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.
On August 29, 2011, we entered into a Management Services Agreement (MSA) with 1347 Advisors, LLC, a wholly-owned subsidiary of Kingsway Financial Services, Inc., a property and casualty insurance company. One of our directors, Larry Swets, serves as the President and Chief Executive Officer of Kingsway, as well as a Managing Director of 1347 Advisors. Mr. Swets also serves as a managing director of the limited liability company that serves as the general partner of Acadia Acquisition Partners, L.P., the parent company of Hamilton Risk Management Co. (HRM). The MSA, which is effective for a six-month period with automatic three-month extensions unless otherwise terminated, stipulates that 1347 Advisors shall provide us with the services of an interim CFO, in addition to actuarial and other analysis services. Hassan Baqar serves as our interim CFO under the MSA. Mr. Baqar also serves as a Managing Director of 1347 Advisors and a Vice President of Kingsway America, Inc., a wholly-owned subsidiary of Kingsway Financial Services, Inc. In exchange for the services, we pay 1347 Advisors a monthly consulting fee of $60 plus any reasonable expenses.
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
Loss Development - This model estimates ultimate losses based on the historical development patterns of losses by accident year. Data known as loss development factors drive the loss-development-based models. We calculate loss development factors by age period (i.e., 12-24 months, 24-36 months, etc.) by taking the total incurred or paid losses
Actual versus Expected Loss Development - This model estimates ultimate losses by adjusting the ultimate losses as projected in the prior period's analysis for the actual experience during the most recent period. For example, if the 2010 actuarial analysis projected that we would pay losses of $1,000 for the 2010 accident year during 2011 for a particular segment, but we actually paid losses of $800 during 2011 for the 2010 accident year for that segment, then we lower estimated ultimate losses for that segment by $200.
Bornhuetter-Ferguson Pure Premium - This model estimates ultimate losses based on earned exposures, expected pure premium and the historical development patterns of 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. Whereas the Actual versus Expected Loss Development model uses a fixed amount (ultimate losses as calculated in the prior year's analysis) as its starting point, this Bornhuetter-Ferguson model uses data from the prior year's analysis to recalculate a starting expectation of ultimate losses based on pure premium. From then on, this model functions like the Actual versus Expected Loss Development model in that we adjust the starting expectation of ultimate losses for the actual experience during the most recent period.
The Bornhuetter-Ferguson model is generally more stable than the loss-development-based models, but this relative strength comes at the cost of less responsiveness to real changes in loss experience.
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 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.
As discussed in Note 2(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 methods described in Note 3. Any change in the estimated fair value of our securities would 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.
ANALYSIS OF FINANCIAL CONDITION - DECEMBER 31, 2011 COMPARED TO DECEMBER 31, 2010
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 at that time rather than in the future because of the uncertainty regarding capital gains taxes and whether the Federal government would increase such taxes. We also believed that interest rates on fixed maturities would begin to increase; therefore, we wanted to have more cash on hand to buy what we expected would be securities with higher interest rates than the interest rates on the securities we sold. Early in 2011, we had not yet found the higher-yield fixed maturities we expected, so we slowly began to reinvest portions of the proceeds from the December 2010 sales in US Treasury securities. Beginning approximately in the late second quarter of 2011, we began to find the higher-yield corporate bonds that we had expected, and we reinvested the remaining portions of the proceeds from the December 2010 sales.
Various states in which we operate require us, by statute, to maintain deposits to secure the payment of claims. The table below summarizes our statutorily-required deposits as of December 31, 2011.
The CD we deposited with the Florida insurance regulatory authority is a twelve-month, automatically renewing CD. The par values of the securities we deposited with the South Carolina and Massachusetts insurance regulatory authorities are $1,000 and $100, respectively.
We entered into the following reinsurance agreements for the period commencing June 1, 2011 through May 31, 2012:
Our catastrophe reinsurance agreements provide us coverage against severe weather events. For our catastrophe reinsurance program, we entered into the Private Agreement for a total premium of $40,774, which was finalized on September 30, 2011 without adjustment. We entered into the FHCF Agreement for a total premium of $33,659. 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. We entered into our RPP Agreement for a premium of $11,509, and our Per Risk Agreement for a premium of $870. See Note 6 in our Notes to Consolidated Financial Statements for additional information regarding our reinsurance program.
We signed our 2011-2012 reinsurance agreements for a cost that exceeded the prior year's contract cost by $2,183. As a result, our prepaid reinsurance costs and reinsurance payable increased over the respective amounts at December 31, 2010.
Two factors primarily caused the $45,169 increase in our gross premiums written: (i) we wrote more policies during 2011, and (ii) previously-discussed rate increases continued to have a positive effect.
Our gross premiums earned increased $25,530 due to the increase in policies written and the effects of the rate increases we implemented.
For the reasons discussed in the Investments subsection of ANALYSIS OF FINANCIAL CONDITION - DECEMBER 31, 2011 COMPARED TO DECEMBER 31, 2010, we reinvested proceeds in 2011 from investment sales we made in December 2010 to realize a specific pool of unrealized gains. Because we had to reinvest the proceeds in low-yield US Treasury securities early in the year and did not begin investing the proceeds in higher-yield fixed maturities until later in the year, we recognized less interest income in 2011 than we did during 2010, primarily contributing to the decrease of $1,056 in net investment income.
Our realized investment gains decreased $4,188 primarily because we did not sell a significant amount of our investment securities during 2011, as we did during 2010.
Our expansion efforts also caused an increase of $2,168 in our general and administrative expenses, primarily due to salary and payroll-related costs which increased $1,071. Salaries increased by $524 because we added a net total of five employees during the year and because we awarded merit increases to most employees. Payroll-related costs increased by $122, mostly a result of increasing health care expenses. We also awarded $425 in bonuses during the year, while we did not award bonuses during 2010. In addition to the increases in salary and payroll-related costs, our use of actuarial and consulting services increased $345 primarily due to additional rate filings and additional loss reserve reviews, our amortization increased $167 because we recorded a full year of amortization on the intangible asset related to the assumption from Sunshine State Insurance Company, and we incurred $110 in fees related to a market conduct exam performed by the Florida insurance regulatory authority during the year.
The impact of wind-mitigation credits continued to suppress the amount of gross premiums we would otherwise have earned, but had less of an effect than it did in the prior year. By the end of 2010, 63% of our policies in force reflected wind-mitigation credits with an impact on premium in force totaling $71,732, while 61% of our policies in force at the end of 2009 reflected the credits with an impact on premium in force totaling $83,108. As we continue to redistribute our policies into areas in which the premium associated with wind peril is less, the impact of wind-mitigations credits on gross premiums earned will also continue to decrease.
Bond interest income decreased because we sold fixed maturities or allowed them to mature in an amount totaling $155,616 throughout 2010. As noted earlier, $52,570 of the $155,616 originated from sales during December 2010, 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 expected would be securities with higher interest rates than the interest rates on the securities we sold.
The increase of $1,778 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 claims incurred during 2010 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.
Although we experienced adverse development on prior accident years, our losses incurred in the 2010 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 2010 accident year incurred losses.
The decrease of $1,250 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.
The increase of $474 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.
Other income (expenses) increased $726 because 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.
We do not conduct any business operations of our own; UPC, UIM, UPC Re and SCS conduct the business operations of the consolidated group. As a result, we rely on cash dividends or intercompany loans from UIM to pay our general and administrative expenses. Insurance regulatory authorities in the states in which we operate heavily regulate UPC, including restricting any dividends paid by UPC and requiring approval of any management fee UPC pays to UIM for services rendered; however, nothing restricts our non-insurance company subsidiaries from paying us dividends other than state corporate laws regarding solvency. Our non-insurance company subsidiaries may pay us dividends from any positive net cash flows that they generate. Our UIM subsidiary pays us dividends primarily using cash from the collection of management fees from UPC, pursuant to a management agreement in effect between those entities.
we paid $8,942 less to our reinsurers than during 2010 because of a change in the reinsurance premium payment schedule in 2010,
we paid $4,360 of income tax deposits during 2011 after making no income tax payments in 2010.
During 2011, we initially recorded a reinsurance premium payable of $86,812 related to our 2011-2012 reinsurance contracts. We paid our reinsurance premium installments of $30,492 during the third quarter of 2011, $39,933 during the fourth quarter of 2011 and we will pay $16,387 during the first four months of 2012.
Under our current reinsurance contracts, should a single hurricane occur, we retain the first $15,000 of losses and LAE, before our reinsurance agreements provide coverage. Should a single, non-hurricane catastrophic event occur, we retain the first $25,000 of losses, before our reinsurance agreements provide coverage. If catastrophe losses exceed our reinsurance coverage, we will be liable for the excess losses as well. We are dependent on the creditworthiness of our reinsurers and if they do not reimburse us for the claims they reinsure, we remain primarily liable for those claims. For additional information regarding our reinsurance coverage, please see Note 6 in our Notes to Consolidated Financial Statements included herein.
During the year ended December 31, 2011, our financing activities used $499 compared to using $27,420 in 2010. The decrease occurred primarily because we retired $22,607 of debt in 2010 while we retired no debt in 2011. We also reduced our bank overdrafts in 2010 by $2,813, while we increased bank overdrafts in 2011 by $1,626.
During May 2011, we became a member of the Federal Home Loan Bank of Atlanta, which provides us access to credit facilities should we choose to make use of financing options. Any use of the credit facilities requires credit approval. In the near term, we do not anticipate a need to access such credit facilities.
The note payable to Florida's State Board of Administration requires UPC to maintain statutory surplus equal to or greater than $50,000 less repayments of principal on the SBA note, catastrophic losses paid since the note originated and any deferred acquisition costs related to Florida policies. At December 31, 2011, the required statutory surplus amount was $41,966. We monitor the surplus as regards policyholders at UPC each quarter and, for various reasons, we occasionally provide additional capital to UPC. During 2011 and 2010, we recorded $3,800 and $4,865 of capital contributions to UPC, respectively. We currently do not foresee a need for any material contributions of capital to UPC; however, any future contributions of capital will depend on circumstances at the time.
Our SBA note requires that we maintain a 2:1 ratio of net written premium to surplus (the SBA note agreement defines surplus as the $20,000 of capital contributed to UPC under the agreement plus the outstanding balance of the note) or a 6:1 ratio of gross written premium to surplus to avoid additional interest penalties. 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. 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 insurance regulatory authority. At December 31, 2011, we were in compliance with the covenants of the SBA note.
We prepare our financial statements in accordance with GAAP; which differs in some respects from reporting practices prescribed or permitted by insurance 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 $5,000. At December 31, 2011, UPC’s surplus as to policyholders was $48,188, exceeding 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, 2011.
On November 9, 2011, our Board of Directors declared a $0.05 per share dividend. We paid the $518 dividend on December 15, 2011 to shareholders of record on November 30, 2011. On March 14, 2012, our Board declared a $0.05 per share dividend. We will pay the $518 dividend on April 5, 2012 to shareholders of record on March 26, 2011. Any future dividends will depend upon circumstances at the time, and our Board must approve and declare any such dividends.
See Note 13 in our Notes to Consolidated Financial Statements for a discussion of our related party transactions, including those with HRM and 1347 Advisors.
The insurance regulatory authorities in Florida, South Carolina and Massachusetts have authorized UPC to write homeowner and dwelling property and casualty lines, as well as flood coverage under the National Flood Insurance Program. In 2011, the insurance regulatory authority in Rhode Island authorized UPC to write in that state, and UPC has applied to insurance regulatory authorities in two additional states to write property and casualty lines. Though the insurance 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.
We operated exclusively in Florida until July 1, 2010, when we began writing our policies in South Carolina. We also assumed a book of business in South Carolina from Sunshine State Insurance Company as of July 1, 2010, representing $5,294 of in-force homeowner premium. On November 1, 2011, we began writing policies in Massachusetts. We expanded outside of Florida to reduce our geographic concentration of exposure to catastrophic losses and our geographic concentration of credit risk.
We reclassified certain amounts in the 2010 and 2009 financial statements to conform to the 2011 presentation. These reclassifications had no impact on our results of operations, cash flows or stockholders' equity as previously reported.
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, 2011, and 2010. Changes in interest rates subsequent to December 31, 2011, may affect the fair value of our investments.
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, except for assumed commissions. 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.
We classify our property and equipment, which we record at cost less accumulated depreciation and amortization, within other assets on our Consolidated Balance Sheets because the total net amount ($223 at December 31, 2011) is not material to our consolidated financial statements. 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.
We capitalize certain direct development costs associated with internal-use software related to our policy administrator and, because the total amount ($872 at December 31, 2011) is not material to our consolidated 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.
On our Consolidated Balance Sheets, we report our reserves for unpaid losses gross of the amounts related to unpaid losses recoverable from reinsurers. On our Consolidated Statements of Income, we report losses net of amounts ceded to reinsurers. We do not discount our loss reserves for financial statement purposes.
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
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 bad debt expense related to reinsurance during the years ended December 31, 2011, 2010 or 2009.
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. Prior to the expiration of our warrants, we used the treasury stock method to calculate common stock equivalents.
a concentration in our distribution network because two agency groups provide approximately 55% of our direct premiums written
a geographic concentration resulting from the fact that, though we now operate in three states, we still write approximately 95% of our premium in Florida
With regard to our cash, we had $3,299 and $55,443 in excess of Federal Deposit Insurance Corporation (FDIC) insurance limits at December 31, 2011, and December 31, 2010, respectively. For calendar years 2011 and 2012, the FDIC expanded its insurance coverage to 100% of any amount in a non-interest-bearing deposit account. As a result, the only uninsured cash amount we had as of December 31, 2011 related to our interest-bearing money market account.
In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. The amendments in ASU No. 2011-05 give entities the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The amendments in ASU No. 2011-05 become effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. Since we already present the total of comprehensive income, the components of net income, and the components of other comprehensive income in a single continuous statement as specified by the amendments, our adoption of ASU No. 2011-05 did not have a material effect on our consolidated financial statements.
In December 2011, the FASB issued ASU No. 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. The amendments in ASU No. 2011-12 delay the effective date of certain provisions in ASU No. 2011-05 that relate to reclassification items until such time as the Financial Accounting Standards Board has time to re-deliberate the presentation of those items. All other provisions of ASU No. 2011-05 take effect on the date originally noted in that ASU.
When we sell investments, we calculate the gain or loss realized on the sale by comparing the sales price (fair value) to the cost or adjusted/amortized cost of the security sold. We determine the cost or adjusted/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, 2011, 2010 and 2009:
The following table presents an aging of our unrealized investment losses by investment class:
The following table presents the fair value measurements of our financial instruments by level at December 31, 2011 and December 31, 2010:
For a single hurricane catastrophe, we have chosen to pay, or “retain”, the first $15,000 of catastrophe losses before our reinsurance contracts provide coverage. For a second catastrophe, we would also retain the first $15,000 of catastrophe losses. Our agreements will reimburse us as much as $520,000 for the first event.
Our agreement with the FHCF allows for one reinstatement of coverage provided by the LAC 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. The
FHCF LAC 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 RPP 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 and 70% on the second private layer. Our agreement with the FHCF does not provide for reinstatement of the coverage provided by the Mandatory or TICL layers.
For the Garage program that we discontinued as of May 31, 2009, 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 $(48), $924 and $405 for the years ended December 31, 2011, 2010, and 2009, 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 $377, $516, and $436, for the years ended December 31, 2011, 2010 and 2009, respectively.
We amortize our prepaid reinsurance premiums over the annual agreement period, and we record that amortization in ceded premiums earned on our unaudited 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:
Effective June 1, 2011, we commuted our 2005 contract with the FHCF; any catastrophe losses we incur (in excess of amounts we reported to the FHCF as of June 1, 2011) on events that occurred during the 2005 contract year that would otherwise have been covered by the FHCF contract prior to commutation will not be reimbursed by the FHCF, though our contracts with our private reinsurers remain in effect with respect to such losses. We settled all outstanding claims with the FHCF related to Hurricane Wilma for $12,738, which we received during the third quarter of 2011. At the time we commuted the contract, our reinsurance recoverable included $13,630 of unpaid losses related to Hurricane Wilma. As a result of settling for less than what we had already recorded as ceded losses, our catastrophe losses incurred for prior accident years increased by $892 during the second quarter.
During the years ended December 31, 2011, 2010 and 2009, we recognized recoveries totaling $22,278, $17,447 and $18,938, respectively, under our reinsurance agreements.
We executed the 20-year, $20,000 note payable to the SBA under its Insurance Capital Build-Up Incentive Program, effective October 1, 2006. The stated rate for the SBA note is a rate equivalent to the 10-year U.S. Treasury Bond rate. We made quarterly interest-only payments for the first three years, then, as of October 1, 2009, we began making quarterly principal and interest payments.
a writing ratio based on gross written premium to surplus of 6:1 ratio for the year beginning January 1, 2010 and thereafter for the remaining term of the note agreement.
The SBA note states that if we fail to exceed either a net writing ratio of 1:1 or a gross writing ratio of 3:1 for three consecutive quarters, we will be obligated to repay a portion of the SBA note such that the appropriate minimum writing ratio will be obtained for the following quarter. 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, the insurance regulatory authority in Florida would only authorize a payment to the SBA if such payment did not create a hazardous financial condition at UPC.
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 2007; therefore, only the 2008 through 2011 tax years remain subject to examination by taxing authorities. No taxing authorities are currently examining any of our federal or state income tax returns.
As of December 31, 2011, we have not taken any uncertain tax positions with regard to our tax returns.
The insurance industry is heavily-regulated. State laws and regulations, as well as national regulatory agency requirements, govern the operations of all insurers such as UPC. The various laws and regulations require that insurers maintain minimum amounts of statutory surplus and risk-based capital, they restrict insurers' ability to pay dividends, they specify allowable investment types and investment mixes, and they subject insurers to assessments.
Our UPC subsidiary is domiciled in Florida, and the laws of that state require that UPC maintain capital and surplus equal to the greater of 10% of its total liabilities or $5,000. Our statutory capital surplus was $48,188 at December 31, 2011. State law also requires UPC to adhere to prescribed premium-to-capital surplus ratios, with which we were in compliance at December 31, 2011.
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 insurance regulatory authorities could require an insurer to cease operations in the event the insurer fails to maintain the required statutory capital. At December 31, 2011, UPC exceeded the 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, 2011, and 2010.
The table below summarizes the activity related to assessments levied upon UPC:
The note payable to the SBA is considered a surplus note pursuant to statutory accounting principles. As a result, UPC is subject to the authority of the Insurance Commissioner of the State of Florida with regard to its ability to repay principal and interest on the surplus note. Any payment of principal or interest requires permission from the insurance regulatory authority.
Statutory accounting requires that we calculate deferred income taxes differently than we would under GAAP.
The table below reconciles our consolidated GAAP net income to the statutory net loss of UPC:
In 2003, we entered into an investment-management agreement, in effect until terminated by either party, with Synovus Trust. For the years ended December 31, 2011, 2010 and 2009, our subsidiaries incurred combined fees under the agreement of $85, $101 and $109, respectively. Synovus Financial Corporation (Synovus) owns Synovus Trust, which provides investment-management services for the investment accounts of our subsidiaries. On September 28, 2011, Synovus, which owned 14.9% of our common stock outstanding, sold all shares of our common stock that it owned.
Our Chairman of the Board also serves as a director of Prime Holdings Insurance Services, Inc. On May 4, 2010 we received the final payment of $402 on the note receivable from Prime.
The table below details the components of accumulated other comprehensive income (loss) at year end:
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 Board of Directors may determine from time to time. As of December 31, 2011, we had not issued any shares of preferred stock.
We are a legal entity separate and distinct from our subsidiaries. As a holding company, we rely on cash received in the form of distributions, dividends and other permitted payments from our subsidiaries to meet our obligations. While there are no restrictions on distributions from UIHC, dividends from UPC have certain restrictions (see Note 10).
On October 4, 2011, all outstanding warrants to purchase shares of our common stock expired.
On November 9, 2011, our Board declared a $0.05 per share dividend. We paid the $518 dividend on December 15, 2011 to shareholders of record on November 30, 2011.
On March 14, 2012, our Board declared a $0.05 per share dividend. We will pay the $518 dividend on April 5, 2012 to shareholders of record on March 26, 2011. Other than the aforementioned dividend declaration, we have not identified any other issues requiring disclosure.