCIC, for each loss occurrence during the contract year, for 90% of the ultimate loss paid by UPCIC in excess of its retention plus 5% of the reimbursed losses to cover loss adjustment expenses, subject to an aggregate contract limit. A covered event means any one storm declared to be a hurricane by the National Hurricane Center for losses incurred in Florida, both while it is a hurricane and through
subsequent downgrades. For the contract year June 1, 2011 to May 31, 2012, UPCIC purchased the traditional FHCF coverage and did not purchase the Temporary Increase in Coverage Limit Option offered to insurers by the FHCF. UPCIC’s estimate of its traditional FHCF coverage is based upon UPCIC’s exposure in-force as of June 30, 2011, as reported by UPCIC to the FHCF on September 1, 2011 and is 90% of $1.172$1.221 billion in excess of $457$461.4 million. The estimated premium for this coverage is $73.3$74 million.
Also at June 1, 2011, the FHCF made available, and UPCIC obtained, $10.0 million of additional catastrophe excess of loss coverage with one free reinstatement of coverage to carriers qualified as Limited Apportionment Companies or companies that participated in the Insurance Capital Build-Up Incentive (“ICBUI”) Program offered by the FHCF, such as UPCIC. This particular layer of coverage at June 1, 2011 is $10.0 million in excess of $34.8 million. The premium for this coverage is $5.0 million.
On October 28, 2011, the SBA published its most recent estimate of the FHCF’s loss reimbursement capacity in the Florida Administrative Weekly. The SBA estimated that the FHCF’s total loss reimbursement capacity under current market conditions for the 2011—2011 – 2012 contract year is projected to be $15.17 billion over the 12-month period following the estimate. The SBA also referred to
its report entitled, “October 18, 2011 Estimated Claims Paying Capacity Report” (“(��Report”) as providing greater detail regarding the FHCF’s loss reimbursement capacity. The Report estimated that the FHCF’s loss reimbursement capacity range is $12.17 billion to $18.17 billion. UPCIC elected to purchase the FHCF Mandatory Layer of Coverage for the 2011—2011 – 2012 contract year, which corresponds to FHCF loss reimbursement capacity of $17 billion. By law, the FHCF’s obligation to reimburse insurers is limited to its actual claims-paying capacity. The aggregate cost of UPCIC’s reinsurance program may increase should UPCIC deem it necessary to purchase additional private market reinsurance due to reduced estimates of the FHCF’s loss reimbursement capacity. Fortunately, no hurricanes made landfall in Florida during the 2011-2012 contract year and no reimbursement payments for the 2011-2012 contract year were required from the FHCF to participating companies. Accordingly, the effect of the change in the FHCF’s reimbursement capacity estimate as compared to prior estimates had no effect on our financial position, results of operations and liquidity. In the 2012 Florida legislative session, the FHCF advocated a statutory change that would have reduced the amount of reimbursement capacity made available to the insurance industry in future years. However, the proposal did not pass.
The total cost of UPCIC’s multiple line excess and property per risk reinsurance program effective June 1, 2011 through May 31, 2012 is $4.575 million, of which UPCIC’s cost is $2.575 million, and the quota share reinsurer’s cost is the remaining $2.0 million. The total costs of APPCIC’s multiple line excess is at a minimum $31,475, of which APPCIC’s cost is at a minimum $15,737 and the quota share reinsurer’s cost is the remaining 50%. The total cost of UPCIC’s underlying excess catastrophe contract with T25 (see below) is $111.4 million, subject to a potential return premium of $83.4 million, which is eliminated in consolidation. The total cost of UPCIC’s private catastrophe reinsurance program effective June 1, 2011 through May 31, 2012 is $135.8 million, of which UPCIC’s cost is 50%, or $67.9 million, and the quota share reinsurer’s cost is the remaining 50%. In addition, UPCIC purchases reinstatement premium protection as described above, the cost of which is $22.4 million. UPCIC’s cost of the subsequent catastrophe event excess of loss reinsurance is $19.8 million. The estimated premium that UPCIC plans to cede to the FHCF for the 2011 hurricane season is $73.3 million of which UPCIC’s cost is 50%, or $36.7 million, and the quota share reinsurer’s cost is the remaining 50%. UPCIC is also participating in the additional coverage option for Limited Apportionment Companies or companies that participated in the Insurance Capital Build-Up Incentive Program offered by the FHCF, the premium for which is $5.0 million, of which UPCIC’s cost is 50%, or $2.5 million, and the quota share reinsurer’s cost is the remaining 50%.
UPCIC is responsible for losses related to catastrophic events with incurred losses in excess of coverage provided by UPCIC’s reinsurance program and for losses that otherwise are not covered by the reinsurance program, which could have a material adverse effect on UPCIC’s and our business, financial condition and results of operations.program.
UPCIC estimates, based upon its in-force exposures as of September 30,December 31, 2011, it had coverage to approximately the 123-year137-year Probable Maximum Loss (PML), modeled using AIR CLASIC/2 v.11.0, long term, without demand surge. Recently, AIR updated its catastrophe model and outlook of risk with the release of its new version, AIR CLASIC/2 v12.04. UPCIC estimates, based on its in-force exposures as of September 30,December 31, 2011, that it had coverage to approximately the 89-year94-year PML, modeled using AIR CLASIC/2 v.12.04, long term, without demand surge. Additionally, from time to time, UPCIC uses estimates from other catastrophe modeling vendors to estimate its PML. UPCIC estimates based upon its in-force exposures as of June 1,September 30, 2011, that it had coverage to approximately the 126-year131-year PML, modeled using RMS’s new release of its RiskLink model, v11, long term, without loss amplification. PML is a general concept applied in the insurance industry for defining high loss scenarios that should be considered when underwriting insurance risk. Both “loss
amplification” and “demand surge” refer to the potential impact of secondary contributors to insured losses arising from catastrophic events. Examples of loss amplification or demand surge include increases in the cost of labor or materials, incremental losses associated with time elapsing between the initial date of loss and the date of repair, claim inflation, and potential coverage ambiguities due to concurrent causes of loss. Catastrophe models produce loss estimates that are qualifiedquantified in terms of dollars and probabilities. Probability of exceedance or the probability that the actual loss level will exceed a particular threshold is a standard catastrophe model output. For example, the 100-year PML represents a 1.00% Annual Probability of Exceedance (the 123-year, 89-year137-year, 94-year and 126-year131-year PML represents a 0.81%0.80%, 1.12%1.06% and 0.79%0.76% Annual Probability of Exceedance, respectively, for AIR v11.0, AIR v12.04 and RMS v11). It is estimated that the 100-year PML is likely to be equaled or exceeded in one year out of 100 on average, or 1 percent of the time. It is the 99th percentile of the annual loss distribution.
UPCIC limits the maximum net loss that can arise from large risks or risks in concentrated areas of exposure by reinsuring (ceding) certain levels of risks with other insurers or reinsurers on an automatic basis under reinsurance contracts. The reinsurance arrangements are intended to provide UPCIC with the ability to limit its exposure to losses within its capital resources. Such reinsurance includes quota share, excess of loss and catastrophe forms of reinsurance. UPCIC submits the reinsurance program annually for regulatory review to the OIR.
In the event of catastrophic losses in the future, there could be a material adverse impact on our Financial Statements. With the implementation of our 2011-2012 reinsurance program at June 1, 2011, we retained a maximum, pre-tax net liability of $157.6 million as of December 31, 2011 for the first catastrophic event up to $1.781 billion of losses. Refer to the preceding table for information with respect to subsequent catastrophic events coverage. If catastrophic losses result in a net operating loss for the 2011 tax year, we can carry back the net operating loss to the 2010 and 2009 tax years and recover all, or a portion of, income taxes paid in those years.
In addition to coverage obtained by UPCIC underSeparately from the Insurance Entities’ reinsurance programs, the ultimate parent of UPCIC obtained $60.0UIH protected its own interests against diminution in value due to catastrophe events by purchasing $60 million ofin coverage via a catastrophe risk-linked transaction contract, effective June 1, 2011 through December 31, 2011,2011. The contract provided for a recovery by UIH in the event of the exhaustion of UPCIC’s catastrophe coverage is exhausted.coverage. The total cost to UIH of the risk-linked transaction contract is $8.7 million.
We continually evaluate strategies to more effectively manage our exposure to catastrophe losses, including the maintenance of catastrophic reinsurance coverage. The Company is currently in the process of renegotiating its 2012-2013 reinsurance program. Based on current discussions, the Company does not expect that the terms of the 2012-2013 reinsurance program will differ materially from the 2011-2012 reinsurance program, but there can be no assurance that the Company will be able to obtain reinsurance at the same levels, terms or price as the 2011-2012 program.
Termination of Agreements with Segregated Account T25
UIH ownsEffective January 1, 2012, the agreement between the Insurance Entities and maintains a segregated account,UIH’s Segregated Account T25—T25 – Universal Insurance Holdings of White Rock Insurance (SAC) Ltd. (“T25”) established by awas replaced at identical limits and retentions as the prior agreement with an unaffiliated third-party reinsurer in accordance with Bermuda law. T25 enters into underlyingas an open market purchase. Effective January 1, 2012 through May 31, 2012, under an excess catastrophe contracts with UPCIC forcontract, the purposeInsurance Entities obtained catastrophe coverage of assuming the risk$140.2 million in excess of certain policies issued by UPCIC,$44.8 million covering certain loss occurrences including hurricanes. UIH securesThe total cost of this reinsurance coverage is $4.4 million. In the obligationsevent of T25a non-hurricane loss subject to this contract, the Insurance Entities will pay to the reinsurer 20.0% of the ultimate net loss ceded to the reinsurer arising out of such non-hurricane loss.
Wind Mitigation Discounts
The insurance premiums charged by the Insurance Entities are subject to various statutory and regulatory requirements. Among these, the Insurance Entities must offer wind mitigation discounts in accordance with a program mandated by the Florida Legislature and implemented by the OIR. The level of wind mitigation discounts mandated by the Florida Legislature to be effective June 1, 2007 for new business and August 1, 2007 for renewal business have had a significant negative effect on our premium.
The following table reflects the effect of wind mitigation credits received by our policy holders (in thousands):
Reduction of in-force premium (only policies including wind coverage) | ||||||||||||||||
Date | Percentage of UPCIC policyholders receiving credits | Total credits | In-force premium | Percentage reduction of in-force premium | ||||||||||||
6/1/2007 | 1.9 | % | $ | 6,285 | $ | 487,866 | 1.3 | % | ||||||||
12/31/2007 | 11.8 | % | $ | 31,952 | $ | 500,136 | 6.0 | % | ||||||||
3/31/2008 | 16.9 | % | $ | 52,398 | $ | 501,523 | 9.5 | % | ||||||||
6/30/2008 | 21.3 | % | $ | 74,186 | $ | 508,412 | 12.7 | % | ||||||||
9/30/2008 | 27.3 | % | $ | 97,802 | $ | 515,560 | 16.0 | % | ||||||||
12/31/2008 | 31.1 | % | $ | 123,525 | $ | 514,011 | 19.4 | % | ||||||||
3/31/2009 | 36.3 | % | $ | 158,230 | $ | 530,030 | 23.0 | % | ||||||||
6/30/2009 | 40.4 | % | $ | 188,053 | $ | 544,646 | 25.7 | % | ||||||||
9/30/2009 | 43.0 | % | $ | 210,292 | $ | 554,379 | 27.5 | % | ||||||||
12/31/2009 | 45.2 | % | $ | 219,974 | $ | 556,557 | 28.3 | % | ||||||||
3/31/2010 | 47.8 | % | $ | 235,718 | $ | 569,870 | 29.3 | % | ||||||||
6/30/2010 | 50.9 | % | $ | 281,386 | $ | 620,277 | 31.2 | % | ||||||||
9/30/2010 | 52.4 | % | $ | 291,306 | $ | 634,285 | 31.5 | % | ||||||||
12/31/2010 | 54.2 | % | $ | 309,858 | $ | 648,408 | 32.3 | % | ||||||||
3/31/2011 | 55.8 | % | $ | 325,511 | $ | 660,303 | 33.0 | % | ||||||||
6/30/2011 | 56.4 | % | $ | 322,640 | $ | 673,951 | 32.4 | % | ||||||||
9/30/2011 | 57.1 | % | $ | 324,313 | $ | 691,031 | 31.9 | % | ||||||||
12/31/2011 | 57.7 | % | $ | 325,315 | $ | 703,459 | 31.6 | % | ||||||||
3/31/2012 | 57.9 | % | $ | 323,286 | $ | 718,164 | 31.0 | % |
Insurers like UPCIC under these contracts by contributingfully experience the impact of rate or discount changes more than 12 months after implementation because insurance policies renew throughout the year. Although UPCIC may seek to offset the impact of wind mitigation credits through subsequent rate increase filings with the OIR, there is no assurance that the OIR and UPCIC will agree on the amount of T25’s liability for losses, net ofrate change that is needed. In addition, any adjustments to UPCIC’s required premium payments,rates similarly take more than 12 months to a trust account as collateral. The collateral will be used to pay any claims that may arise in the event of the occurrence of covered events. Transactions related to this arrangement are eliminated in consolidation; however, the amount of collateral is held in trust for the benefit of UPCIC until the occurrence of a covered event, expiration or termination of the agreement between T25 and UPCIC.fully integrated into its business.
UPCIC and T25 mutually agreed to a Commutation and Settlement Agreement on May 31, 2011, related to the underlying Property Catastrophe Excess of Loss Reinsurance Contract that was effective January 1, 2011. A replacement contract was entered into between the parties on June 1, 2011 as part of UPCIC’s reinsurance program in effect for the period June 1, 2011, through May 31, 2012. In conjunction with entering into the replacement contract, UIH contributed additional funds to T25 due to the increased reinsurance coverage and collateral requirements. The amount of collateral in the trust account at September 30, 2011 was $63.0 million.
Results of Operations - Operations—Three Months Ended September 30, 2011,March 31, 2012, Compared to Three Months Ended September 30, 2010March 31, 2011
The following table summarizes changes in each component of our Statement of Income for the three months ended September 30, 2011,March 31, 2012, compared to the same period in 20102011 (in thousands):
Three Months Ended September 30, | Change | Three Months Ended March 31, | Change | |||||||||||||||||||||||||||||
2011 | 2010 | $ | % | 2012 | 2011 | $ | % | |||||||||||||||||||||||||
PREMIUMS EARNED AND OTHER REVENUES | ||||||||||||||||||||||||||||||||
Direct premiums written | $ | 171,370 | $ | 152,662 | $ | 18,708 | 12.3 | % | $ | 190,003 | $ | 173,175 | $ | 16,828 | 9.7 | % | ||||||||||||||||
Ceded premiums written | (123,984 | ) | (108,539 | ) | (15,445 | ) | 14.2 | % | (163,434 | ) | (123,891 | ) | (39,543 | ) | 31.9 | % | ||||||||||||||||
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Net premiums written | 47,386 | 44,123 | 3,263 | 7.4 | % | 26,569 | 49,284 | (22,715 | ) | -46.1 | % | |||||||||||||||||||||
Decrease in net unearned premium | 2,248 | 4,708 | (2,460 | ) | NM | |||||||||||||||||||||||||||
Decrease (increase) in net unearned premium | 22,071 | (1,280 | ) | 23,351 | NM | |||||||||||||||||||||||||||
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Premiums earned, net | 49,634 | 48,831 | 803 | 1.6 | % | 48,640 | 48,004 | 636 | 1.3 | % | ||||||||||||||||||||||
Net investment income | 122 | 66 | 56 | 84.8 | % | |||||||||||||||||||||||||||
Net realized gains on investments | 5,884 | 6,149 | (265 | ) | -4.3 | % | ||||||||||||||||||||||||||
Net unrealized (losses) gains on investments | (15,985 | ) | 6,281 | (22,266 | ) | NM | ||||||||||||||||||||||||||
Net foreign currency losses on investments | (455 | ) | (8 | ) | (447 | ) | NM | |||||||||||||||||||||||||
Net investment (expense) income | (36 | ) | 257 | (293 | ) | NM | ||||||||||||||||||||||||||
Net realized (losses) gains on investments | (7,449 | ) | 3,652 | (11,101 | ) | NM | ||||||||||||||||||||||||||
Net unrealized gains on investments | 9,187 | 2,588 | 6,599 | 255.0 | % | |||||||||||||||||||||||||||
Net foreign currency gains on investments | 23 | 71 | (48 | ) | -67.6 | % | ||||||||||||||||||||||||||
Commission revenue | 5,192 | 4,423 | 769 | 17.4 | % | 4,541 | 4,180 | 361 | 8.6 | % | ||||||||||||||||||||||
Policy fees | 3,535 | 3,525 | 10 | 0.3 | % | 3,901 | 4,173 | (272 | ) | -6.5 | % | |||||||||||||||||||||
Other revenue | 1,486 | 1,468 | 18 | 1.2 | % | 1,440 | 1,408 | 32 | 2.3 | % | ||||||||||||||||||||||
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Total premiums earned and other revenues | 49,413 | 70,735 | (21,322 | ) | -30.1 | % | 60,247 | 64,333 | (4,086 | ) | -6.4 | % | ||||||||||||||||||||
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OPERATING COSTS AND EXPENSES | ||||||||||||||||||||||||||||||||
Losses and loss adjustment expenses | 29,343 | 29,370 | (27 | ) | -0.1 | % | 26,174 | 26,185 | (11 | ) | 0.0 | % | ||||||||||||||||||||
General and administrative expenses | 18,827 | 20,053 | (1,226 | ) | -6.1 | % | 17,844 | 15,072 | 2,772 | 18.4 | % | |||||||||||||||||||||
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Total operating costs and expenses | 48,170 | 49,423 | (1,253 | ) | -2.5 | % | 44,018 | 41,257 | 2,761 | 6.7 | % | |||||||||||||||||||||
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INCOME BEFORE INCOME TAXES | 1,243 | 21,312 | (20,069 | ) | -94.2 | % | 16,229 | 23,076 | (6,847 | ) | -29.7 | % | ||||||||||||||||||||
Income taxes, current | 7,331 | 7,359 | (28 | ) | -0.4 | % | 774 | 8,737 | (7,963 | ) | -91.1 | % | ||||||||||||||||||||
Income taxes, deferred | (7,063 | ) | 876 | (7,939 | ) | NM | 5,582 | 441 | 5,141 | 1165.8 | % | |||||||||||||||||||||
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Income taxes, net | 268 | 8,235 | (7,967 | ) | -96.7 | % | 6,356 | 9,178 | (2,822 | ) | -30.7 | % | ||||||||||||||||||||
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NET INCOME | $ | 975 | $ | 13,077 | $ | (12,102 | ) | -92.5 | % | $ | 9,873 | $ | 13,898 | $ | (4,025 | ) | -29.0 | % | ||||||||||||||
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Net income decreased by $12.1$4 million, or 92.5%29%, primarily as a result of unrealized tradingrealized losses in our investment portfolio. These losses reflect a particularly steep declineportfolio compared to realized gains during the three months ended March 31, 2011 and an increase in the equity marketsgeneral and administrative expenses due primarily to accelerated amortization of deferred acquisition costs as a whole duringresult of adopting new accounting guidance provided by the quarter ended September 2011.FASB. These factors were partially offset by an increase in unrealized gains of $6.6 million.
The increase in net earned premiums of $803$636 thousand, or 1.6%1.3%, was due toreflects an increase in the numberdirect earned premium of policies written generated$14.2 million mostly offset by our agent network and thean increase in ceded earned premium of $13.6 million. The increase in direct earned premium is due primarily to rate increases whichthat first became effective in February 2011, as well as those that became effective in the latter partand March of 2009.2011. These rate increases have had a positive effect on premium generated by renewal policies. The benefit from these factors was partially offset by an increasepolicies but have resulted in a moderate reduction in the number of policies-in-force eligible for wind mitigation credits.
policies in force. The following table reflectsbenefit from the effect ofrate increases continued to be partially offset by wind mitigation credits received by UPCIC policyholders (in thousands):within the state of Florida. The increase in ceded earned premium of $13.6 million includes $2.7 million in the 2012 period relating to the aforementioned underlying property catastrophe excess of loss reinsurance contract with an unaffiliated third-party reinsurer.
Date Percentage of UPCIC receiving credits Total credits In-force premium Percentage reduction of in-force premium 6/1/2007 12/31/2007 3/31/2008 6/30/2008 9/30/2008 12/31/2008 3/31/2009 6/30/2009 9/30/2009 12/31/2009 3/31/2010 6/30/2010 9/30/2010 12/31/2010 3/31/2011 6/30/2011 9/30/2011 Reduction of in-force premium (only policies including wind coverage)
policyholders 1.9% $ 6,285 $ 487,866 1.3% 11.8% $ 31,952 $ 500,136 6.0% 16.9% $ 52,398 $ 501,523 9.5% 21.3% $ 74,186 $ 508,412 12.7% 27.3% $ 97,802 $ 515,560 16.0% 31.1% $ 123,525 $ 514,011 19.4% 36.3% $ 158,230 $ 530,030 23.0% 40.4% $ 188,053 $ 544,646 25.7% 43.0% $ 210,292 $ 554,379 27.5% 45.2% $ 219,974 $ 556,557 28.3% 47.8% $ 235,718 $ 569,870 29.3% 50.9% $ 281,386 $ 620,277 31.2% 52.4% $ 291,306 $ 634,285 31.5% 54.2% $ 309,858 $ 648,408 32.3% 55.8% $ 325,511 $ 660,303 33.0% 56.4% $ 322,640 $ 673,951 32.4% 57.1% $ 324,313 $ 691,031 31.9%
Net unrealizedinvestment expenses for the three months ended March 31, 2012, compared to net investment income for the same period in the prior year, reflects one time charges for investment accounting services as we convert to a new investment accounting service provider.
Realized losses on investments of $16.0$7.5 million recorded during the three months ended September 30, 2011,March 31, 2012 reflect loss in value primarily in the metals and mining sector.
Net unrealized gains on investments of $9.2 million, recorded during the three months ended March 31, 2012, include both a reclassification of unrealized gains and losses recorded in prior periods to realized gains and losses upon disposition during the current period and a net decreaseincrease in value of investments held in our trading portfolio as of September 30, 2011. These unrealized lossesMarch 31, 2012. The majority of the increase in value was in the trading portfolio during the three months ended September 30, 2011, were partially offset by realized gains of $5.9 million recorded during the same period. The unrealized losses reflect a particularly steep decline in the equity markets as a whole during the quarter ended September 2011. We will continue to record future changes in the market value of our trading portfolio directly to earnings as unrealized gainsmetals and losses on investments. All investment securities held at June 30, 2010, were classified as available-for-sale with net unrealized losses reflected in Accumulated Other Comprehensive Income in the Condensed Consolidated Statement of Financial Condition. During 2010, management evaluated the trading activity of our investment portfolio, investing strategy and overall investment program. As a result of this evaluation, we reclassified the available-for-sale portfolio as a trading portfolio effective July 1, 2010. Since July 1, 2010, changes in the market value of our trading portfolio are recorded directly to revenues as unrealized gains or losses on investments. In previous periods, the changes in unrealized gains and losses on the available-for-sale portfolio were appropriately included in Other Comprehensive Income rather than current period income.mining sector.
Commission revenue is comprised principally of reinsurance commission sharing agreements. The increase in commission revenue of $769$361 thousand is due to an increase in the amount of ceded premiums.
Policy fees are comprised primarily of the managing general agent’s policy fee income from insurance policies. The decrease of $272 thousand reflects a reduction in the number of policies written primarily due to the rate increases that have taken affect, which has caused some attrition.
The net loss and LAE ratios, or net losses and LAE as a percentage of net earned premiums, were 59.1%53.8% and 60.1%54.5% during the three-month periods ended September 30,March 31, 2012 and 2011, and 2010, respectively, and were comprised of the following components (in thousands):
Three months ended March 31, 2012 | ||||||||||||
Direct | Ceded | Net | ||||||||||
Loss and loss adjustment expenses | $ | 52,607 | $ | 26,433 | $ | 26,174 | ||||||
Premiums earned | $ | 178,804 | $ | 130,164 | $ | 48,640 | ||||||
Loss & LAE ratios | 29.4 | % | 20.3 | % | 53.8 | % |
Three months ended September 30, 2011 | Three months ended March 31, 2011 | |||||||||||||||||||||||
Direct | Ceded | Net | Direct | Ceded | Net | |||||||||||||||||||
Loss and loss adjustment expenses | $ | 59,789 | $ | 30,446 | $ | 29,343 | $ | 53,131 | $ | 26,946 | $ | 26,185 | ||||||||||||
Premiums earned | $ | 175,858 | $ | 126,224 | $ | 49,634 | $ | 164,587 | $ | 116,583 | $ | 48,004 | ||||||||||||
Loss & LAE ratios | 34.0 | % | 24.1 | % | 59.1 | % | 32.3 | % | 23.1 | % | 54.5 | % | ||||||||||||
Three months ended September 30, 2010 | ||||||||||||||||||||||||
Direct | Ceded | Net | ||||||||||||||||||||||
Loss and loss adjustment expenses | $ | 59,512 | $ | 30,142 | $ | 29,370 | ||||||||||||||||||
Premiums earned | $ | 162,093 | $ | 113,262 | $ | 48,831 | ||||||||||||||||||
Loss & LAE ratios | 36.7 | % | 26.6 | % | 60.1 | % |
The reduction in the direct loss and LAE ratio reflects an increase in earned premiums and favorable loss experience in the current year net of adverse development related to prior years.premiums.
General and administrative expenses decreasedincreased by $1.2$2.8 million due primarily to the adoption of new accounting guidance related to deferred acquisition costs. The overall impact under the new guidance, which was adopted on January 1, 2012, was a decreasereduction in performance-based bonus accrualsearnings of $1.9$2.7 million ($1.7 million after tax or $0.04 per diluted share). The $2.7 million pre-tax reduction in earnings during the three months ended March 31, 2012, includes an acceleration of capitalized costs existing as of December 31, 2011, which would have been amortized to earnings within a twelve-month period, and a decrease in bad debt expensethe immediate recognition of $807 thousand. Performance-based bonuses are based on either net income before taxes or net income. These decreases werecosts which otherwise would have been deferred, partially offset by an increasea lesser amount of amortization expense due to the reduction in capitalized costs. The new guidance does not result in incremental charges to earnings, but rather affects the timing of the recognition of those charges in the income statement. There were also increases in stock-based compensation of $422$614 thousand for the three months ended September 30, 2011March 31, 2012 compared to 2010,the same period in 2011, and non-recurring credits in the amount of $975$469 thousand from the recovery of Florida Insurance Guaranty Association (“FIGA”) assessments recorded during the three months ended September 30, 2010. FIGA assessments are ultimately passed down to policyholders. Amounts charged or credited to our earnings represent timing differences between the time assessments are made by FIGA to us, and the collection of those assessments from policyholders.
The decrease in income tax expense was the result of a significant reduction in taxable income due to unrealized losses in the trading portfolio. In addition, we recorded adjustments in connection with the filing of federal and state income tax returns for prior periods reducing the effective tax rate to 21.6% for the three months ended September 30,March 31, 2011.
Results of Operations—Nine Months Ended September 30, 2011 Compared to Nine Months Ended September 30, 2010
The following table summarizes changes in each component of our Statement of Income for the nine months ended September 30, 2011, compared to the same period in 2010 (in thousands):
PREMIUMS EARNED AND OTHER REVENUES Direct premiums written Ceded premiums written Net premiums written Increase in net unearned premium Premiums earned, net Net investment income Net realized gains on investments Net unrealized (losses) gains on investments Net foreign currency (losses) gains on investments Commission revenue Policy fees Other revenue Total premiums earned and other revenues OPERATING COSTS AND EXPENSES Losses and loss adjustment expenses General and administrative expenses Total operating costs and expenses INCOME BEFORE INCOME TAXES Income taxes, current Income taxes, deferred Income taxes, net NET INCOME Nine Months Ended September 30, Change 2011 2010 $ % $ 558,024 $ 520,782 $ 37,242 7.2 % (393,673 ) (357,411 ) (36,262 ) 10.1 % 164,351 163,371 980 0.6 % (17,189 ) (39,865 ) 22,676 -56.9 % 147,162 123,506 23,656 19.2 % 358 377 (19 ) -5.0 % 12,496 11,893 603 5.1 % (23,037 ) 6,281 (29,318 ) NM (384 ) 801 (1,185 ) NM 14,313 13,469 844 6.3 % 12,110 12,000 110 0.9 % 4,400 3,489 911 26.1 % 167,418 171,816 (4,398 ) -2.6 % 81,380 77,857 3,523 4.5 % 48,598 43,631 4,967 11.4 % 129,978 121,488 8,490 7.0 % 37,440 50,328 (12,888 ) -25.6 % 25,690 19,016 6,674 35.1 % (10,672 ) 524 (11,196 ) NM 15,018 19,540 (4,522 ) -23.1 % $ 22,422 $ 30,788 $ (8,366 ) -27.2 %
Net income decreased by $8.4 million, or 27.2%, primarily as a result of unrealized trading losses in our investment portfolio. These losses reflect a particularly steep decline in the equity markets as a whole during the quarter ended September 2011.
The increase in net earned premiums of $23.7 million, or 19.2%, was due to an increase in the number of policies written generated by our agent network and the rate increases which became effective in the second quarter of 2011, as well as those that became effective in the latter part of 2009. These rate increases have had a positive effect on premiums generated by renewal policies. This benefit was partially offset by an increase in the number of policies-in-force eligible for and receiving wind mitigation credits. See “Results of Operations – Three Months Ended September 30, 2011 Compared to Three Months Ended September 30, 2010” for a table reflecting the effect of wind mitigation credits received by UPCIC policyholders.
Net unrealized losses on investments of $23.0 million recorded during the nine months ended September 30, 2011, reflect the net decrease in value of investments held in our trading portfolio as of September 30, 2011. These unrealized losses in the trading portfolio during the three months ended September 30, 2011, were partially offset by realized gains of $12.5 million recorded during the same period. The unrealized losses reflect a particularly steep decline in the equity markets as a whole during the quarter ended September 2011. We will continue to record future changes in the market value of investments held in our trading portfolio directly to earnings as unrealized gains and losses on investments. All investment securities held at June 30, 2010, were classified as available-for-sale with net unrealized losses reflected in Accumulated Other Comprehensive Income in the Condensed Consolidated Statement of Financial Condition. As discussed in the Results of Operations for the Three Months Ended September 30, 2011, compared to 2010, management evaluated the trading activity of our investment portfolio, investing strategy, and overall investment program during 2010. As a result of this evaluation, we reclassified the available-for-sale portfolio as a trading portfolio effective July 1, 2010. Since July 1, 2010, changes in the market value of our trading portfolio are recorded directly to revenues as unrealized gains or losses on investments. In previous periods, the changes in unrealized gains and losses on the available-for-sale portfolio were appropriately included in Other Comprehensive Income rather than current period income.
During the nine months ended September 30, 2010, we recorded $2.4 million of other than temporary losses for certain securities that were available-for-sale. Effective July 1, 2010, we transferred all securities classified as available-for-sale to the trading portfolio and recognized all unrealized gains and losses in earnings thereafter.
Foreign currency losses and gains reflect changes in exchange rates for investments denominated in currencies other than U.S dollars.
The increase in other revenues of $911 thousand is due primarily to a higher volume of policyholders participating in our installment payment plan program offered by UPCIC.
The increase in net losses and LAE of $3.5 million, or 4.5%, was primarily related to the servicing of additional policies due to the growth in policy count on a year-over-year basis.
The net loss and LAE ratios, or net losses and LAE as a percentage of net earned premiums, were 55.3% and 63.0% during the nine-month periods ended September 30, 2011, and 2010, respectively, and were comprised of the following components (in thousands):
Nine months ended September 30, 2011 | ||||||||||||
Direct | Ceded | Net | ||||||||||
Loss and loss adjustment expenses | $ | 166,280 | $ | 84,900 | $ | 81,380 | ||||||
Premiums earned | $ | 510,579 | $ | 363,417 | $ | 147,162 | ||||||
Loss & LAE ratios | 32.6 | % | 23.4 | % | 55.3 | % | ||||||
Nine months ended September 30, 2010 | ||||||||||||
Direct | Ceded | Net | ||||||||||
Loss and loss adjustment expenses | $ | 156,537 | $ | 78,680 | $ | 77,857 | ||||||
Premiums earned | $ | 452,848 | $ | 329,342 | $ | 123,506 | ||||||
Loss & LAE ratios | 34.6 | % | 23.9 | % | 63.0 | % |
The improvement in the direct loss and LAE ratio for the nine-month period ended September 30, 2011, compared to the same period in the prior year, was the result of an increase in earned premiums and favorable loss experience in the current year net of adverse development related to prior years.
General and administrative expenses increased by $5.0 million due primarily to an increase in the amortization of deferred acquisition costs of $4.1 million. The increase in amortization of deferred acquisition costs is primarily in response to an increase in commissions paid on direct premium and the associated premium taxes thereon, partially offset by an increase in ceding commissions. Commissions and premium taxes are directly related to the volume of direct premium. Direct written premium has increased in response to an increase in the number of policies-in-force and the increase in average premium per policy. Other factors giving rise to the increase in general and administrative expenses include non-recurring credits in the amount of $2.3 million from the recovery of FIGA assessments recorded during the nine months ended September 30, 2010, an increase in legal fees of $678 thousand
related to corporate matters, and an increase in insurance expense of $364 thousand. FIGA assessments are ultimately passed down to policyholders. Amounts charged or credited to our earnings represent timing differences between the time assessments are made by FIGA to us, and the collection of those assessments from policyholders. These increases were partially offset by a decrease of $1.5 million in performance-based bonus accruals a decrease in bad debt expense of $1.0 million,$418 thousand and a decrease of $242 thousand in stock-based compensation of $569 thousand.legal fees related to corporate matters. Performance-based bonuses are based on either net income before taxes or net income.
The decrease in income tax expense was the result of a significant reduction in taxable income due primarily to unrealizedthe realized losses in the trading portfolio.portfolio and an increase general and administrative expenses.
Analysis of Financial Condition - Condition—As of September 30, 2011,March 31, 2012 Compared to December 31, 20102011
We believe that premiums will be sufficient to meet our working capital requirements for at least the next twelve months.
Our policy is to invest amounts considered to be in excess of current working capital requirements. We reduced our aggregate investment securities to $153.5 million as of September 30, 2011, from $224.5 million as of December 31, 2010, in response to market conditions. We have a receivable of $5.6$4.1 million at September 30, 2011,March 31, 2012 for securities sold that had not yet settled compared to $17.6$9.7 million at December 31, 2010,2011, and a payable for securities purchased that had not yet settled of $17.7$8.0 million as of September 30,March 31, 2012 compared to $1.1 million at December 31, 2011.
The following table summarizes, by type, the carrying values of investments (in thousands):
As of September 30, | As of December 31, | |||||||||||||||
Type of Investment | 2011 | 2010 | As of March 31, 2012 | As of December 31, 2011 | ||||||||||||
Cash and cash equivalents | $ | 328,838 | $ | 147,585 | $ | 325,968 | $ | 229,685 | ||||||||
Restricted cash and cash equivalents | 48,178 | 78,312 | ||||||||||||||
Debt securities | 58,063 | 130,116 | 3,800 | 3,801 | ||||||||||||
Equity securities | 95,413 | 94,416 | 96,996 | 95,345 | ||||||||||||
Non-hedge derivatives | 1,545 | 182 | 60 | 123 | ||||||||||||
Other investments | 366 | — | 385 | 371 | ||||||||||||
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Total Investments | $ | 484,225 | $ | 372,299 | $ | 475,387 | $ | 407,637 | ||||||||
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Prepaid reinsurance premiums represent ceded unearned premiums related to our catastrophe and quota share reinsurance programs. The increase of $30.3$33.3 million to $251.3$276.4 million during the ninethree months ended September 30, 2011,March 31, 2012, was primarily due to an increase in premiums for catastrophe reinsurance coverage, as previously described in Recent Developments, 2011-2012 Reinsurance Program, and an increase in quota share reinsurance premiums commensurate with the increase in direct written premium. Premiums for catastrophe reinsurance coverage are earned over the respective contract periods which are generally effective from June 1, 2011, through May 31, 2012.
Reinsurance recoverables represent amounts due from reinsurers for ceded loss and LAE. The decrease in reinsurance recoverables of $8.7 million to $77 million reflects favorable loss experience in the current period and the timing of settlements with reinsurers.
Reinsurance receivable, net, represents inuring premiums receivable, net of ceded premiums payable with our quota share reinsurer. The increasedecrease of $12.2$39.4 million to $49.8$15.8 million during the ninethree months ended September 30, 2011,March 31, 2012 was due to greater ceded premiums on our catastrophe reinsurance program and timing of the settlement with the quota share reinsurer. In prior periods, we netted this receivable against reinsurance payables. See Note 1 “Nature of Operations and Basis of Presentation” for more information about this reclassification in theBasis of Presentation section.
Premiums receivable represent amounts due from policyholders. The increase in Property and Equipment of $7.0$1.3 million to $50.6$8.4 million duringreflects the nine months ended September 30, 2011cost of building a new office building which was due toplaced into service at the growth in direct written premiums and an increase in the numberend of policyholders participating in the installment payment plan program offered by UPCIC.March 2012.
See Note 5, “Insurance Operations”Insurance Operations. in our Notes to Condensed Consolidated Financial Statements for a roll-forward in the balance of our deferred policy acquisition costs.
The increasedecrease in net deferred income taxestax asset of $10.7$5.6 million during the ninethree months ended September 30, 2011March 31, 2012 is due primarily to a decrease in the amount of unrealized losses in the trading portfolio.
See Note 5, “Insurance Operations”Insurance Operations, in our Notes to Condensed Consolidated Financial Statements for a roll-forward in the balance of our unpaid losses and loss adjustment expenses.LAE.
Unearned premiums represent the portion of written premiums that will be earned pro rata in the future. The increase of $47.4$11.2 million to $375.8$371 million during the ninethree months ended September 30, 2011March 31, 2012 was due to growth in, and timing of, direct written premiums.
Advance premium represents premium payments made by policy holders ahead of a policy’s effective date. The increase of $11.7 million to $31.1 million reflects a trend for an increase in the volume of policies with advance payments in March, relative to December.
Reinsurance payable, net, represents our liability to reinsurers for ceded written premiums, net of ceding commissions receivable. The increase of $53.3$27 million to $128.8$114.5 million during the ninethree months ended September 30, 2011March 31, 2012 was primarily due to the timing of settlements with reinsurers and amounts not yet due to reinsurers for catastrophe reinsurance coverage, as previously described above in Recent Developments,2011-2012 Reinsurance Program. In prior periods, we netted reinsurance receivable, net against reinsurance payables. See Note 1 “Nature of Operations and Basis of Presentation” for more information about this reclassification in theBasis of PresentationProgram section..
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 generally been sufficient to meet our liquidity requirements and we expect that in the future funds from operations will continue to meet such requirements.
The balance of cash and cash equivalents as of September 30, 2011,March 31, 2012 was $328.8$326 million compared to $147.6$229.7 million at December 31, 2010.2011. See our Condensed Consolidated Statements of Cash Flows for a reconciliation of the balance of cash and cash equivalent between September 30, 2011March 31, 2012 and December 31, 2010.2011. Most of this amount is available to pay claims in the event of a catastrophic event pending reimbursement amounts recoverable under reinsurance agreements. The source of liquidity for possible claim payments consists of the collection of net premiums after deductions for expenses, reinsurance recoverables and short-term loans.
As a means by which T25 can secure its potential obligation under its reinsurance contractThe balance of restricted cash and cash equivalents as of March 31, 2012 was $48.2 million. Restricted cash as of March 31, 2012 is mostly comprised of cash equivalents on deposit with UPCIC, UIH holds collateral in a trust account for the benefit of UPCIC until the occurrence of a covered event or the expiration or termination of the agreement between T25 and UPCIC. The amount of collateralregulatory agencies in the trust account at September 30, 2011 was $63.0 million and is placed with a major U.S. financial institution as provided by the Floridavarious states in which our Insurance Code. These funds are segregated from the general operating funds of UIH. See Note 4 “Reinsurance” in our Notes to Condensed Consolidated Financial Statements for information about the arrangement between T25 and UPCIC.
In consultation with the OIR, UPCIC has offered to segregate from its general operating funds an amount equivalent to its anticipated future reinsurance premiums under the arrangement with T25 and UPCIC.
On October 28, 2011, UPCIC remitted $45.5 million as a deposit with the Florida Department of Financial Services. According to the terms of the reinsurance contract, UPCIC will pay approximately half of the deposited amount to T25 on or about January 1, 2012 and the remaining amount on or about April 1, 2012. Alternatively, UPCIC anticipates that it will propose to commute the existing contract in December 2011. The commutation would result in the entire deposit being returned to UPCIC in December or being used to support a replacement contract.Entities do business.
The Company’s liquidity requirements primarily include potential payments of catastrophe losses, the payment of dividends to shareholders, and interest and principal payments on debt obligations. The declaration and payment of future dividends to shareholders will be at the discretion of our Board of Directors and will depend upon many factors, including our operating results, financial condition, capital requirements and any regulatory constraints.
Our insurance operations provide liquidity in that premiums are generally received months or even years before losses are paid under the policies sold. Historically, cash receipts from operations, consisting of insurance premiums, commissions, policy fees and investment income, have provided more than sufficient funds to pay loss claims and operating expenses. We maintain substantial investments in highly liquid, marketable securities. Liquidity can also be generated by funds received upon the sale of marketable securities in our investment portfolio.
Effective July 1, 2010, we elected to classify our securities investment portfolio as trading. Accordingly, purchases and sales of investment securities are included in cash flows from operations beginning July 1, 2010. We generated $176.0$95.3 million in cash from operations during the ninethree months ended September 30, 2011,March 31, 2012, compared to $ 131.9119.8 million of cash generated by operating activities for the ninethree months ended September 30, 2010.March 31, 2011. The generation of cash during the ninethree months ended September 30, 2011March 31, 2012 reflects proceeds from sales of investment securities, net of purchases, of $89.0 million.$12.4 million, compared to $71.2 million during the three months ended March 31, 2011.
UPCIC isThe Insurance Entities are responsible for losses related to catastrophic events with incurred losses in excess of coverage provided by UPCIC’sthe Insurance Entities’ reinsurance programs and for losses that otherwise are not covered by the reinsurance programs, which could have a material adverse effect on either UPCIC’sthe Insurance Entities’ or our business, financial condition, results of operations and liquidity (see Note 42011-2012 Reinsurance Program above for a discussion of the 2011-2012 reinsurance program and Note 3 to our Consolidated Financial Statements in Part II, Item 8 of Form 10-K for the Year Ended December 31, 2010 for a discussion of the 2008-2009, 2009-2010 and 2010-2011 reinsurance programs)program).
Funds generated from operations have generally been sufficient to meet liquidity requirements and we expect that in the future funds from operations will continue to meet such requirements. There can be no assurances, however, that this will be the case.
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. At September 30, 2011,March 31, 2012, we had total capital of $179.0$177.9 million, comprised of stockholders’ equity of $156.9$156.6 million and total debt of $22.1$21.3 million. Our debt-to-total-capital ratio and debt-to-equity ratio were 12.3%12% and 14.1%13.6%, respectively, at September 30,March 31, 2012. At December 31, 2011, we had total capital of $171.7 million, comprised of stockholders’ equity of $150 million and total debt of $21.7 million. Our debt-to-total-capital ratio and debt-to-equity ratio were 12.6% and 14.5%, respectively, at December 31, 2011.
At September 30, 2011,March 31, 2012, UPCIC was in compliance with all of the covenants under its surplus note and its total adjusted capital was in excess of regulatory requirements.
Cash Dividends
On January 6, 2011,February 22, 2012, we declared a dividend of $0.10 per share on our outstanding common stock to be paid on April 7, 2011,6, 2012, to the shareholders of record at the close of business on March 11, 2011. 28, 2012.
On August 8, 2011,April 23, 2012, we declared a dividend of $0.08 per share on our outstanding common stock to be paid on October 6, 2011,July 9, 2012, to the shareholders of record at the close of business on September 16, 2011.June 26, 2012. We expect to declare additional quarterly dividends in the same amount to shareholders of record in the third and fourth quarters of 2012. Declaration and payment of future dividends is subject to the discretion of UIH’s board of directors and will be dependent on future earnings, cash flows, financial requirements and other factors.
Contractual Obligations
There have been no material changes during the period covered by this Quarterly Report on Form 10-Q, outside of the ordinary course of business, to the contractual obligations specified in the table of contractual obligations included in Part 1, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2010.2011.
Critical Accounting Policies and Estimates
There have been no material changes during the period covered by this Quarterly Report on Form 10-Q to Critical Accounting Policies and Estimates previously disclosed in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2010.2011.
Accounting Pronouncements Issued and Not Yet Adopted
In September 2010,December 2011, the Financial Accounting Standards Board (“FASB”) issued guidance related to accounting for costs associated with acquiring or renewing insurance contracts. This guidance defines allowable deferred acquisition costs as costs incurred by insurance entities for the successful acquisition of new and renewal contracts. Such costs result directly from and are essential to the contract transaction(s) and would not have been incurred by the insurance entity had the contract(s) not occurred. This guidance will be effective for periods beginning after December 15, 2011, with early adoption permitted. We plan to prospectively adopt this guidance on January 1, 2012. Although we have not yet completed our evaluation of the impact to our financial statements, this guidance represents a significant departure from current industry practice upon adoption and will result in a reduction in our net deferred policy acquisition costs of as much as 20% to 30%, with a corresponding charge to earnings, and a reduction of deferrals and amortization of policy acquisition costs in future periods. This adjustment represents an acceleration of the amortization of costs that ultimately are charged to earnings.
In June 2011, the FASB updated its guidance related to the Comprehensive IncomeBalance Sheet Topic 220210 of the FASB Accounting Standards Codification (ASC).Codification. The objective of this updated guidance isrequires entities that have financial and derivative instruments that are offset to increasedisclose information about offsetting and related arrangements to enable users of financial statements to understand the prominenceeffect of items reported in other comprehensive income by eliminating the option of presenting components of other comprehensive income as part of the statement of changes in stockholders’ equity. The guidance requires total comprehensive income (including both the net income components and other comprehensive income components) be reported in either a single continuous statement of comprehensive income, or two separate but consecutive statements (the approach currently used in the Company’s consolidatedthose arrangements on an entity’s financial statements).position. This guidance is to be applied retrospectively to fiscal years (andfor annual reporting periods beginning on or after January 1, 2013, and interim periods within those years) beginning after December 15, 2011. Early adoptionannual periods. Disclosure is permitted. Since we already userequired retrospectively for all comparative periods presented. The additional disclosures required by the two-statement approach for reporting comprehensive income, thisupdated guidance will not have an impact on the presentation of our operating results, cash flows or financial statements and notes.
In May 2011, the FASB updated its guidance related to the Fair Value Measurement, Topic 820 of the ASC, to achieve common fair value measurement and disclosure requirements with International Financial Reporting Standards. The amendments change the wording used to describe many of the requirements in United States generally accepted accounting principles, to clarify the intent of application of existing fair value measurement and disclosure requirements, and to change particular principles or requirements for measuring and disclosing fair value measurements. The amendments are to be applied prospectively to interim and annual reporting periods beginning after December 15, 2011. The amendments are to be applied prospectively. The Company is currently evaluating the requirements of the guidance and its impact on the Company’s financial statements.position.
Related Parties
See Note 8, “RelatedRelated Party Transactions”Transactions, in our Notes to Condensed Consolidated Financial Statements for information about related parties.
Cautionary Note Regarding Forward-Looking Statements
We operate in a rapidly changing environment that involves a number of uncertainties, some of which are beyond our control. Certain statements made in this report that reflect management’s expectations regarding future events are forward-looking in nature and, accordingly are subject to risks and uncertainties. These forward-looking statements are only current expectations about future events. Actual results could differ materially from those set forth in or implied by any forward-looking statement. Factors that could cause or contribute to such differences include, but are not limited to, risk factors set forth in filings with the Securities and Exchange Commission, including our annual and quarterly reports. The following is a summary of uncertainties which were disclosed in greater detail in “Factors Affecting Operating Results and Market Price of Stock” in our Annual Report on Form 10-K for the year ended December 31, 2010:
Industry risks relating to fluctuating operating results caused by competition, catastrophe losses, general economic conditions including interest rate changes and market conditions, legislative initiatives, the regulatory environment, the frequency of litigation, the size of judgments, severe weather conditions, climate changes or cycles, the role of federal or state government in the insurance market, judicial or other authoritative interpretations of laws and policies, and the availability and cost of reinsurance.
Our ability to manage our exposure to catastrophic losses.
Risks related to our dependence upon third party developers of models to estimate hurricane losses and the reasonableness of assumptions or scenarios incorporated into the models which may be provided by third parties or management.
Risks related to our dependence upon third parties to perform certain functions including, but not limited to, the purchase of reinsurance and risk management analysis. We also rely on reinsurers to limit the amount of risk retained under our policies and to increase our ability to write additional risks.
Our ability to obtain reinsurance to the same extent and at the same cost as currently in place and minimize the loss of potential profits by ceding premiums to reinsurers.
Credit risk, including certain concentrations with respect to our reinsurers, in light of our primary liability for the full amount of the risk underlying the reinsurance agreements.
Risks related to the ability of the Florida Hurricane Catastrophe Fund (FHCF) to provide reimbursements at levels requested and relied upon by us or as timely as required by our claims payments to policyholders. In addition, the cost of our reinsurance program may increase should we deem it necessary to purchase additional private market reinsurance due to reduced estimates of the FHCF’s claims-paying capacity.
Risks that laws, contracts or requirements relating to the FHCF may not be interpreted in a manner consistent with UPCIC’s understandings or will change in the future.
Our ability to estimate and maintain adequate liabilities to pay claims for losses and loss adjustment expenses.
Adverse regulation or legislation.
Our ability to implement sufficient and timely rate adjustments to provide aggregate premiums commensurate with expected losses.
Risks related to our dependence upon the efforts of key individuals.
Our ability to compete in a highly competitive industry.
Our ability to maintain our financial stability rating provided by Demotech, Inc.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk is the potential for economic losses due to adverse changes in fair value of financial instruments. Our primary market risk exposures are related to our investment portfolio and include interest rates, equity prices and commodity prices. We also have exposure to foreign currency exchange rates for investments denominated in foreign currencies, and to a lesser extent, our debt obligation in the form of a surplus note. The surplus note, as previously described in “Liquidity and Capital Resources,” accrues interest at an adjustable rate based on the 10-year Constant Maturity Treasury rate. Investments held in trading are carried on the balance sheet at fair value. Our investment trading portfolio is comprised primarily of debt and equity securities and also includes non-hedging derivatives and physical positions in precious metals. See Note 5, “Investments”Investments, for a schedule of investment holdings as of September 30, 2011March 31, 2012 and December 31, 2010.2011.
Our investments have been, and may in the future be, subject to significant volatility. Our investment objective is to maximize total rate of return after federal income taxes while maintaining liquidity and minimizing risk. Our investment portfolio is managed by an investment committee consisting of all current directorsstrategy includes maintaining investments to support unpaid losses and loss adjustment expenses for the Insurance Entities in accordance with guidelines established by insurance regulators. In addition to investment securities, we invest in derivative financial instruments to try to increase investment returns and for income-generation purposes. The most commonly used instruments are call and put equity options and written call options on common stock (i.e., covered calls). These derivatives are held in our trading portfolio and do not meet the OIR. The committee reviews management’s investment policies on a regular basis. The current investment policy limits investment in non-investment grade fixed maturity securities (including high-yield bonds), and limits total investments in preferred stock and common stock. We comply with applicable laws and regulations, which further restrict the type, quality and concentration of investments. In general, these laws and regulations permit investments, within specified limits and subject to certain qualifications, in federal, state and municipal obligations, corporate bonds, preferred and common equity securities and real estate mortgages.criteria for hedge accounting.
Interest Rate Risk
Interest rate risk is the sensitivity of a fixed-rate instrument to changes in interest rates. When interest rates rise, the fair value of our fixed-rate instruments decline.investment securities declines.
The following table provides information about our fixed income investments, which are sensitive to changes in interest rates. The table presents cash flows of principal amounts and related weighted average interest rates by expected maturity dates for investments held in trading at September 30, 2011, and December 31, 2010as of the periods presented (in thousands):
As of September 30, 2011 | As of March 31, 2012 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Amortized Cost | Amortized Cost | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2011 | 2012 | 2013 | 2014 | 2015 | Thereafter | Total | Fair Value | 2012 | 2013 | 2014 | 2015 | 2016 | Thereafter | Total | Fair Value | |||||||||||||||||||||||||||||||||||||||||||||||||
U.S. government securities obligations and agencies | $ | — | $ | 172 | $ | — | $ | — | $ | — | $ | 3,153 | $ | 3,325 | $ | 3,711 | $ | 136 | $ | — | $ | — | $ | — | $ | — | $ | 3,158 | $ | 3,294 | $ | 3,800 | ||||||||||||||||||||||||||||||||
Average interest rate | 4.09 | % | 1.85 | % | 1.97 | % | 1.97 | % | 4.63 | % | — | — | — | — | 1.85 | % | 1.97 | % | 1.96 | % | ||||||||||||||||||||||||||||||||||||||||||||
Foreign government bonds | $ | 1,894 | $ | 52,459 | $ | — | $ | — | $ | — | $ | — | $ | 54,353 | $ | 54,352 | ||||||||||||||||||||||||||||||||||||||||||||||||
Average interest rate | 6.00 | % | 0.79 | % | 0.97 | % | 0.97 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
As of December 31, 2010 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Amortized Cost | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2011 | 2012 | 2013 | 2014 | 2015 | Thereafter | Total | Fair Value | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
U.S. government securities obligations and agencies | $ | — | $ | 174 | $ | — | $ | — | $ | — | $ | 137,792 | $ | 137,966 | $ | 130,116 | ||||||||||||||||||||||||||||||||||||||||||||||||
Average interest rate | 2.60 | % | 1.30 | % | 1.30 | % | 1.30 | % |
As of December 31, 2011 | ||||||||||||||||||||||||||||||||
Amortized Cost | ||||||||||||||||||||||||||||||||
2012 | 2013 | 2014 | 2015 | 2016 | Thereafter | Total | Fair Value | |||||||||||||||||||||||||
U.S. government securities obligations and agencies | $ | 171 | $ | — | $ | — | $ | — | $ | — | $ | 3,157 | $ | 3,328 | $ | 3,801 | ||||||||||||||||
Average interest rate | 4.09 | % | 1.85 | % | 1.97 | % | 1.97 | % |
United States government and agency securities are rated from AAA to Aaa by Moody’s Investors Service, Inc., and AA+ by Standard and Poor’s Company.
Equity and Commodity Price Risk
Equity and commodity price risk is the potential for loss in fair value of investments in common stock, exchange-traded funds (ETF), and mutual funds from adverse changes in the prices of those instruments.
The following table provides information about the composition of equity securities, non-hedging derivatives and other investments held in the Company’s investment portfolio (in thousands):
XXX,XXX | XXX,XXX | XXX,XXX | XXX,XXX | |||||||||||||||||||||||||||||
As of September 30, 2011 | As of December 31, 2010 | As of March 31, 2012 | As of December 31, 2011 | |||||||||||||||||||||||||||||
Fair Value | Percent | Fair Value | Percent | Fair Value | Percent | Fair Value | Percent | |||||||||||||||||||||||||
Equity securities: | ||||||||||||||||||||||||||||||||
Common stock: | ||||||||||||||||||||||||||||||||
Metals and mining | $ | 30,829 | 31.7 | % | $ | 25,752 | 27.2 | % | $ | 34,460 | 35.4 | % | $ | 38,816 | 40.5 | % | ||||||||||||||||
Energy | 7,203 | 7.4 | % | |||||||||||||||||||||||||||||
Other | 16,173 | 16.6 | % | 362 | 0.4 | % | 2,145 | 2.2 | % | 11,944 | 12.5 | % | ||||||||||||||||||||
Exchange-traded and mutual funds: | ||||||||||||||||||||||||||||||||
Metals and mining | 23,295 | 23.9 | % | 42,209 | 44.6 | % | 15,174 | 15.6 | % | 25,997 | 27.1 | % | ||||||||||||||||||||
Agriculture | 15,411 | 15.8 | % | 14,877 | 15.7 | % | 19,811 | 20.3 | % | 16,878 | 17.6 | % | ||||||||||||||||||||
Energy | 8,333 | 8.6 | % | 5,559 | 5.9 | % | ||||||||||||||||||||||||||
Indices | 1,372 | 1.4 | % | 4,613 | 4.9 | % | 18,203 | 18.7 | % | 1,710 | 1.8 | % | ||||||||||||||||||||
Other | — | 0.0 | % | 1,044 | 1.1 | % | ||||||||||||||||||||||||||
Derivatives: | ||||||||||||||||||||||||||||||||
Non-risk management instruments | 1,545 | 1.6 | % | 182 | 0.2 | % | ||||||||||||||||||||||||||
Other investments (4) | 366 | 0.4 | % | — | 0.0 | % | ||||||||||||||||||||||||||
Derivatives: non-hedging | 60 | 0.1 | % | 123 | 0.1 | % | ||||||||||||||||||||||||||
Other investments (1) | 385 | 0.4 | % | 371 | 0.4 | % | ||||||||||||||||||||||||||
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Total | $ | 97,324 | 100.0 | % | $ | 94,598 | 100.0 | % | $ | 97,441 | 100.0 | % | $ | 95,839 | 100.0 | % | ||||||||||||||||
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(1) | Other investments represent physical metals that we hold in our trading portfolio. |
A hypothetical decrease of 10%20% in the market prices of each of the equity securities, non-hedging derivatives, and other investments held at September 30, 2011,March 31, 2012, and December 31, 2010,2011, would have resulted in decreases of $9.7$19.5 million and $9.6$19.2 million, respectively, in the fair value of the equity securities, non-hedging derivatives and other investment portfolio.
Foreign Currency Exchange Risk
A hypothetical change of 10% in the exchange rates of our foreign denominated investments held at September 30, 2011, would have resulted in a charge or credit to earnings of $5.4 million.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company carried out an evaluation under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 as of the period covered by this report. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that disclosure controls and procedures were effective as of September 30, 2011,March 31, 2012, to ensure that information required to be disclosed by the Company in its reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
Changes in Internal Control Over Financial Reporting
There was no change in the Company’s internal controls over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
The Company is involvedWe are subject to litigation in certain lawsuits. In the opinionnormal course of management, noneour business. As of these lawsuits: (1) involve claims for damages exceeding 10% of the Company’s cash and invested assets, (2) involve matters that areMarch 31, 2012, we were not routine litigation incidental to the claims aspect of its business, (3) involve bankruptcy, receivership or similar proceedings, (4) involve material Federal, state, or local environmental laws; (5) potentially involve more than $100 thousand in sanctions and a governmental authority is a party or (6) are material proceedings to any non-routine litigation which any director, officer, affiliate of the Company, beneficial owner of more than 5% of any class of voting securities of the Company, or security holder is a party adverseexpected by management to the Company or hashave a material interest adverse to the Company.effect on our results of operations, financial condition or liquidity.
Due to the implementation of our 2011-2012 reinsurance program, we retained a maximum, pre-tax net liability of $157.6 million for the first catastrophic event up to $1.781 billion of losses. Refer to the table in the2011-2012 Reinsurance Programunder2011 Developmentsin Management’s Discussion and Analysis of Financial Condition and Results of Operations for information with respect to subsequent catastrophic events coverage. If catastrophic losses result in a net operating loss for the 2011 tax year, we can carry back the net operating loss to the 2010 and 2009 tax years and recover all, or a portion of, income taxes paid in those years.
In the opinion of management, other than the modification provided below to a risk factor that appeared in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, there have been no other material changes during the period covered by this Quarterly Report on Form 10-Q to the risk factors previously disclosed in Part I, Item 1A, “Risk Factors”, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.2011.
AtOn April 17, 2012, Demotech, Inc. provided an update to guidance originally published in March 2010. Included in the Company’s 2011 Annual Meetingupdate was a statement that Demotech will no longer provide full credit for the Mandatory Layer of Shareholders held on May 11, 2011, the Company’s shareholders voted on an advisory proposal regardingFHCF reinsurance coverage. As a result of this statement, the frequency of future advisory votes on executive compensation. As reportedCompany has modified the following risk factor that appeared in the Company’s CurrentAnnual Report on Form 8-K, consistent with10-K for the recommendationyear ended December 31, 2011. The modification appears in bold.
A downgrade in our Financial Stability Rating® may have an adverse effect on our competitive position, the marketability of our product offerings, and our liquidity, operating results and financial condition
Financial Stability Ratings® are important factors in establishing the competitive position of insurance companies and generally have an effect on an insurance company’s business. On an ongoing basis, rating agencies review the financial performance and condition of insurers and could downgrade or change the outlook on an insurer’s ratings due to, for example, a change in an insurer’s statutory capital; a change in a rating agency’s determination of the Company’s Boardamount of Directors, shareholders votedrisk-adjusted capital required to maintain a particular rating;a change in favorthe perceived adequacy of conducting future advisory votes on executive compensation once every three years and,an insurer’s reinsurance program; an increase in the perceived risk of an insurer’s investment portfolio; a reduced confidence in management or a host of other considerations that may or may not be under an insurer’s control. The current insurance Financial Stability Rating® of UPCIC is from Demotech, Inc. The assigned rating is A. Because this rating is subject to annual re-evaluationcontinuous review, the retention of this rating cannot be assured. A downgrade in or withdrawal of this rating, or a decision by the Board, the Company will follow this advisory voteDemotech to require UPCIC’s parent company to make a capital infusion into UPCIC to maintain its rating, may adversely affect our liquidity, operating results and conduct future advisory votes on executive compensation every three years.financial condition.
Exhibit No. | Exhibit | |
31.1 | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2 | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32 | Certifications of Chief Executive Officer and Chief Financial Officer |
101.INS-XBRL | Instance Document | |
101.SCH-XBRL | Taxonomy Extension Schema Document | |
101.CAL-XBRL | Taxonomy Extension Calculation Linkbase Document | |
101.LAB-XBRL | Taxonomy Extension Label Linkbase Document | |
101.PRE-XBRL | Taxonomy Extension Presentation Linkbase Document |
In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to the Quarterly Report on Form 10-Q shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be part of any registration statement or other document filed under the Securities Act or Exchange Act, except as shall be expressly set forth by specific reference in such filing.
In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
UNIVERSAL INSURANCE HOLDINGS, INC. | ||||||
Date: | /s/ Bradley I. Meier | |||||
Bradley I. Meier, President and Chief Executive Officer | ||||||
Date: May 9, 2012 | /s/ George R. De Heer | |||||
George R. De Heer, Chief Financial Officer
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