During the fourth quarter of 2007, the Florida legislature implemented a program allowing homeowners to qualify for insurance premium discounts called wind-mitigation credits if their insured home meets certain required standards. At December 31, 2010 and 2009, state-imposed wind-mitigation credits depressed our premium in force by $71,732 and $83,108, respectively. To offset the significant impact of the wind-mitigation credits on our underwriting profitability, we implemented an average 12.7% rate increase for policies written under our Protector Homeowner Program in September 2009, and an average 15% rate increase for policies written under our Guardian Dwelling Fire Program in October 2009. We believe that our continuing process of optimizing our risk exposures, which includes shifting policies into areas with less risk of wind peril, will continue to minimize the impact of wind-mitigation credits.
We purchase reinsurance to mitigate the financial impact of catastrophe-related losses. The premium for our 2010-2011 catastrophe reinsurance contracts decreased only slightly from the cost of our 2009-2010 catastrophe reinsurance contracts. See Note 9 in our consolidated financial statements for a more detailed discussion of our reinsurance coverage.
As noted previously, we discontinued our commercial line of business, which represented approximately 1% and 4% of our gross premiums written for 2009 and 2008, respectively. After May 31, 2009, we did not write new, or renew any existing, commercial line policies; however, policies in force as of May 31, 2009 continued in force until they expired on various dates through May 31, 2010.
On January 6, 2011, the Massachusetts state regulatory authority approved UPC to write and service property and casualty lines in Massachusetts.
On September 30, 2008, we completed a merger whereby United Subsidiary Corp., a wholly-owned subsidiary of FMG Acquisition Corp., merged with and into UIH with UIH remaining as the surviving entity. As consideration for the merger, we paid members of UIH an aggregate of $25,000 in cash, issued 8,929,819 shares of our common stock and granted warrants to purchase 1,273,569 shares of our common stock.
We paid the cash consideration for the merger with cash held in our trust account established in connection with our initial public offering, as well as with the net proceeds from the five unsecured notes payable we issued on September 29, 2008 in relation to the merger. We issued the merger notes with a total face amount of $18,280 and, in exchange, we received $10,000 in cash and 869,565 shares of our common stock, valued at $6,878 at the time the notes were issued, from certain accredited investors including two of our former stockholders. We recorded a discount on these notes of $1,401 which we amortized to interest expense through May 5, 2010, the date on which we paid these notes plus accrued interest in full. See Note 12 in our Notes to Consolidated Financial Statements for a further discussion.
As discussed above, we borrowed $10,000 from certain accredited investors and then used this cash to pay $10,039 to holders of 1,267,863 shares of our common stock who did not vote in favor of the merger and elected to have their shares of common stock converted to cash.
FMGI surrendered 179,819 shares of UIHC common stock it owned. No consideration was paid for these surrendered shares and the shares were cancelled. FMGI also surrendered 179,819 of the common stock warrants it owned.
UIH paid to UIHC $5,707 of cash, which was primarily used to repurchase certain shares of our common stock as described above.
When we establish our reserves, we analyze various factors such as our historical loss experience and that of the insurance industry, claims frequency and severity, our business mix, our claims processing procedures, legislative enactments, judicial decisions and legal developments in imposition of damages, and general economic conditions, including inflation. A change in any of these factors from the assumptions implicit in our estimates will cause our ultimate loss experience to be better or worse than indicated by our reserves, and the difference could be material. Due to the correlated nature of the aforementioned factors, there is no precise method for evaluating the impact of any one specific factor in isolation, and an element of judgment is ultimately required. Due to the uncertain nature of any projection of the future, the ultimate amount we will pay for losses will be different from the reserves we record.
We use all of the following actuarial models to estimate our loss reserves.
Incurred Bornhuetter-Ferguson Severity - This model estimates ultimate losses as the sum of cumulative incurred losses and estimated IBNR losses. The model estimates IBNR losses based on expected average severity, estimated ultimate number of claims and the historical development patterns related to incurred losses. We adjust historical loss severities to current levels using severity on-level factors which include a provision for notable changes in average claim costs between accident years 2003 and 2004.
Incurred Bornhuetter-Ferguson Pure Premium - This model estimates ultimate losses based on earned exposures, expected pure premium and the historical development patterns of incurred losses. We use earned exposures as a proxy for the number of risks insured, and we calculate pure premium as the amount of incurred losses divided by earned exposures.
Reasonably-Likely Changes in Variables. As previously noted, we evaluate several factors when exercising our judgment in the selection of the loss development factors that ultimately drive the determination of our loss reserves. The process of establishing our reserves is complex and necessarily imprecise, as it involves using judgment that is affected by
As discussed in Note 3(c) in our Notes to Consolidated Financial Statements, we value our investments at fair value using quoted prices from active markets, to the extent available. For securities for which quoted prices in active markets are unavailable, we use observable inputs such as quoted prices in inactive markets, quoted prices in active markets for similar instruments, benchmark interest rates, broker quotes and other relevant inputs. We do not have any investments in our portfolio which require us to use unobservable inputs. The fair value for our fixed-maturities is calculated by a third-party pricing service using price evaluations and/or matrix pricing. Any change in the estimated fair value of our securities could impact the amount of unrealized gain or loss we have recorded, which could change the amount we have recorded for our investments and other comprehensive income on our Consolidated Balance Sheets.
Quarterly, we perform an assessment of our available-for-sale investments to determine if any are other-than-temporarily impaired. See Note 3(b) in our Notes to Consolidated Financial Statements for further information regarding our impairment testing.
As discussed in Note 4 in the Notes to Consolidated Financial Statements, ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures About Fair Value Measurements, added new disclosures related to activity in investments that require Level 3 inputs to estimate their fair value, which become effective for fiscal years beginning after December 15, 2010, and interim periods within those fiscal years. Since we do not generally maintain investments that require Level 3 inputs to estimate fair value, we do not expect that our adoption of this portion of ASU No. 2010-06 will have a material effect on our consolidated financial statements.
In December 2010, we sold $52,570 of fixed maturities to realize the gains related to those securities. We made the decision to recognize the gains now rather than in the future because of the uncertainty regarding capital gains taxes and whether the Federal government would increase such taxes. We also believe that interest rates on fixed maturities will begin to increase; therefore, we wanted to have more cash on hand to buy what we expect will be securities with higher interest rates than the interest rates on the securities we sold.
The overall change in our net unrealized holding gains (losses) primarily resulted from the realizing of gains on sales of our fixed maturities in December 2010. At December 31, 2010, we had gross unrealized losses of $128 for a period of twelve months or greater. Approximately $47 of gross unrealized losses were related to six fixed maturities for which we have no plan to sell and for which we expect to fully recover our cost basis. The other eight securities are equity securities with total unrealized losses of $81. We reviewed these securities and determined that we did not need to record impairment charges on them at December 31, 2010.
Effective June 1, 2010, we entered into the following reinsurance contracts:
Property Catastrophe Excess of Loss Reinsurance Agreement (Private Agreement) between United Property & Casualty Insurance Company and Various Reinsurance Companies
Florida Hurricane Catastrophe Fund Reimbursement Contract (FHCF Agreement) between United Property & Casualty Insurance Company and the State Board of Administration of Florida
Our catastrophe reinsurance contracts provide us coverage against severe weather events. For our catastrophe reinsurance program, the premiums on our Private Agreement, the Second Event Agreement and the Third Event Agreement totaled $37,366, and the premium on our FHCF Agreement totaled $30,574. The Private Agreement provides coverage against severe weather events such as hurricanes, tropical storms and tornadoes. The FHCF Agreement provides coverage only against storms that are designated as hurricanes by the National Hurricane Center. The premium on our RPP Agreement totaled $12,030 and the premium on our Per Risk Agreement totaled $737. See Note 9 for additional information regarding our reinsurance program.
At December 31, 2010, we owed $14,398 on our 2010-2011 reinsurance agreements, an amount we paid in January 2011. The decrease in the reinsurance payable resulted from two factors: i) an acceleration in the payment schedule of reinsurance premiums on our catastrophe contracts (imposed by reinsurers on all their customers beginning in 2010) from equal quarterly payments to three equal payments, one every four months, and ii) the effect of contractually-allowed reductions we made in October 2010 to our 2010-2011 reinsurance premium totaling $3,921 as compared to adjustments we had to make in October 2009 to increase our 2009-2010 reinsurance premium by $1,737.
Two factors primarily caused the increase in our gross premiums written: (i) an increase in average in-force premium per policy, partially offset by (ii) a decrease in policies-in-force.
Two factors caused the decrease in our gross premiums earned: (i) a $3,833 increase in gross unearned premiums that resulted from our writing $4,066 more during the fourth quarter of 2010 compared to the fourth quarter of 2009, offset by (ii) an increase in gross written premiums discussed above.
The increase in losses incurred during 2010 primarily resulted from $1,006 adverse loss development on prior year claims. The adverse development resulted from claims payments that exceeded prior year estimations and from increases we made to our estimates of ultimate losses on prior year claims. We also increased our estimates of ultimate losses on current year claims as a result of the adverse development described. During 2009, we experienced positive development of $2,976 on prior year claims, mostly related to our homeowners policies.
Policy acquisition costs decreased primarily for two reasons. We amortized less agents' commissions in 2010 as a result of the reduction in premiums written in late 2009 and early 2010. Also, we incurred additional fees from Computer Sciences Corporation in 2009 related to their conversion and processing of data from our former policy administrator; we incurred no such fees during 2010.
The decrease in our operating expenses primarily resulted because we incurred a $1,045 assessment during 2009 that we did not incur during 2010, offset by various changes in other operating expenses.
We recorded a $726 loss on the early extinguishment of our $18,280 merger-related notes during the second quarter of 2010. The $726 represents the unamortized original issue discount that we wrote off upon extinguishing the notes.
Due to our operating loss for the current year, we recorded a benefit for income taxes for 2010 compared to recording tax expense for 2009. Our effective tax rate for 2010 was 34.3%, compared to 35.9% for 2009.
The increase in our gross premiums earned primarily resulted from an increase in policies in force and is closely correlated to the 10% increase in gross premiums written in 2009 compared to 2008.
During 2009, we were assessed $1,045, but had no such assessments during 2008; this primarily contributed to the increase in operating expenses. The remaining increases were in operating and underwriting expense categories that were individually not significant.
During the third quarter of 2008, we recorded $2,564 of other income when we reversed a liability related to a put option associated with UIH membership units. We reversed the put option liability because it ceased to exist by operation of law as a result of our merger.
During 2009, our effective tax rate was 35.9%, compared to 19.7% for the same period in 2008. The 82.2% increase in our effective tax rate primarily resulted from recording corporate taxes on all of our entities during 2009; whereas, until the merger, only UPC recorded a provision for income taxes as the other subsidiaries were treated as partnerships for income tax purposes. Effective October 1, 2008, we recorded a provision for income taxes for all of our subsidiaries because we included all of our subsidiaries in our consolidated corporate income tax return.
We generate cash through premium collections, reinsurance recoveries, investment income and the sale or maturity of invested assets. We use our cash to pay claims and related costs, policy acquisition costs, salaries and employee benefits, other expenses and stockholder dividends, as well as to purchase investments.
In June, we recorded a reinsurance premium payable of $84,628 related to our 2010-2011 reinsurance contracts, and we reduced the total amount to be paid to $80,707 after adjusting our private reinsurance contracts for the difference between the actual amount of total insured value at September 30, 2010 and the amount of total insured value we projected we would have at September 30, 2010; we also recorded a reduction in our FHCF contract premium once we received final data from the FHCF. Though our reinsurance premiums remained relatively flat in relation to the 2009-2010 contracts, we secured more coverage. Our current contracts exclude our participation in any catastrophe losses in excess of our initial retained loss, up to the aggregate limits of coverage, and the contracts include coverage for each of a second and third catastrophic event with lower amounts of retained loss on those events. We paid reinsurance premium totaling $28,209 during the third quarter of 2010, $38,100 during the fourth quarter of 2010 and $14,398 in the first quarter of 2011.
The SBA note requires UPC to maintain statutory surplus equal to or greater than $50,000 less repayments of principal on the SBA note and less payments of catastrophic losses. We monitor the surplus as to policyholders at UPC each quarter and, for various reasons, we occasionally provide additional capital to UPC. During 2010, we recorded $4.9 million of capital contributions to UPC. We currently do not foresee a need for any further material contributions of capital to UPC; however, any future contributions of capital will depend on circumstances at the time.
Our SBA note further provides that the SBA may, among other things, declare its loan immediately due and payable for all defaults existing under the SBA note; however, any payment is subject to approval by the state regulatory authority. At December 31, 2010, except as noted above, we were in compliance with the covenants of the SBA note.
During 2010, we paid $529 of dividends to our shareholders. Our Board of Directors will need to declare any future dividends and authorize payment.
In accordance with Florida law, UPC may pay dividends or make distributions out of that part of statutory surplus derived from its net operating profit and its net realized capital gains. The law further provides calculations to determine the amount of dividends or distributions that can be made without the prior approval of the state regulatory authority and the amount of
dividends or distributions that would require prior approval of the regulatory authority. The risk-based capital guidelines published by the NAIC may further restrict UPC’s ability to pay dividends or make distributions if the amount of the intended dividend or distribution would cause surplus as to policyholders to fall below minimum RBC guidelines. Most states, including Florida, have adopted the NAIC requirements, and insurers having less surplus as to policyholders than required will be subject to varying degrees of regulatory action, depending on the level of capital inadequacy. State regulatory authorities could require us to cease operations in the event we fail to maintain the statutory capital required. At December 31, 2010, UPC's surplus as to policyholders exceeded minimum RBC requirements.
We have audited the accompanying consolidated balance sheets of United Insurance Holdings Corp. and subsidiaries (the “Company”) as of December 31, 2010 and 2009, and the related consolidated statements of income, stockholders' equity, and cash flows for the years then ended. Our audits also included the financial statement schedules of United Insurance Holdings Corp. listed in Item 15. These consolidated financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and schedules based on our audits.
We have audited the accompanying consolidated balance sheet of United Insurance Holdings Corp. and subsidiaries (the “Company”), a Delaware corporation, as of December 31, 2008 and the related consolidated statements of income, consolidated statements of stockholders’ equity, and consolidated statements of cash flows for the year ended December 31, 2008. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
On September 30, 2008, we acquired United Insurance Holdings, L.C. (UIH) and accounted for the transaction as a reverse acquisition and recapitalization since UIH was deemed to be the accounting acquirer. Accordingly, the Consolidated Statements of Cash Flows do not reflect certain transactions that occurred during 2008 prior to the effective date of the Merger. Such transactions include:
We issued 8,929,819 shares of our common stock to the members of UIH, as well as warrants to purchase 1,273,569 shares of our common stock. Each common stock warrant allows the holder to purchase one share of our common stock at an exercise price of $6.00 per share. The warrants became exercisable beginning October 4, 2008, and expire on October 4, 2011.
We repurchased 869,565 shares from two former stockholders by exchanging notes payable for the shares. The notes have a face value of $7,527 and bear interest at 11% per year [these notes were repaid in full during 2010; see Note 12(c)].
United Insurance Holdings Corp. (UIHC, we, us, our), formerly known as FMG Acquisition Corp. (FMG), incorporated under the laws of the State of Delaware. On September 30, 2008, UIHC, United Subsidiary Corp. (merger sub) and United Insurance Holdings, L.C. (UIH) completed a merger whereby merger sub was merged into UIH, with UIH remaining as the surviving entity.
The Florida and South Carolina state regulatory authorities have authorized UPC to write homeowner and dwelling property and casualty lines, as well as flood coverage under the National Flood Insurance Program. Though the state regulatory authority has authorized UPC to write a commercial line of business in Florida that includes auto and multi-peril coverage, we voluntarily discontinued writing that line as of May 31, 2009.
Through June 30, 2010, we operated exclusively in Florida, which subjected us to geographic concentrations of credit risk and risk of catastrophic loss. On July 1, 2010, we began writing our policies in South Carolina, and we also assumed a book of business from Sunshine State Insurance Company representing $5,294 of in-force homeowner premium in South Carolina. We began operating in South Carolina so that we could begin to reduce our geographic concentration of exposure to catastrophic losses, and the assumption from Sunshine State and subsequent renewals of South Carolina policies will also reduce our geographic concentration of credit risk.
SCS provides claims appraisal services, one of several companies that currently provide such services to UPC.
We include all of our subsidiaries in our consolidated financial statements, eliminating all significant intercompany balances and transactions during consolidation. We have reclassified certain amounts in the prior years' financial statements and footnotes to conform to the current year presentation. These reclassifications had no impact on our consolidated financial position, results of operations or cash flows as previously reported.
We currently classify all of our investments in fixed maturities and equity securities as available-for-sale, and report them at fair value. Subsequent to our acquisition of available-for-sale securities, we record changes in value through the date of disposition as unrealized holding gains and losses, net of tax effects, and include them as a component of accumulated other comprehensive income included in stockholders’ equity. We include realized gains and losses, which we calculate using the specific-identification method for determining the cost of securities sold, in net income. We amortize any premium or discount on fixed maturities over the remaining maturity period of the related securities using the effective interest method, and we report the amortization in Net Investment Income. We recognize dividends and interest income when earned.
We estimate the fair value of our investments using the closing prices on the last business day of the reporting period, obtained from active markets such as the NYSE, NASDAQ, and AMEX. For securities for which quoted prices in active markets are unavailable, we use observable inputs such as quoted prices in inactive markets, quoted prices in active markets for similar instruments, benchmark interest rates, broker quotes and other relevant inputs. We do not have any investments in our portfolio which require us to use unobservable inputs. Our estimates of fair value reflect the interest rate environment that existed as of the close of business on December 31, 2010, and 2009. Changes in interest rates subsequent to December 31, 2010, may affect the fair value of our investments.
At each reporting date, we determine whether we have a premium deficiency. A premium deficiency would result if the sum of our expected losses, deferred policy acquisition costs, and policy maintenance costs (such as costs to store records and costs incurred to collect premiums and pay commissions) exceeded our related unearned premiums plus investment income. Should we determine that a premium deficiency exists, we would write off the unrecoverable portion of deferred policy acquisition costs.
Because the total net amount ($296 at December 31, 2010) is not material to our financial statements, we classify our property and equipment, which we record at cost less accumulated depreciation and amortization, within other assets on our consolidated balance sheets. We use the straight-line method of calculating depreciation over the estimated useful lives of the assets, which are three to five years. We also use the straight-line method to calculate amortization of leasehold improvements over the estimated useful lives of the assets or the term of the lease, whichever is shorter. We periodically review estimated useful lives and, where appropriate, we make changes prospectively. We charge maintenance and repair costs to expense as incurred.
Our policy fees consist of the managing general agent fee and a pay-plan fee. Florida law allows managing general agents to charge policyholders a $25.00 fee on each policy written; we defer such fees as unearned revenue and then include them in income on a pro rata basis over the term of the underlying policies. We record our pay-plan fees, which we charge to all policyholders that pay their premium in more than one installment, as income when collected. We report all policy-related fees in other revenue on our Consolidated Statements of Income.
We estimate uncollectible amounts receivable from reinsurers based on an assessment of factors including the creditworthiness of the reinsurers and the adequacy of collateral obtained, where applicable. We recorded no allowance for uncollectible reinsurance during the years ended December 31, 2010, 2009 or 2008.
Prior to consummation of the merger, UIH had elected to be treated as a partnership for income tax purposes; therefore, the members of UIH reported all taxable income and tax credits attributable to UIH and its two limited liability company subsidiaries, UIM and SCS, on the members’ individual tax returns. Our UPC subsidiary has recorded income taxes since its inception.
Effective October 1, 2008, we entered into a tax sharing agreement with each of our subsidiaries and we began filing consolidated tax returns. Under the tax sharing agreement, we allocate taxes to each subsidiary in proportion to the amount of taxable income that each subsidiary contributes to the consolidated taxable income. The income tax provision included in these statements is attributable to UPC for periods through the merger date and to all entities after the merger date.
We report both basic earnings per share and diluted earnings per share. To calculate basic earnings per share, we divide net income by the weighted-average number of common stock shares outstanding during the period. We calculate diluted earnings per share by dividing net income by the weighted-average number of common stock shares and common stock equivalents outstanding during the period. We use the treasury stock method to calculate common stock equivalents.
Though we now operate in Florida and South Carolina, we still write more than 95% of our business in Florida, which subjects us to a geographic concentration of credit risk. We are also subject to a group concentration of credit risk with regard to our reinsurance recoverable, since all of our reinsurers engage in similar activities and have similar economic characteristics that could cause their ability to repay us to be similarly affected by changes in economic or other conditions. We mitigate both risks by entering into reinsurance contracts with financially-stable reinsurers, and by securing irrevocable letters of credit from reinsurers when necessary.
Additionally, all of our cash is on deposit at two financial institutions, one of which is a subsidiary of a company that is our largest shareholder. Consequently, we are subject to a concentration of credit risk with regard to our cash. We had $55,443 in excess of federal government insured limits at December 31, 2010. Our cash deposits were fully insured at December 31, 2009.
The following table details the difference between cost or amortized cost and estimated fair value, by major investment category, at December 31, 2010, and 2009:
In the first quarter of 2008, we sold one of our investments in common stock back to the issuing company, a related party known as Prime Holdings Insurance Services, Inc., in exchange for a note receivable in the amount of $1,133. We recorded $133 of unearned gain at the time of the sale. When Prime Holdings paid the first installment in 2008, we recognized $45 of gain and when they paid the second installment in 2009, we recognized $44 of gain. We recognized the remaining $44 of unearned gain when Prime Holdings paid the final installment in May 2010. See Note 17 for additional information.
The following table presents the fair value measurements of our financial instruments by level at December 31, 2010:
We follow industry practice of reinsuring a portion of our risks. Reinsurance involves transferring (ceding), all or a portion of the risk exposure on policies we write to another insurer, known as a reinsurer. To the extent that our reinsurers are unable to meet the obligations they assume under our reinsurance agreements, we remain liable for the entire insured loss.
With regard to all of our reinsurance agreements, we retain aggregate catastrophe losses, from all events, exceeding our reinsurance coverage.
Our non-catastrophe reinsurance agreement provides excess-of-loss coverage for losses arising out of property business up to $1,700 in excess of $1,000 per risk. Should a loss recovery, or series of loss recoveries, exhaust the coverage provided under the agreement for losses arising out of property business, one reinstatement of the $1,700 of coverage limit is included at 50% additional premium. The agreement, including reinstatements, provides aggregate coverage of $3,400 for losses arising out of property business, while any single occurrence is limited to $1,700. The agreement also provides coverage for losses arising out of a combination of property and casualty business up to $2,200 in excess of $1,000 per occurrence, subject to a maximum recovery on any one loss occurrence, regardless of the number of risks involved for property or the number or type of insureds for casualty, of $2,200.
For our discontinued commercial line of business, we entered into quota share reinsurance agreements for policy years prior to the 2009-2010 policy year, but we did not enter into a new quota share agreement after July 31, 2009. We recognized commission revenue on our previous quota share agreements totaling $924, $405 and $606 for the years ended December 31, 2010, 2009 and 2008, respectively.
We write flood insurance under an agreement with the National Flood Insurance Program. We cede 100% of the premiums written and the related risk of loss. We earn commissions for the issuance of flood policies based upon a fixed percentage of net written premiums and the processing of flood claims based upon a fixed percentage of incurred losses, and we can earn additional commissions by meeting certain growth targets for the number of in-force policies. We recognized commission revenue from our flood program of $516, $436 and $337 for the years ended December 31, 2010, 2009 and 2008, respectively.
During the years ended December 31, 2010, 2009 and 2008, we recognized recoveries totaling $17,447, $18,938 and $16,606, respectively, under our reinsurance agreements.
As part of an assumption agreement with Citizens that ended in 2006, we received bonuses for policies assumed from Citizens during multiple assumptions in 2004 and 2005. During the year ended December 31, 2008, we recognized policy assumption bonus income of $6,493, which included $791 of interest income, from the 2005 assumptions.
On July 1, 2010, we assumed all of Sunshine State's in-force homeowners policies in South Carolina. For the year ended December 31, 2010, we recorded $2,779 of written premium assumed and $293 of assumed commissions incurred on those policies. Unlike the assumptions we made from Citizens, policyholders cannot "opt out" of our assumption from Sunshine State. For the right to assume and renew their in-force homeowners policies in South Carolina, we agreed to pay Sunshine State $300, plus as much as an additional $700 depending upon the renewal rate of the policies we assumed. Based on an analysis of our historical renewal rates for similar policies, we initially recorded an intangible asset of $860, representing the amount we
Based upon our internal analysis and our review of the statement of actuarial opinion provided by our independent actuarial consultants, we believe that the reserve for unpaid losses reasonably represents the amount necessary to pay all claims and related expenses which may arise from incidents that have occurred as of the balance sheet date.
As reflected by our losses incurred related to prior years, we had a reserve deficiency in 2010 compared to a reserve redundancy in 2009. The deficiency resulted from increases we made to our estimates of ultimate losses on prior year claims because payments on prior year claims exceeded our estimates.
At December 31, 2010, our net writing ratio was 1.7:1 and our gross writing ratio was 4:1, resulting in a default on the note. Since we did not meet either writing ratio established by the SBA, we must pay additional interest of 25 basis points during the first quarter of 2011.
During the first three quarters of 2008, we incurred an additional 450 basis points of interest expense as we did not meet the writing ratio as stated in the initial note agreement with the SBA during the fourth quarter of 2007 and the first two quarters of 2008. From the third quarter of 2008 through the end of 2009, we complied with the required writing ratios; however, since the
increase in the required writing ratios beginning in January 2010, we have not met the required writing ratios and have incurred a 25 basis point interest penalty each quarter.
At December 31, 2009, UIH agreed to contribute $2,000 to UPC to ensure that UPC remained in compliance with the minimum surplus covenant. On February 23, 2010, UIH funded the capital contribution. We also complied with each of the other loan covenants at December 31, 2010.
As of December 31, 2010, the annual maturities of our long-term debt are as follows:
In February 2007, we entered into a $33,000 loan agreement with CB&T, a related party. On February 16, 2010, we paid the final installment of $4,327 plus accrued interest that was due on the CB&T note. Therefore, we no longer have any amounts outstanding related to the CB&T note.
On August 15, 2008, we entered into a note purchase agreement with five noteholders. Upon approval of the merger on September 29, 2008, we issued unsecured notes payable with a total face amount of $18,280. On May 5, 2010, we paid the notes in full by remitting $18,475, inclusive of principal plus accrued interest of $195, to the noteholders. We recognized a $726 loss on the extinguishment of the notes due to the write off of the unamortized original issue discount.
On September 10, 2006, UIH and York Enhanced Strategies Fund, LLC entered into a $20,000 loan agreement. In connection with the transaction, York received a 4.75% equity interest in UIH and entered into a redeemable Put Agreement with UIH. When the merger between FMG and UIH became effective, York exchanged its ownership interest in UIH, including the ability to exercise the put option, for the merger consideration. To account for the fact that the put option no longer represented a liability to us as of the close of the merger, we reversed the liability of $2,564 we had recorded prior to the merger and recorded it in Other Income on our Consolidated Statements of Income.
The actual income tax expense differs from the “expected” income tax expense computed by applying the combined applicable effective federal and state tax rates to income before the provision for income taxes as follows:
The table below summarizes the significant components of our net deferred tax asset:
The statute of limitations related to our consolidated Federal income tax returns and our Florida income tax returns expired for all tax years up to and including 2006; therefore, only the 2007 through 2010 tax years remain subject to examination by taxing authorities. No taxing authorities are currently examining any of our Federal or Florida income tax returns.
As of December 31, 2010, we have not taken any uncertain tax positions with regard to our tax returns.
Florida law requires that UPC maintain capital and surplus equal to the greater of 10% of its total liabilities or $4,000. Our statutory capital surplus was $48,495 at December 31, 2010. State law also requires UPC to adhere to prescribed premium-to-capital surplus ratios, with which we were in compliance at December 31, 2010.
The National Association of Insurance Commissioners published risk-based capital guidelines for insurance companies that are designed to assess capital adequacy and to raise the level of protection that statutory surplus provides for policy holders. Most states, including Florida, have enacted the NAIC guidelines as statutory requirements, and insurers having less statutory surplus than required will be subject to varying degrees of regulatory action, depending on the level of capital inadequacy. State regulatory authorities could require an insurer to cease operations in the event the insurer fails to maintain the required statutory capital. At December 31, 2010, UPC exceeded the minimum risk-based capital requirements.
State agencies can also levy assessments upon policyholders, and we collect the amount of the assessments from policyholders as surcharges for the benefit of the assessing agency.
Because UPC issued a surplus note as defined by statutory accounting principles, as discussed in Note 12(a), we are subject to the authority of the Insurance Commissioner of the State of Florida with regard to our ability to repay principal and interest on the surplus note. Any payment of principal or interest requires permission from the state regulatory authority.
Statutory accounting requires that surplus notes, also known as surplus debentures, be recorded in statutory surplus, while GAAP requires us to record surplus notes as a liability.
We are involved in claims-related legal actions arising in the ordinary course of business. We accrue any amounts resulting from claims-related legal actions in unpaid losses and loss adjustment expenses during the period in which we determine that an unfavorable outcome becomes probable and that we can estimate the amounts. Management revises our estimates based on its analysis of subsequent information that we receive regarding various factors, including: (i) per claim information; (ii) company and industry historical loss experience; (iii) judicial decisions and legal developments in the awarding of damages, and (iv) trends in general economic conditions, including the effects of inflation.
On January 3, 2011, Synovus Bank voluntarily dismissed its case without prejudice against UIH and UIHC. We did not establish any reserves regarding this action because we were not able to predict the probable outcome of the action.
We lease office space and office equipment under operating leases. In June 2008, we entered into a six-year operating lease agreement for office space for our corporate headquarters. The lease provides us with an option for two renewal periods of five
years each. The office equipment leases have various expiration dates. Lease expense amounted to $433, $433, and $241 for the years ended December 31, 2010, 2009 and 2008, respectively. At December 31, 2010, our minimum future lease payments under non-cancellable operating leases are:
Prior to consummation of the merger on September 30, 2008, the owner of two independent insurance agencies that write our policies, Alpha Insurance Management and Comegys Insurance Corner, served on the Board of Directors (Board or BOD) of UIH. During 2008, we incurred board fees and agents’ commissions related to the aforementioned agencies totaling $616. We paid commissions to these agencies based upon standard industry rates. After September 30, 2008, the owner of the aforementioned insurance agencies no longer served as a director, but remains a common stockholder.
We place private reinsurance through BMS Group, Ltd., a broker that employs a person that served as a UIH director until the close of the merger. The reinsurers pay commissions to the broker determined in accordance with industry rates. After September 30, 2008, the aforementioned person no longer served as a director, but remains a common stockholder.
Our Chairman of the Board is also a director of Prime Holdings. Prime Holdings issued us a note receivable in exchange for their common stock that we owned, as discussed in Note 6. During March 2009, we agreed to modify the note receivable from Prime Holdings by delaying the next payment date from May 1, 2009 to July 15, 2009; we received the $452 payment as scheduled on July 15, 2009. We received the final payment of $402 in May 2010.
Two of our directors are among the owners of FMGI, which purchased warrants from us in a private placement prior to our initial public offering. As part of the merger transaction, FMGI surrendered to us warrants to purchase 179,819 shares of our
We provide a 401(k) plan for substantially all of our employees. We match 100% of the first 5% of employees’ contributions to the plan. For the years ended December 31, 2010, 2009 and 2008, our contributions to the plan on behalf of the participating employees were $87, $81, and $80, respectively.
On September 29, 2008, we amended our Articles of Incorporation to increase the number of authorized shares of our common stock from 20,000,000 to 50,000,000 with a $0.0001 par value per share.
See the section entitled Supplemental Cash Flows Information on our Consolidated Statements of Cash Flows regarding transactions relating to our capital stock that occurred in connection with the merger with UIH.
Prior to the merger, and in accordance with the UIH Members Agreement, UIH provided cash distributions to each of its members on an annual basis to allow each member to pay any federal income tax which may have been owed on the taxable income attributable to the person/entity as a member of UIH. During 2008, UIH paid tax distributions to its members totaling $16,225. Also during 2008, UIH declared and paid a $2,000 non-tax-related distribution to UIH members; the merger agreement specifically authorized the $2,000 distribution.
See our Statements of Income and our Statements of Cash Flows for information regarding dividends declared and dividends paid, respectively.
On March 8, 2011, we assumed 5,912 policies from Citizens, representing in-force premium totaling approximately $10,556. We will record approximately $5,000 of written premium assumed, as well as approximately $800 of assumed commissions incurred once we receive final data from Citizens at the end of March. The amount of written premium assumed and assumed commissions expense we record related to our policy assumptions from Citizens can be affected by policyholder “opt-outs”, policy endorsements and cancellations; however, under current regulations, policyholders have more limited conditions under which they can opt-out when compared to previous assumption programs. As was the case with the assumptions we conducted under the 2008 assumption agreement with Citizens, this current assumption agreement does not allow for any bonuses related to policies assumed.