We are a smaller reporting company as defined in Rule 12b-2 of the Exchange Act; therefore, pursuant to Regulation S-K we are not required to make disclosures under this Item.
We write property and casualty insurance lines in Florida and South Carolina through our insurance subsidiary, UPC. We offer standardized policies for a broad range of exposures, and our policies include coverage options for standard single-family homeowners, tenants (renters), and condominium unit owners. We also write flood policies, on which we earn a commission while retaining no risk of loss, in all states in which we write our other products.
Though we have authorization to write a commercial line of business in Florida that includes auto and multi-peril coverage, we discontinued writing this business after May 31, 2009.
Effective June 1, 2010, the South Carolina state regulatory authority approved UPC to write and service property and casualty lines in South Carolina. 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.
To reach a broad range of prospective policyholders, we use numerous agents to produce policies for us, and we also assume policies from Citizens. We refer to policies produced by our agents as direct policies or direct business. Direct policies and policies assumed from Sunshine State represent 84% of our homeowner policies in force at December 31, 2010, and we assumed the remaining 16% from Citizens under assumption programs that ended prior to 2010. At December 31, 2010, we had approximately 80,500 homeowner policyholders, a decrease of 13% over the number of policyholders at December 31, 2009. This decrease resulted from our efforts to mitigate our risk exposure through the non-renewal of selected policies that did not conform to our exposure management plan.
During the fourth quarter of 2009, we filed for an additional rate increase to partially offset our higher reinsurance costs. The Florida state regulatory authority approved an overall 14% rate increase for our Protector Homeowner Program that became effective in March 2010, and an overall 14.7% rate increase for our Guardian Dwelling Fire Program that became effective in April 2010.
The Florida state regulatory authority recently approved our application for an average 15.9% rate increase that we expect to implement on Florida policies during the second quarter of 2011. Applying a rate increase to all policies that were in force on the date the increase became effective takes as long as a year, and then we must recognize the increased premium pro rata over 12 months; therefore, rate increases may take as long as two years to fully impact net income.
We accounted for the merger as a reverse acquisition and recapitalization since UIH was deemed to be the acquirer for accounting purposes. Accordingly, our historical consolidated financial statements reflect the assets, liabilities and operations of UIH prior to the merger date, recorded on a historical cost basis. We then recorded UIHC’s (formerly FMG's) assets and liabilities at their fair value on the date of the merger.
We paid cash of $15,740 pursuant to agreements to repurchase 1,980,671 shares of our common stock on September 29, 2008.
UIH paid a non-tax related distribution of $2,000 to its members as permitted in the Amended and Restated Agreement and Plan of Merger.
When we prepare our consolidated financial statements and accompanying notes in conformity with GAAP, we are required to make estimates and assumptions about future events that affect the amounts reported. Certain of these estimates result from judgments that can be subjective and complex; therefore, our actual results may differ, perhaps substantially, from the estimates.
Reserves for loss incurred but not reported (IBNR reserves) - We estimate IBNR reserves by projecting the ultimate losses using the methods discussed below and then deduct actual loss payments and case reserves from the projected ultimate losses. We review and adjust our IBNR reserves on a quarterly basis based on information available to us at the balance sheet date.
We determine our ultimate loss reserves by selecting a point estimate within a relevant range of indications that we calculate using generally accepted actuarial techniques. Our selection of the point estimate is influenced by the analysis of our paid losses and incurred losses since inception. For each accident year, we estimate the ultimate incurred losses for both known and unknown claims. In establishing this estimate, we calculate high, low, and expected values from the distribution of ultimate loss estimates compiled from the results of the paid and incurred loss development models discussed below.
Incurred Loss Development - This model estimates ultimate losses based on the historical development patterns of incurred losses by accident year. Incurred losses are defined as paid losses plus case reserves.
The strength of this method is its ease of use and comparability to industry benchmarks while its weakness is the potential for volatility in the calculated factors as well as an element of subjectivity in the selected factors. The volatility can arise from a number of factors such as inflation, changes in reserving practices, changes in underwriting criteria and geographic concentration.
Paid Loss Development - This model estimates ultimate losses based on the historical development patterns of paid losses by accident year.
During 2010, we used the estimated ultimate number of claims closed with payment for sinkhole claims in the Incurred Bornhuetter-Ferguson Severity model rather than the estimated ultimate number of claims; making the change prevents the number of sinkhole claims closed without payment from skewing the model's output. Also during 2010, we replaced the Incurred Bornhuetter-Ferguson Loss Ratio model with the Incurred Bornhuetter-Ferguson Pure Premium model. Earned premium affects the results of the Incurred Bornhuetter-Ferguson Loss Ratio model, and changes in premium rates affect earned premium; therefore, we decided that the results of the model would be unnecessarily skewed by the several recent rate increases we have implemented. Additionally, we believe that pure premium provides a better basis for estimating ultimate losses than does earned premium.
The main drivers in the Loss-Development models are the selected development factors. Development factors are calculated by age period (i.e., 12-24 months, 24-36 months, etc.), by taking the current year’s total incurred or paid losses for the particular accident year and dividing by the prior year’s total incurred or paid losses for the particular accident year. Averages of the resulting development factors in each age period are calculated, such as the three-year average, five-year average, cumulative average, and cumulative average excluding the high and low. An evaluation of the calculated development factors and their resulting averages is performed and judgment is used to select a particular development factor per age period. The selected development factors are used to project expected ultimate losses by accident year.
Reliance and Selection of Methods. Though all four of the models described above produce substantially similar results in our case, we rely heavily on our loss-development models when calculating our estimate of ultimate losses. Our focus on the two loss-development models is justified because of the relative responsiveness of those, the fact that the Bornhuetter-Ferguson models are not expected to produce materially different results, and the short-tailed nature of our book of business. (A “short-tailed” line of business is one in which claims are reported and settled quickly following the occurrence of a loss). Ultimately, this means the main assumptions of the loss-development models, the selected loss development factors, represent the most critical aspect of our loss reserving process. We use the same set of loss development factors in the models during our loss reserving process that we also use to calculate the premium necessary to ensure we are always earning enough premiums to pay expected ultimate losses.
many variables. We believe a reasonably-likely change in almost any of these aforementioned factors could have an impact on our reported results, financial position and liquidity. However, we do not believe any reasonably likely changes in the frequency or severity of claims would have a material impact on us.
The assessment of whether an other-than-temporary impairment (OTTI) exists involves a high degree of subjectivity and judgment, and we base our assessment on the information available to us at a given point in time. Significant changes in the factors we consider when evaluating investments for impairment losses could result in a significant change in impairment losses reported within our consolidated financial statements if future events, information and the passage of time cause us to determine that a decline in value is other-than-temporary. Any change in the determination of whether the impairment is temporary or other-than-temporary would affect the amount of OTTI charges we record within our Consolidated Statements of Income and the amount of unrealized loss we record in other comprehensive income within our Consolidated Balance Sheets.
We classify all of our investments as available-for-sale. Our investments at December 31, 2010 and 2009, consist mainly of U.S. government and agency securities and securities of high-quality corporate issuers. Most of the corporate bonds we hold were issued by companies in the consumer products, telecommunications and finance industries. At December 31, 2010, approximately 98% of our fixed-maturities are U.S. Treasury or corporate bonds rated “A” or better and 2% are corporate bonds rated “BBB”. Our equity holdings reflect a similar diversification, as most of our holdings were issued by companies in the energy, healthcare, industrial, consumer products and technology sectors.
During the fourth quarter of 2010, we recorded an impairment charge of $97, after determining that impairments related to three of our equity securities were other-than-temporary. During the first quarter of 2009, we recorded an impairment charge of $1,878 after determining that impairments related to 29 of our equity securities were other-than-temporary. During 2009, after recording the OTTI charge related to the 29 securities, we sold 25 of those securities for a gain of $807; we had recorded a total impairment charge of $1,582 on the 25 securities sold.
As required by various state regulatory authorities, we have placed securities on deposit with those regulatory authorities to secure the payment of our claims. We placed a $300 certificate of deposit, which automatically renews every twelve months and which we recorded in our other long-term investments at December 31, 2010 and 2009, on deposit with the Florida state regulatory authority. We placed a $1,008 fixed maturity and a $98 fixed maturity on deposit with the South Carolina and the Massachusetts state regulatory authorities, respectively, and we recorded these securities in our fixed maturities at December 31, 2010.
Property Catastrophe Second Event Excess of Loss Reinsurance Agreement (Second Event Agreement) between United Property & Casualty Insurance Company and Various Reinsurance Companies
Property Catastrophe Third Event Excess of Loss Reinsurance Agreement (Third Event Agreement) between United Property & Casualty Insurance Company and Various Reinsurance Companies
Reinstatement Premium Protection Reinsurance Agreement (RPP Agreement) between United Property & Casualty Insurance Company and Various Reinsurance Companies
The decrease in notes payable resulted from our effort to reduce our outstanding debt and recognize savings in interest costs. During February 2010, we paid in full the remaining $4,327 principal balance of our note payable to CB&T when the note matured. In May 2010, we paid in full the outstanding $18,280 principal balance on our merger notes that were due to mature in September 2011; we also recognized a loss totaling $726 on the early extinguishment. By extinguishing the merger notes early, we recognized a $409 improvement in our 2010 net income and we expect to realize a $1,006 improvement in our 2011 net income.
The number of our homeowner policies-in-force at December 31, 2010, decreased to approximately 80,500 from approximately 93,000 at December 31, 2009, as a result of our actions to reduce risk exposures.
Ceded premiums earned increased because the cost of our 2008-2009 contracts was $34,528 lower than the cost of our 2009-2010 contracts. As a result, for the first five months of 2009, our reinsurance costs were substantially less than our reinsurance costs for the first five months of 2010. The effect of the increase described was partially offset because we made contractually-allowed reductions to our 2010-2011 reinsurance premium totaling $3,921, while we had to make adjustments to increase our 2009-2010 reinsurance premium by $1,737.
The decrease in our net investment income primarily resulted from a $556 decrease in bond interest income. Also contributing to the overall decline was a $242 decrease in interest income related to our cash and short-term securities due to lower investment yields.
Bond interest income decreased because we sold fixed maturities or allowed them to mature in an amount totaling $155,616 throughout the year. As noted earlier, $52,570 of the $155,616 originated from sales during December, and at December 31, 2010, we were still holding a portion of the proceeds from those December sales and from earlier sales and maturities to reinvest in what we expect will be securities with higher interest rates than the interest rates on the securities we sold.
For the reasons discussed in the TOTAL INVESTMENTS section, we sold a large portion of our investment portfolio to realize gains from those investments. In 2009, we did not sell securities on the scale that we did in the current year.
Other-than-temporary impairments decreased because we only recorded an impairment charge of $97 related to three equity securities in 2010 compared to an impairment charge of $1,878 related to 29 equity securities in 2009.
Although we experienced adverse development on prior accident years, our losses incurred in the current accident year improved. In addition to accident-year decreases in our claims frequency, claims severity and loss incurred per exposure, a decrease in homeowners exposures, coupled with the premium rate increases, impacted the current accident year incurred losses.
The increase in our general and administrative expenses primarily resulted from a $234 increase in professional fees and from $159 of amortization related to the intangible asset that resulted from the assumption of South Carolina policies. The remaining increases were in expense categories that were individually not significant.
Two factors caused the increase in our gross premiums written: (i) an increase in policies-in-force, partially offset by (ii) a decrease in average premium per policy.
Our average premium per policy decreased from $1,930 for 2008, to $1,663 for 2009. The state-imposed wind-mitigation credits primarily caused the decrease per policy of $267, or 14%. In 2008, approximately 45% of our policies included wind-mitigation credits, and that percentage increased to 61% in 2009. See the OVERVIEW section for a more detailed discussion of wind-mitigation credits.
Though gross premiums earned increased by 12%, the impact of wind-mitigation credits continued to suppress the amount we would otherwise have earned. By the end of 2009, 61% of our policies in force reflected wind-mitigation credits with an impact on premium in force of $83,108, while only 45% of our policies in force at the end of 2008 reflected the credits with an impact on premium in force of $47,852. The wind-mitigation credits impacted us so significantly because our underwriting profile focuses on newer homes that would more likely include construction characteristics that would generate wind-mitigation credits. Additionally, our portfolio of risks is skewed towards areas of the state where the policy premium related to wind peril is high.
Our underwriting results were further negatively impacted because the increase in our gross premiums earned was less than that in our homeowners exposures, which increased by 37.9% during 2009. See below for a further explanation of the change in losses incurred.
Our adjusted catastrophe reinsurance costs increased $34,528 for several reasons: (i) our September 30, 2009 total insured value, on which catastrophe reinsurance premium is largely based, increased by approximately 46% over our September 30, 2008 value, (ii) the FHCF increased the attachment point of its mandatory layer; therefore, we purchased more expense private reinsurance up to that revised FHCF attachment point to avoid a gap in coverage, and (iii) the rate reinsurers charged us for certain layers of our catastrophe contracts increased from the prior contract year.
Our net investment income decreased because the interest rates on our cash and cash equivalents were lower; therefore, we earned less interest income.
Prompted by the severe declines in the securities markets in 2008, we decided to begin shifting amounts invested in equity securities to fixed maturities. As a result, we sold more equity securities during 2009, resulting in a change in net realized gains of $517. The remaining change in our net realized gains resulted from routine sales of fixed maturities.
Quarterly during 2009, we performed an assessment of our investment portfolio using the criteria discussed in Note 3(b) in the Notes to Consolidated Financial Statements, and we determined that certain of our equity securities were other-than-temporarily impaired; therefore, we recorded an impairment charge of $1,878 during 2009. We recorded no impairment charge during 2008.
During 2008, we received a bonus from Citizens related to policies we assumed during 2004 and 2005. We did not assume any policies from Citizens during 2006 and 2007, and the agreement we entered into with Citizens during 2008 does not include a bonus provision; therefore, we did not receive any bonuses from Citizens during 2009.
Policy acquisition costs consist of agents’ commissions, policy administration fees and premium taxes. The increase in policy acquisition costs resulted from the increase in policies written during late 2008 and early 2009.
See our Consolidated Statements of Income for a pro forma calculation of the estimated corporate income taxes, based upon a tax rate of 38.6%, which we may have recorded for 2008 if all of our subsidiaries had recorded corporate income tax provisions during that period.
Our operations used cash totaling $7,943 during 2010, compared to generating cash totaling $6,447 during 2009. Our operations used $14,390 more during 2010 than during 2009 primarily because we paid $20,559 more in premiums to our reinsurers and we collected $1,349 less in reimbursements related to catastrophe losses from our reinsurers during 2010 than during 2009. The increase in premium payments primarily resulted from an acceleration in the payment schedule from equal quarterly payments to three equal payments, one every four months. We collected $8,858 more in premiums from our policyholders during 2010 than during 2009, partially offsetting the uses of cash related to our reinsurance, while we experienced no change in the amount of loss payments to our policyholders.
For additional information regarding our reinsurance coverage, please see Note 9 in the Notes to Consolidated Financial Statements included herein.
During February 2010 our note with CB&T matured, so we paid the remaining principle of $4,327 plus accrued interest. During May 2010, we chose to pay off the $18,280 of merger notes. See Note 12 in our Notes to Consolidated Financial Statements for more information regarding our retirement of the two obligations in early 2010.
Our SBA note, which has an interest rate of 2.8% at December 31, 2010, requires us to remit quarterly principal payments of $294 plus accrued interest. During 2010, we paid interest payments of $837. Our SBA note matures on September 30, 2026 and is our only outstanding note payable at December 31, 2010.
We record our financial statements in accordance with GAAP; which differs in some respects from reporting practices prescribed or permitted by state regulatory authorities. To retain our certificate of authority, Florida law requires UPC to maintain surplus as to policyholders equal to the greater of 10% of our total liabilities or $4,000. At December 31, 2010, UPC’s surplus as to policyholders was $48,495, and exceeded the minimum requirements. Florida law also requires UPC to adhere to prescribed premium-to-capital surplus ratios, with which we were in compliance at December 31, 2010.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of United Insurance Holdings Corp. and subsidiaries as of December 31, 2010 and 2009, and the results of its operations and its cash flows for years then ended, in conformity with U.S. generally accepted accounting principles.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of United Insurance Holdings Corp. and subsidiaries as of December 31, 2008, and the results of its operations and its cash flows for the year ended December 31, 2008 in conformity with accounting principles generally accepted in the United States of America.
MEMBERS OF AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS: MANAGEMENT CONSULTING SERVICES DIVISION; SEC PRACTICE SECTION;
FMG Investors, LLC (FMGI) surrendered 179,819 shares of UIHC common stock it owned. We gave no consideration in exchange for the surrendered shares, which we canceled. FMGI also surrendered 179,819 of the common stock warrants that it owned. See Note 17 for a further discussion of FMGI being a related party.
During the first quarter of 2009, we issued a total of 25,000 shares of common stock to two of our officers in exchange for services performed. We recorded $75 of expense related to the transaction.
Through UIH, our wholly-owned subsidiary, and UIH’s three wholly-owned subsidiaries, we write and service property and casualty insurance policies in Florida and South Carolina. The three subsidiaries of UIH, each incorporated under Florida law, include United Property & Casualty Insurance Company (UPC), United Insurance Management, L.C. (UIM) and Skyway Claims Services, LLC (SCS). We operate under one business segment.
We write our own policies throughout both states utilizing our agency network. We occasionally supplement those writings by assuming policies from Citizens Property Insurance Corporation (Citizens), a insurer supported by the State of Florida.
UIM, a managing general agent, manages all aspects of UPC’s operations, including underwriting, policy administration, collections and disbursements, accounting and claims processes.
We prepare our financial statements in conformity with U.S. generally accepted accounting principles (GAAP). While preparing our financial statements, we make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, as well as reported amounts of revenues and expenses during the reporting period. Accordingly, actual results could differ from those estimates. Reported amounts that require us to make extensive use of estimates include our reserves for unpaid losses and loss adjustment expenses, reinsurance recoverable, deferred policy acquisition costs, and investments. Except for the captions on our Consolidated Balance Sheets and Consolidated Statements of Income, we generally use the term loss(es) to collectively refer to both loss and loss adjustment expenses.
Since we accounted for the merger as a reverse acquisition and recapitalization, we have retroactively restated certain equity accounts for the period prior to the merger.
If we determine that an equity security has incurred an other-than-temporary impairment, we permanently reduce the cost of the security to fair value and recognize an impairment charge in our Consolidated Statements of Income. If a debt security is impaired and we either intend to sell the security or it is more likely than not that we will have to sell the security before we are able to recover the amortized cost, then we record the full amount of the impairment in our Consolidated Statements of Income. If we determine that an impairment of a debt security is other-than-temporary and we neither intend to sell the security nor it is more likely than not that we will have to sell the security before we are able to recover its cost or amortized cost, then we separate the impairment into (a) the amount of impairment related to credit loss and (b) the amount of impairment related to all other factors. We record the amount of the impairment related to the credit loss as an impairment charge in our Consolidated Statements of Income, and we record the amount of the impairment related to all other factors in accumulated other comprehensive income.
Premiums receivable represents amounts due from our policyholders for billed premiums and related policy fees. We perform a policy-level evaluation to determine the extent to which the balance of premium receivable exceeds the balance of unearned premium. We then age any resulting exposure based on the last date the policy was billed to the policyholder, and we establish an allowance for credit losses for any amounts outstanding for more than 90 days. When we receive payments on amounts previously charged off, we credit bad debt expense in the period we receive the payment. The balances of our allowance for uncollectible premiums totaled $61 and $370 at December 31, 2010 and 2009, respectively.
We incur policy acquisition costs that vary with, and are directly related to, the production of new business. Policy acquisition costs consist primarily of the following three items: i) commissions paid to outside agents at the time of policy issuance and commissions paid to Citizens for policies assumed, net of commissions refunded for cancelled policies; ii) policy administration fees paid to a third-party administrator at the time of policy issuance; and iii) premium tax. We capitalize policy acquisition costs to the extent recoverable, then we amortize those costs over the contract period of the related policy.
We capitalize certain direct development costs associated with internal-use software related to our policy administrator and, because the total amount ($1,214 at December 31, 2010) is not material to our financial statements, we classify it within other assets on our consolidated balance sheets. We amortize capitalized software costs over the unexpired portion of the contract term. The contract term at the time we put the software into use, which is six years, is the minimum period of time we expect the software to be useful to us.
We estimate our reserves for unpaid losses using individual case-basis estimates for reported claims and actuarial estimates for IBNR claims. Trends in loss severity and frequency may affect our estimated losses, and we continually review and adjust our estimated losses as necessary based on our historical experience and as we obtain new information. If our unpaid loss reserves prove to be inadequate or excessive, we increase or decrease the liability in the period in which we identify the difference, thereby impacting net income. Though our estimate of the ultimate cost of settling all reported and unreported claims may change at any point in the future, a reasonable possibility exists that our estimate may vary significantly in the near term from the estimated amounts included in our consolidated financial statements.
We pay commissions to Citizens for any policies that we assume. We amortize our assumed commissions on a pro rata basis over the 12-month period from the date of assumption, and we amortize any subsequent changes in the amount of commission over the months remaining in the original 12-month period. The assumed commission amounts are recorded as an expense in policy acquisition costs on our Consolidated Statements of Income.
We record guaranty fund and other insurance-related assessments imposed upon us as an expense in the period the regulatory agency imposes the assessment. To recover the assessment, we use a process, created by Florida statute, known as Use and File (South Carolina has not yet imposed any assessments upon us). We calculate and begin collecting a policy surcharge that will allow us to collect the entire assessment over a 12-month period, based on our estimate of the number of policies we expect to write. We then submit a filing to the state regulatory authority requesting formal approval of the policy surcharge. The process may be repeated in successive 12-month periods until we collect the entire assessment. We record the recoveries as revenue in the period that we collect the cash. While current regulations allow us to recover from policyholders the amount of assessments imposed upon us, our payment of the assessments and our recoveries may not offset each other in the same fiscal period in our financial statements.
liabilities in operations in the period that includes the enactment date. Realization of our deferred income tax assets depends upon our generation of sufficient future taxable income.
We record any income tax penalties and income-tax-related interest as income tax expense in the period incurred. We did not incur any tax penalties or income-tax-related interest during the years ended December 31, 2010, 2009 or 2008.
We expense all advertising costs when we incur those costs. For the years ended December 31, 2010, 2009 and 2008, we incurred advertising costs of $783, $712, and $484, respectively.
In June 2009, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 166, Accounting for Transfers of Financial Assets - an amendment of FASB Statement No. 140. In SFAS No. 166, the FASB improves the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor's continuing involvement, if any, in transferred financial assets. In December 2009, the FASB issued Accounting Standards Update (ASU) No. 2009-16, Accounting for Transfers of Financial Assets, which incorporated SFAS No. 166 into the Accounting Standards Codification (ASC). We adopted ASU No. 2009-16 as of January 1, 2010, and our adoption of the changes to the ASC made by ASU No. 2009-16 did not have a material effect on our consolidated financial statements.
In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R). In SFAS No. 167, the FASB replaces the quantitative-based risks and rewards calculation for determining whether an enterprise is the primary beneficiary in a variable interest entity with an approach that is primarily qualitative, requires ongoing assessments of whether an enterprise is the primary beneficiary of a variable interest entity, and requires additional disclosures about an enterprise's involvement in variable interest entities. In December 2009, the FASB issued ASU No. 2009-17, Consolidations (Topic 810), which incorporated SFAS No. 167 into the ASC. We adopted ASU No. 2009-17 as of January 1, 2010, and our adoption of the changes to the ASC made by ASU No. 2009-17 did not have a material effect on our consolidated financial statements.
In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures About Fair Value Measurements. The amendments in ASU 2010-06 add some new disclosures regarding fair value measurements, including information regarding transfers into and out of Level 1 and Level 2, and information about purchases, sales, issuances and settlements of investments that require Level 3 inputs to estimate their fair value. The amendments also clarify certain existing disclosure requirements. The amendments related to the activities in Level 3 measurements shall be effective for fiscal years beginning after December 15, 2010, and interim periods within those fiscal years; we adopted all other amendments as of January 1, 2010. Our adoption of the portions of ASU No. 2010-06 that have already become effective did not have a material effect on our consolidated financial statements, though it expanded our associated disclosures. 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 October 2010, the FASB issued ASU No. 2010-26, Financial Services-Insurance (Topic 944): Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts. The amendments in ASU No. 2010-26 address diversity in practice regarding the interpretation of which costs relating to the acquisition of new or renewal insurance contracts qualify for deferral; they clarify which costs should be deferred and which costs should be expensed when incurred. The amendments in ASU No. 2010-26 become effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. Since we already record deferred acquisition costs as specified by the amendments, we do not expect that our adoption of ASU No. 2010-26 will have a material effect on our consolidated financial statements.
In exchange for 100% of the membership units in UIH, we paid the members of UIH $25,000 cash, we issued 8,929,819 shares of our common stock at a quoted market value of $7.91 per share on September 29, 2008, and we granted warrants to purchase 1,273,569 shares of our common stock at a quoted market value of $0.35 per warrant on September 29, 2008. The warrants are exercisable at $6.00 per share beginning October 4, 2008, and expire on October 4, 2011.
We did not present in our footnotes any pro forma information regarding the effects of the merger as if the merger occurred on January 1, 2007, because UIHC was a blank-check company with no material operations prior to the merger.
When we sell investments, we calculate the gain or loss realized on the sale by comparing the sales price (fair value) to the cost, amortized cost or adjusted cost of the security sold. We determine the cost or amortized cost of the security sold using the specific-identification method. The following tables detail our realized gains (losses) by major investment category for the years ended December 31, 2010, 2009 and 2008:
The table below summarizes our fixed maturities at December 31, 2010, by contractual maturity periods. Actual results may differ as issuers may have the right to call or prepay obligations, with or without penalties, prior to the contractual maturity of those obligations.
During the years ended December 31, 2010 and 2009, we recorded other-than-temporary impairment charges of $97 and $1,878, respectively, after determining that impairments related to certain of our equity investments were other-than-temporary. Since we incurred the impairment charges on our equity securities, we recorded the impairment amount in our Consolidated Statements of Income. We have never recorded an other-than-temporary impairment charge on our debt-security investments. We did not record any other-than-temporary impairment charges in 2008.
During our quarterly evaluations of our securities for impairment, we determined that none of our investments in debt and equity securities that reflected an unrealized loss position were other-than-temporarily impaired. For both the debt and equity securities we own, we noted at December 31, 2010, that many of those for which we did not recognize an impairment charge in prior periods had experienced increases in value resulting from a recovery in the securities markets, and that the issuers had stable financial histories and remained financially stable in the current economic environment. With regard to our debt securities, we neither intend to sell nor is it likely that we would be required to sell the debt securities before we recover our amortized cost basis, and all issuers continue to make interest payments on a timely basis. All the issuers of the equity securities we own, and on which we did not record an impairment charge, had promising near-term prospects that indicated we could recover our cost basis; we also had the ability and the intent to hold these equity securities until their value exceeds their cost. Additionally, most of the securities have recovered to a fair value near our cost.
For our investments in U.S. government securities that do not have prices in active markets, agency securities, state and municipal governments, and corporate bonds, we obtain the fair values from Synovus Trust Company, NA, which uses a third-party valuation service. In our case, the valuation service calculates prices for our investments in the aforementioned security types on a month-end basis by using several matrix-pricing methodologies that incorporate inputs from various sources. The model the valuation service uses to price U.S. government securities and securities of states and municipalities incorporates inputs from active market makers and inter-dealer brokers. To price corporate bonds and agency securities, the valuation service calculates non-call yield spreads on all issuers, uses option-adjusted yield spreads to account for any early redemption features, then adds final spreads to the U.S. Treasury curve at 3 p.m. (ET) as of quarter end. A special cash-discounting yield/price routine then calculates the prices. Since the inputs the valuation service uses in their calculations are not quoted prices in active markets, but are observable inputs, they represent Level 2 inputs.
The table below reflects the diluted weighted-average number of common stock shares outstanding using the treasury stock method:
We have 7,077,375 warrants outstanding; each warrant can be exercised for one share of common stock. For the year ended December 31, 2010, the warrants were anti-dilutive; therefore, we did not include the shares associated with the warrants in the diluted weighted-average shares outstanding reported in the table above. See Note 20 for additional information.
Our catastrophe reinsurance agreements provide us coverage against severe weather events. We entered into excess-of-loss agreements with a group of private reinsurers and with the Florida Hurricane Catastrophe Fund (FHCF). The private agreements provide coverage against severe weather events such as hurricanes, tropical storms and tornadoes. The agreement with the FHCF only provides coverage against storms that the National Hurricane Center designates as a hurricane at landfall.
For the policy year beginning June 1, 2010, we have a private catastrophe reinsurance agreement structured into layers. The coverage provided by one layer picks up (attaches), at the point where coverage under the previous layer ends. Our agreement with the FHCF divides our coverage into three layers: the Limited-Apportionment Company layer, the Mandatory layer and the Temporary-Increase-in-Coverage-Limit layer. The FHCF estimates the amount of coverage provided by their agreement until they are able to determine how many insurers are participating and at what amounts of coverage; they must also verify the data on exposures to be reinsured as submitted by participating insurers. The amount of coverage provided by the FHCF agreement usually changes slightly in the fourth quarter, when the FHCF completes the necessary validations.
For a single non-hurricane catastrophe, we would retain the first $25,000 of catastrophe losses. For a second and a third non-hurricane catastrophe, we would retain the first $5,000 of catastrophe losses for each event. Our agreements will reimburse us as much as $127,200 for the first event.
Our agreement with the FHCF allows for one reinstatement of coverage provided by the limited-apportionment company layer should losses resulting from one hurricane exhaust that coverage, while our agreement with the private reinsurers allows for one reinstatement of coverage on all the private layers should losses resulting from one or more severe weather events exhaust that coverage. Our agreement with the FHCF does not provide for reinstatement of the coverage provided by the other layers. The FHCF limited-apportionment company layer provides for reinstatement of coverage at no additional premium; however, our private agreement requires us to pay 100% additional premium to reinstate the coverage it provides. To protect us in the event a reinstatement of coverage under our private agreement becomes necessary, we purchased a reinsurance premium protection policy. Our reinsurance premium protection policy reimburses us 100% of the amount of any reinstatement premium that we would have to pay to reinstate coverage on the first private layer.
We amortize our prepaid reinsurance premiums over the annual agreement period, and we record that amortization in ceded premiums earned on our Consolidated Statements of Income. The table below summarizes the amounts of our ceded premiums written under the various types of agreements, as well as the amortization of prepaid reinsurance premiums:
The following table depicts written premiums, earned premiums and losses, showing the effects that our reinsurance transactions have on these components of our Consolidated Statements of Income:
Ceded losses incurred decreased by $2,704 during the year ended December 31, 2010 compared to the year ended December 31, 2009 primarily for two reasons: i) losses related to our terminated commercial line of business continue to significantly decline and ii) we have reached or significantly passed the end of the statute of limitations on the filing of claims related to the 2005 and 2004 storm years, so policyholders are neither reporting as many new claims as in the prior year nor are they reopening as many previously-closed claims as in the prior year. The losses we incurred in 2010, 2009 or 2008 related to storms that occurred in those same years did not exceed our retained loss.
Reinsurance recoverable at December 31, 2010 and 2009, consists of the following:
We conducted three policy assumptions under a 2008 assumption agreement with Citizens that terminated during the first quarter of 2010. For the years ended December 31, 2010, 2009 and 2008, we recorded ($17), $1,501 and $5,669 of written premium assumed, respectively, and $23, $240 and $907 of assumed commissions incurred, respectively, on those policies. 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.
ultimately expected to pay Sunshine State for the renewal right. At December 31, 2010 , we increased the value of the intangible asset from $832 at the end of the third quarter to $839 after our quarterly evaluation of renewal rates indicated that the actual renewal rate was better than we estimated at the end of the third quarter. We determined that we will amortize the intangible asset over five years, representing the amount of time we expect the assumed policies to provide us a benefit. During the year ended December 31, 2010, we recorded amortization totaling $159.
The redundancies in 2009 than 2008 resulted from reductions to our estimates of ultimate losses because of favorable loss development on our homeowner line of business.
We agreed to certain covenants, the violation of which could cause an event of default. Among others, these covenants include: 1) maintaining statutory surplus greater than or equal to $50,000 less repayments of principal on the SBA note and less payments of catastrophic losses, 2) refraining from the payment of dividends when principal and/or interest payments related to the note are past due, and 3) maintaining a minimum writing ratio. The amended note permits us to meet either of the following ratios:
As part of the program, the SBA required that we contribute an equivalent amount of capital to UPC; therefore, UIM made a $20,000 capital contribution to UPC at the time we executed the note in 2006. For purposes of calculating the writing ratio on a quarterly basis, the amended note defines surplus as the sum of the $20,000 matching contribution of capital to UPC and the outstanding principal balance of the note. Should we fail to exceed either a net writing ratio of 1.5:1 or a gross writing ratio of 4.5:1, our interest rate will increase by 450 basis points above the stated rate of the note. Any other writing ratio deficiencies result in an interest rate penalty of 25 basis points above the stated rate of the note.
Deferred income taxes, which is included in other assets or other liabilities as appropriate, reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
On our Consolidated Statements of Income, the pro forma computation of income taxes for the year ended 2008 represents the tax effects we would have reported had all of our subsidiaries reported U.S. federal and state income taxes on a consolidated tax return. We based our pro forma estimate upon the statutory income tax rates and adjustments to income for estimated permanent differences occurring during each period. Our actual rates and expenses may have differed had all our subsidiaries actually been subject to U.S. federal and state income taxes for all periods presented. Therefore, we included the pro forma amounts for informational purposes only; we do not intend for the pro forma amounts to be indicative of our results of operations had we been required to file a consolidated tax return that included all of our subsidiaries for all periods presented.
Florida law permits an insurer to pay dividends or make distributions out of that part of statutory surplus derived from net operating profit and 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. Statutory risk-based capital requirements may further restrict UPC’s ability to pay dividends or make distributions if the amount of the intended dividend or distribution would cause statutory surplus to fall below minimum risk-based capital requirements.
Florida law limits an insurer’s investment in equity instruments and also restricts investments in medium to low quality debt instruments. We were in compliance with all investment restrictions at December 31, 2010, and 2009.
Our insurance subsidiary must file with the various state regulatory authorities an “Annual Statement” which reports, among other items, net income (loss) and surplus as regards policyholders, which is called stockholder’s equity under GAAP.
On August 5, 2010, Synovus Bank (Synovus), a Georgia banking corporation filed a lawsuit in the Circuit Court of the Sixth Judicial Circuit in and for Pinellas County, Florida against several defendants, including UIHC and UIH. With respect to UIHC and UIH, the complaint: (1) sought to foreclose on a security interest in membership units of UIH owned by a UIH shareholder named as a defendant, including the proceeds thereof (the United Collateral), (2) sought a declaratory judgment requiring UIHC and UIH to deliver proceeds of the United Collateral to Synovus (including shares of UIHC and warrants to purchase shares of UIHC or the equivalent value thereof in cash, and a cash distribution), (3) alleged tortious interference with a contract between the UIH shareholder named as a defendant and Synovus relating to the United Collateral, (4) sought conversion of the United Collateral, and (5) alleged negligence in connection with the delivery of the United Collateral. Synovus sought unspecified damages and other relief in connection with the foregoing.
See Note 12 for information regarding commitments related to long-term debt, and Note 14 for commitments related to regulatory actions.
Effective October 8, 2003, we entered into an investment-management agreement with Synovus Trust Company, N.A.. The agreement remains in effect until terminated by either party. Synovus Financial Corporation, our largest shareholder, owns Synovus Trust, which provides discretionary investment management services for the investment accounts of our subsidiaries. Synovus owned 14.6% of our outstanding common stock at December 31, 2010, 2009 and 2008. During the years ended December 31, 2010, 2009 and 2008, our subsidiaries incurred combined fees under the agreement of $101, $109, and $104, respectively.
At December 31, 2009, we owed $4,327 to CB&T under a secured loan agreement executed in February 2007; we repaid the $4,327 in February 2010. Synovus owns CB&T. Under the loan agreement, we incurred interest of $19, $147, and $754 for the years ended December 31, 2010, 2009 and 2008, respectively. CB&T charged us standard industry rates.
In March 2008, we amended our letter agreement with Raymond James Financial, Inc., our investment banking advisor; the agreement that remained in effect until consummation of the merger. A person that served as a director of UIH prior to the merger, and who remains a common stockholder after the merger, works for Raymond James as a managing director. During 2008, we incurred fees of $1,646 under the agreement that were related to the merger; therefore, those fees were a portion of the amount by which we reduced equity for direct costs of the merger. We incurred no fees in 2007 under the agreement.
In March 2008, we forgave notes receivable from certain officers in the amount of $100, plus accrued interest of $15.
During the first quarter of 2008, UIH’s Chairman of the Board exercised an option for $63 to purchase 258 additional membership units of UIH. No further UIH equity purchase options exist.
common stock, as well as 179,819 of our common stock shares it owned. We gave no consideration in exchange for the surrendered shares, which we cancelled.
FMGI made available to us a limited-recourse, revolving line of credit totaling $250. The revolving line of credit terminated upon the completion the merger.
We report changes in other comprehensive income items within comprehensive income on the Consolidated Statements of Income, and we include accumulated other comprehensive income as a component of stockholders’ equity on the Consolidated Balance Sheets.
Our Articles of Incorporation authorize us to issue 1,000,000 shares of preferred stock with such designations, voting and other rights and preferences as the BOD may determine from time to time. As of December 31, 2010, we had not issued any shares of preferred stock.
On March 25, 2009, the Compensation Committee of our Board voted to award 12,500 shares of our common stock each to our CEO and our then CFO as a bonus for services performed. We valued the 25,000 total shares at $3.00 per share, which was the closing price of UIHC common stock on March 25, 2009, when the shares were authorized. As a result, we recorded $75 of compensation expense during the year ended December 31, 2009. We do not have a formal stock compensation program as of December 31, 2010.
We have a right to redeem outstanding warrants if the last sales price of the common stock equals or exceeds $11.50 per share, for any 20 trading days within a 30 trading day period ending on the third business day prior to the notice of redemption to warrant holders. If we call the warrants for redemption, our management will have the option to require any holder that wishes to exercise his, her or its warrant to do so on a “cashless basis.” If our management takes advantage of this option, all holders of warrants would pay the exercise price by surrendering his, her or its warrants for that number of shares of common stock equal to the quotient obtained by dividing (x) the product of the number of shares of common stock underlying the warrants, multiplied by the difference between the exercise price of the warrants and the “fair market value” by (y) the fair market value. The right of redemption does not apply to the private warrants held by FMGI, as discussed below.
At December 31, 2010, we had 7,077,375 warrants outstanding to purchase shares of our common stock. The warrants have an exercise price of $6.00 and they expire on October 4, 2011.