Attached files
file | filename |
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EX-31.1 - EX-31.1 - UNIVERSAL INSURANCE HOLDINGS, INC. | g26676exv31w1.htm |
EXCEL - IDEA: XBRL DOCUMENT - UNIVERSAL INSURANCE HOLDINGS, INC. | Financial_Report.xls |
EX-32 - EX-32 - UNIVERSAL INSURANCE HOLDINGS, INC. | g26676exv32.htm |
EX-99.1 - EX-99.1 - UNIVERSAL INSURANCE HOLDINGS, INC. | g26676exv99w1.htm |
EX-31.2 - EX-31.2 - UNIVERSAL INSURANCE HOLDINGS, INC. | g26676exv31w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2011
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 001-33251
UNIVERSAL INSURANCE HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware | 65-0231984 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
1110 W. Commercial Blvd., Fort Lauderdale, Florida 33309
(Address of principal executive offices)
(Address of principal executive offices)
(954) 958-1200
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such period that the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See the definitions of large accelerated filer and
accelerated filer in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act) Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as
of the latest practicable date: 39,989,206 shares of common stock, par value $0.01 per share,
outstanding on August 1, 2011.
UNIVERSAL INSURANCE HOLDINGS, INC.
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EX-101 SCHEMA DOCUMENT | ||||||||
EX-101 CALCULATION LINKBASE DOCUMENT | ||||||||
EX-101 LABELS LINKBASE DOCUMENT | ||||||||
EX-101 PRESENTATION LINKBASE DOCUMENT |
2
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To The Board of Directors and Stockholders of
Universal Insurance Holdings, Inc. and Subsidiaries
Fort Lauderdale, Florida
Universal Insurance Holdings, Inc. and Subsidiaries
Fort Lauderdale, Florida
We have reviewed the accompanying condensed consolidated balance sheet of Universal Insurance
Holdings, Inc. and Subsidiaries as of June 30, 2011 and the related condensed consolidated
statements of income for the three and six-month periods ended June 30, 2011 and 2010 and cash
flows for the six-month periods ended June 30, 2011 and 2010. These interim financial statements
are the responsibility of the Companys management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight
Board (United States). A review of interim financial information consists principally of applying
analytical procedures and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board (United States), the objective of which
is the expression of an opinion regarding the financial statements taken as a whole. Accordingly,
we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the
accompanying interim financial statements for them to be in conformity with accounting principles
generally accepted in the United States of America.
/s/ Blackman Kallick, LLP
Chicago, Illinois
August 5, 2011
3
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. | Financial Statements |
UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except per share data)
(in thousands, except per share data)
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
ASSETS: |
||||||||
Cash and cash equivalents |
$ | 356,739 | $ | 147,585 | ||||
Investment securities, at fair value |
95,945 | 224,532 | ||||||
Prepaid reinsurance premiums |
253,582 | 221,086 | ||||||
Reinsurance recoverables |
77,203 | 79,552 | ||||||
Premiums receivable, net |
52,020 | 43,622 | ||||||
Receivable from securities |
20,505 | 17,556 | ||||||
Other receivables |
3,562 | 2,864 | ||||||
Property and equipment, net |
6,087 | 5,407 | ||||||
Deferred policy acquisition costs, net |
12,026 | 9,446 | ||||||
Deferred income taxes |
17,057 | 13,448 | ||||||
Other assets |
2,011 | 1,132 | ||||||
Total assets |
$ | 896,737 | $ | 766,230 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY LIABILITIES: |
||||||||
Unpaid losses and loss adjustment expenses |
$ | 155,375 | $ | 158,929 | ||||
Unearned premiums |
380,268 | 328,334 | ||||||
Advance premium |
25,830 | 19,840 | ||||||
Accounts payable |
5,692 | 3,767 | ||||||
Bank overdraft |
22,597 | 23,030 | ||||||
Payable for securities |
336 | | ||||||
Reinsurance payable, net |
92,504 | 37,946 | ||||||
Income taxes payable |
13,480 | 8,282 | ||||||
Other accrued expenses |
20,022 | 23,150 | ||||||
Long-term debt |
22,427 | 23,162 | ||||||
Total liabilities |
738,531 | 626,440 | ||||||
Commitments and Contingencies (Note 12) |
||||||||
STOCKHOLDERS EQUITY: |
||||||||
Cumulative convertible preferred stock, $.01 par value |
1 | 1 | ||||||
Authorized shares - 1,000 |
||||||||
Issued shares - 108 |
||||||||
Outstanding shares - 108 |
||||||||
Minimum liquidation preference, $2.66 per share |
||||||||
Common stock, $.01 par value |
410 | 404 | ||||||
Authorized shares - 55,000 |
||||||||
Issued shares - 41,007 and 40,407 |
||||||||
Outstanding shares - 39,989 and 39,388 |
||||||||
Treasury shares, at cost - 1,018 and 1,019 |
(3,102 | ) | (3,109 | ) | ||||
Additional paid-in capital |
34,580 | 33,675 | ||||||
Retained earnings |
126,317 | 108,819 | ||||||
Total stockholders equity |
158,206 | 139,790 | ||||||
Total liabilities and stockholders equity |
$ | 896,737 | $ | 766,230 | ||||
The accompanying notes to condensed consolidated financial statements are an integral part of
these statements.
4
Table of Contents
UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in thousands, except per share data)
(in thousands, except per share data)
For the Three | For the Six | |||||||||||||||
Months Ended June 30, | Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
PREMIUMS EARNED AND OTHER REVENUES |
||||||||||||||||
Direct premiums written |
213,479 | 208,020 | 386,654 | 368,119 | ||||||||||||
Ceded premiums written |
(145,798 | ) | (121,304 | ) | (269,689 | ) | (248,872 | ) | ||||||||
Net premiums written |
67,681 | 86,716 | 116,965 | 119,247 | ||||||||||||
(Increase) decrease in net unearned premium |
(18,157 | ) | (45,356 | ) | (19,437 | ) | (44,573 | ) | ||||||||
Premiums earned, net |
49,524 | 41,360 | 97,528 | 74,674 | ||||||||||||
Net investment (loss) income |
(21 | ) | 118 | 236 | 311 | |||||||||||
Net realized gains on investments |
2,960 | 4,457 | 6,612 | 8,152 | ||||||||||||
Net unrealized losses on investments |
(9,640 | ) | | (7,052 | ) | | ||||||||||
Net foreign currency gains on investments |
| 125 | 71 | 809 | ||||||||||||
Other-than-temporary impairment of investments |
| | | (2,408 | ) | |||||||||||
Commission revenue |
4,941 | 4,244 | 9,121 | 9,046 | ||||||||||||
Policy fees |
4,402 | 4,540 | 8,575 | 8,476 | ||||||||||||
Other revenue |
1,506 | 1,016 | 2,914 | 2,020 | ||||||||||||
Total premiums earned and other revenues |
53,672 | 55,860 | 118,005 | 101,080 | ||||||||||||
OPERATING COSTS AND EXPENSES |
||||||||||||||||
Losses and loss adjustment expenses |
25,852 | 24,835 | 52,037 | 48,487 | ||||||||||||
General and administrative expenses |
14,699 | 13,389 | 29,771 | 23,578 | ||||||||||||
Total operating costs and expenses |
40,551 | 38,224 | 81,808 | 72,065 | ||||||||||||
INCOME BEFORE INCOME TAXES |
13,121 | 17,636 | 36,197 | 29,015 | ||||||||||||
Income taxes, current |
9,622 | 8,172 | 18,359 | 11,656 | ||||||||||||
Income taxes, deferred |
(4,050 | ) | (1,303 | ) | (3,609 | ) | (352 | ) | ||||||||
Income taxes, net |
5,572 | 6,869 | 14,750 | 11,304 | ||||||||||||
NET INCOME |
$ | 7,549 | $ | 10,767 | $ | 21,447 | $ | 17,711 | ||||||||
Basic net income per common share |
$ | 0.19 | $ | 0.27 | $ | 0.55 | $ | 0.45 | ||||||||
Weighted average of common shares
outstanding Basic |
39,187 | 39,167 | 39,187 | 39,029 | ||||||||||||
Fully diluted net income per share |
$ | 0.19 | $ | 0.27 | $ | 0.53 | $ | 0.44 | ||||||||
Weighted average of common shares
outstanding Diluted |
40,645 | 40,446 | 40,657 | 40,441 | ||||||||||||
Cash dividend declared per common share |
$ | | $ | 0.10 | $ | 0.10 | $ | 0.22 | ||||||||
For the Three | For the Six | |||||||||||||||
Months Ended June 30, | Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Comprehensive Income: |
||||||||||||||||
Net income |
$ | 7,549 | $ | 10,767 | $ | 21,447 | $ | 17,711 | ||||||||
Change in net
unrealized gains
(losses) on
investments, net
of tax |
| 791 | | (967 | ) | |||||||||||
Comprehensive Income |
$ | 7,549 | $ | 11,558 | $ | 21,447 | $ | 16,744 | ||||||||
The accompanying notes to condensed consolidated financial statements are an integral part of
these statements.
5
Table of Contents
UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
(in thousands)
Six Months Ended | ||||||||
June 30, 2011 | June 30, 2010 | |||||||
Cash flows from operating activities: |
||||||||
Net Income |
$ | 21,447 | $ | 17,711 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Bad debt expense |
394 | 630 | ||||||
Depreciation |
299 | 298 | ||||||
Amortization of cost of stock options |
456 | 1,453 | ||||||
Amortization of non-vested shares |
463 | 456 | ||||||
Net realized gains on investments |
(6,612 | ) | (8,152 | ) | ||||
Net unrealized losses on investments |
7,052 | | ||||||
Net foreign currency gains on investments |
(71 | ) | (842 | ) | ||||
Other-than-temporary impairment of investments |
| 2,408 | ||||||
Amortization of premium / accretion of discount, net |
170 | 271 | ||||||
Deferred income taxes |
(3,609 | ) | 9 | |||||
Other |
(21 | ) | (15 | ) | ||||
Net change in assets and liabilities relating to operating activities: |
||||||||
Prepaid reinsurance premiums |
(32,496 | ) | (32,792 | ) | ||||
Reinsurance recoverables |
2,349 | 28,581 | ||||||
Premiums receivable, net |
(8,790 | ) | (12,618 | ) | ||||
Accrued investment income |
981 | (80 | ) | |||||
Other receivables |
(1,682 | ) | 2,519 | |||||
Income taxes recoverable |
| 3,212 | ||||||
Deferred policy acquisition costs, net |
(2,580 | ) | (4,577 | ) | ||||
Proceeds from sale of trading securities |
454,266 | | ||||||
Purchases of trading securities |
(327,774 | ) | | |||||
Other assets |
(1,936 | ) | (426 | ) | ||||
Unpaid losses and loss adjustment expenses |
(3,554 | ) | 1,706 | |||||
Unearned premiums |
51,934 | 77,365 | ||||||
Accounts payable |
1,925 | 1,650 | ||||||
Reinsurance payable |
54,558 | 13,710 | ||||||
Income taxes payable |
5,198 | 3,417 | ||||||
Other accrued expenses |
(3,128 | ) | (1,895 | ) | ||||
Advance premium |
5,990 | 2,980 | ||||||
Net cash provided by operating activities |
215,229 | 96,979 | ||||||
Cash flows from investing activities: |
||||||||
Proceeds from sale of property, plant and equipment |
63 | 15 | ||||||
Purchases of property, plant and equipment |
(1,021 | ) | (1,296 | ) | ||||
Purchases of fixed maturities, available for sale |
| (129,141 | ) | |||||
Proceeds from sales of fixed maturities, available for sale |
| 116,238 | ||||||
Purchases of equity securities, available for sale |
| (80,730 | ) | |||||
Proceeds from sales of equity securities, available for sale |
| 70,681 | ||||||
Net cash used in investing activities |
(958 | ) | (24,233 | ) | ||||
Cash flows from financing activities: |
||||||||
Bank overdraft |
(433 | ) | 2,276 | |||||
Preferred stock dividend |
(10 | ) | (10 | ) | ||||
Common stock dividend |
(3,939 | ) | (4,700 | ) | ||||
Issuance of common stock |
| 7 | ||||||
Purchase of treasury shares |
| (3,724 | ) | |||||
Excess tax benefits from stock-based compensation |
| 3,660 | ||||||
Repayment of debt |
(735 | ) | (735 | ) | ||||
Net cash used in financing activities |
(5,117 | ) | (3,226 | ) | ||||
Net increase in cash and cash equivalents |
209,154 | 69,520 | ||||||
Cash and cash equivalents at beginning of period |
147,585 | 192,924 | ||||||
Cash and cash equivalents at end of period |
$ | 356,739 | $ | 262,444 | ||||
Supplemental cash flow disclosure |
||||||||
Interest |
$ | 564 | $ | 504 | ||||
Income taxes |
$ | 13,083 | $ | 466 |
The accompanying notes to condensed consolidated financial statements are an integral part of
these statements.
6
Table of Contents
UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(unaudited)
1. Nature of Operations and Basis of Presentation
Nature of Operations
Universal Insurance Holdings, Inc. (the Company) is a Delaware corporation originally
incorporated as Universal Heights, Inc. in November 1990. The Company changed its name to Universal
Insurance Holdings, Inc. on January 12, 2001. The Company is a vertically integrated insurance
holding company performing all aspects of insurance underwriting, distribution and claims. Through
its wholly owned subsidiaries, including Universal Property & Casualty Insurance Company (UPCIC),
the Company is principally engaged in the property and casualty insurance business offered
primarily through a network of independent agents. Risk from catastrophic losses is managed through
the use of reinsurance agreements. The Companys primary product is homeowners insurance currently
offered in four states, including Florida, where a majority of the Companys policies are in force. See
Note 5, Insurance Operations, for more information regarding the Companys insurance operations.
The Company generates revenues primarily from the collection of premiums and the investment of
those premiums. Other significant sources of revenue include commissions collected from reinsurers
and policy fees.
Basis of Presentation
The Company has prepared the accompanying unaudited Condensed Consolidated Financial Statements
(Financial Statements) in accordance with the rules and regulations of the Securities and
Exchange Commission (SEC) for interim financial information. Accordingly, they do not include all
of the information and footnotes required by United States generally accepted accounting principles
(GAAP) for complete financial statements. Therefore, the Financial Statements should be read in
conjunction with the audited Consolidated Financial Statements contained in the Companys Annual
Report on Form 10-K for the fiscal year ended December 31, 2010 filed with the SEC on March 31,
2011. The condensed consolidated balance sheet at December 31, 2010 was derived from audited
financial statements, but does not include all disclosures required by GAAP. In the opinion of
management, all adjustments (consisting of normal recurring adjustments) necessary for a fair
presentation have been included in the Financial Statements. The results for interim periods do not
necessarily indicate the results that may be expected for any other interim period or for the full
year.
The Financial Statements include the accounts of the Company and its wholly
owned subsidiaries. All material intercompany balances and transactions have been eliminated in
consolidation.
To conform to the current period presentation, certain amounts in the prior periods consolidated
financial statements and notes have been reclassified. Such reclassifications were of an immaterial
amount and had no effect on net income or stockholders equity.
Management must make estimates and assumptions that affect amounts reported in the Companys
Financial Statements and in disclosures of contingent assets and liabilities. Actual results could
differ from those estimates.
7
Table of Contents
2. Significant Accounting Policies
The Company reported Significant Accounting Policies in its Annual Report on Form 10-K for the year
ended December 31, 2010. The following are new or revised disclosures or disclosures required on a
quarterly basis.
Concentrations of Credit Risk. The Company is exposed to concentrations of credit risk, consisting
principally of cash and cash equivalents, debt securities, premiums receivable and reinsurance
recoverables.
Concentrations of credit risk with respect to cash on deposit are limited by the Companys policy
of investing excess cash with custodial institutions who invest primarily in money market accounts
backed by the United States Government and United States Government agency securities with major
national banks. These accounts are held by the Institutional Trust & Custody division of U.S. Bank,
the Trust Department of SunTrust Bank and Bank of New York Trust Fund.
The Company maintains depository relationships with SunTrust Bank and Wachovia Bank, a division of
Wells Fargo Bank N.A. It is the Companys policy not to have a balance of more than $250 thousand
for any of its affiliates at either institution on any given day to minimize exposure to a bank
failure. Cash balances in excess of $250 thousand are transferred daily into custodial accounts
with SunTrust Bank where cash is immediately invested into shares of Federated Treasury Obligations
Money Market Funds.
8
Table of Contents
Cash and cash equivalents consist of checking, repurchase, and money market accounts with carrying
values as follows (in thousands):
As of June 30, 2011 | ||||||||||||||||
Money Market | ||||||||||||||||
Institution | Cash | Funds | Total | % | ||||||||||||
U. S. Bank IT&C |
$ | | $ | 41,455 | $ | 41,455 | 11.6 | % | ||||||||
Evergreen Investment Management Company, L.L.C. |
| 3 | 3 | 0.0 | % | |||||||||||
SunTrust Bank |
2,726 | | 2,726 | 0.8 | % | |||||||||||
SunTrust Bank Institutional Asset Services |
| 279,977 | 279,977 | 78.4 | % | |||||||||||
Wells Fargo Bank N.A. |
920 | | 920 | 0.3 | % | |||||||||||
Bank of New York Trust Fund (1) |
| 31,029 | 31,029 | 8.7 | % | |||||||||||
All Other Banking Institutions |
629 | | 629 | 0.2 | % | |||||||||||
$ | 4,275 | $ | 352,464 | $ | 356,739 | 100.0 | % | |||||||||
As of December 31, 2010 | ||||||||||||||||
Money Market | ||||||||||||||||
Institution | Cash | Funds | Total | % | ||||||||||||
U. S. Bank IT&C |
$ | | $ | 41,454 | $ | 41,454 | 28.1 | % | ||||||||
Evergreen Investment Management Company, L.L.C. |
| 3 | 3 | 0.0 | % | |||||||||||
SunTrust Bank |
1,241 | | 1,241 | 0.8 | % | |||||||||||
SunTrust Bank Institutional Asset Services |
| 92,324 | 92,324 | 62.6 | % | |||||||||||
Wells Fargo Bank N.A. |
780 | | 780 | 0.5 | % | |||||||||||
Bank of New York Trust Fund (1) |
| 11,340 | 11,340 | 7.7 | % | |||||||||||
All Other Banking Institutions |
443 | | 443 | 0.3 | % | |||||||||||
$ | 2,464 | $ | 145,121 | $ | 147,585 | 100.0 | % | |||||||||
(1) | Amounts held in trust include collateral contributed by the Company in connection with reinsurance contracts entered into between a segregated account owned and maintained by the Company and UPCIC. See Note 4 Reinsurance for information about this arrangement. |
All debt securities owned by the Company as of June 30, 2011 and December 31, 2010 are direct
obligations of the United States Treasury.
Concentrations of credit risk with respect to premiums receivable are limited due to the large
number of individuals comprising the Companys customer base. However, the majority of the
Companys revenues are currently derived from products and services offered to customers in
Florida, which could be adversely affected by economic downturns, an increase in competition or
other environmental changes.
In order to reduce credit risk for amounts due from reinsurers, UPCIC seeks to do business with
financially sound reinsurance companies and regularly evaluate the financial strength of all
reinsurers used. Everest Reinsurance Company, the reinsurer to which UPCIC cedes the largest volume
of premium, has the following ratings from each of the rating agencies: A+ from A.M. Best Company,
A+ from Standard and Poors Rating Services and Aa3 from Moodys Investors Service, Inc. UPCICs
reinsurance portfolio contained the following authorized reinsurers that had unsecured recoverables
for paid and unpaid losses, including incurred but not reported (IBNR) reserves, loss adjustment
expenses and unearned premiums whose aggregate balance exceeded 3% of UPCICs statutory surplus (in
thousands):
9
Table of Contents
As of June 30, | As of December 31, | |||||||
Reinsurer | 2011 | 2010 | ||||||
Everest Reinsurance Company |
$ | 255,514 | $ | 227,942 | ||||
Florida Hurricane Catastrophe Fund |
| 32,849 | ||||||
Total |
$ | 255,514 | $ | 260,791 | ||||
Recently Adopted Accounting Pronouncements
In January 2010, the Financial Accounting Standards Board (FASB ) issued new accounting guidance
which expands disclosure requirements relating to fair value measurements. The guidance adds
requirements for disclosing amounts of and reasons for significant transfers into and out of Levels
1 and 2 and requires gross rather than net disclosures about purchases, sales, issuances and
settlements relating to Level 3 measurements. The guidance also provides clarification that fair
value measurement disclosures are required for each class of assets and liabilities. Disclosures
about the valuation techniques and inputs used to measure fair value for measurements that fall in
either Level 2 or Level 3 are also required. The Company adopted the provisions of the new
guidance as of March 31, 2010 except for disclosures about purchases, sales, issuances and
settlements in the roll forward of activity in Level 3 fair value measurements, which were adopted
as of January 1, 2011. Disclosures are not required for earlier periods presented for comparative
purposes. The new guidance affects disclosures only; and therefore, the adoption had no impact on
the Companys results of operations or financial position.
3. Investments
The following table summarizes, by type, the carrying values of investments (in thousands):
As of June 30, | As of December 31, | |||||||
Type of Investment | 2011 | 2010 | ||||||
Cash and cash equivalents |
$ | 356,739 | $ | 147,585 | ||||
Debt securities |
3,595 | 130,116 | ||||||
Equity securities |
92,350 | 94,416 | ||||||
Non-hedge derivatives |
739 | 182 | ||||||
Total Investments |
$ | 453,423 | $ | 372,299 | ||||
The Company has made an assessment of its invested assets for fair value measurement as
further described in Note 13 Fair Value Measurements.
The Company is required by various state laws and regulations to keep certain cash and cash
equivalents or securities on deposit in depository accounts with the states in which it does
business. As of June 30, 2011 and December 31, 2010, amounts having a fair value of $6.2 million
and $6.0 million, respectively, were on deposit. These laws and regulations govern not only the
amount, but also the type of security that is eligible for deposit.
10
Table of Contents
Major sources of net investment income, comprised primarily of interest and dividends, are
summarized as follows (in thousands):
For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Cash and cash equivalents |
$ | 35 | $ | 33 | $ | 50 | $ | 51 | ||||||||
Debt securities |
67 | 246 | 468 | 546 | ||||||||||||
Equity securities |
34 | 10 | 60 | 20 | ||||||||||||
Total investment income |
136 | 289 | 578 | 617 | ||||||||||||
Less investment expenses |
(157 | ) | (171 | ) | (342 | ) | (306 | ) | ||||||||
Net investment income |
$ | (21 | ) | $ | 118 | $ | 236 | $ | 311 | |||||||
During the three-month period ended September 30, 2010, the Company evaluated the trading
activity in its investment portfolio, its investing strategy, and its overall investment program.
As a result of this evaluation, the Company reclassified its available-for-sale portfolio as a
trading portfolio effective July 1, 2010.
Realized gains and losses for investment securities, net of other than temporary losses of $2.4
million recorded during the six months ended June 30, 2010, and non-hedge derivatives are
summarized as follows (in thousands):
11
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For the Three Months Ended | For the Three Months Ended | |||||||||||||||
June 30, 2011 | June 30, 2010 | |||||||||||||||
Realized Gains | Proceeds (Fair | Realized Gains | Proceeds (Fair | |||||||||||||
(Losses) | Value at Sale) | (Losses) | Value at Sale) | |||||||||||||
Debt securities |
$ | 2,652 | $ | 201,787 | $ | 1,835 | $ | 85,102 | ||||||||
Equity securities |
6,205 | 44,110 | 3,084 | 32,641 | ||||||||||||
Non-hedge derivatives |
379 | 228 | | | ||||||||||||
Total |
9,236 | 246,125 | 4,919 | 117,743 | ||||||||||||
Debt securities |
(2,129 | ) | 48,738 | (84 | ) | 5,813 | ||||||||||
Equity securities |
(3,523 | ) | 22,498 | (378 | ) | 4,115 | ||||||||||
Non-hedge derivatives |
(624 | ) | | | | |||||||||||
Total |
(6,276 | ) | 71,236 | (462 | ) | 9,928 | ||||||||||
Net |
$ | 2,960 | $ | 317,361 | $ | 4,457 | $ | 127,671 | ||||||||
For the Six Months Ended | For the Six Months Ended | |||||||||||||||
As of June 30, 2011 | As of June 30, 2010 | |||||||||||||||
Realized Gains | Proceeds (Fair | Realized Gains | Proceeds (Fair | |||||||||||||
(Losses) | Value at Sale) | (Losses) | Value at Sale) | |||||||||||||
Debt securities |
$ | 2,775 | $ | 210,027 | $ | 1,896 | $ | 91,064 | ||||||||
Equity securities |
20,253 | 105,195 | 7,194 | 69,127 | ||||||||||||
Non-hedge derivatives |
379 | 228 | | | ||||||||||||
Total |
23,407 | 315,450 | 9,090 | 160,191 | ||||||||||||
Debt securities |
(6,392 | ) | 113,738 | (284 | ) | 25,173 | ||||||||||
Equity securities |
(9,386 | ) | 28,254 | (3,010 | ) | 9,964 | ||||||||||
Non-hedge derivatives |
(1,017 | ) | | (52 | ) | | ||||||||||
Total |
(16,795 | ) | 141,992 | (3,346 | ) | 35,137 | ||||||||||
Net |
$ | 6,612 | $ | 457,442 | $ | 5,744 | $ | 195,328 | ||||||||
All investment securities as of June 30, 2011 and December 31, 2010 were held by the Company
for trading, with cost/amortized cost of $101.8 million and $222.5 million, respectively.
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The following table summarizes the Companys investment securities and non-hedge derivatives as of
the periods presented (in thousands):
As of June 30, 2011 | As of December 31, 2010 | |||||||||||||||
Fair Value | Percent of Total | Fair Value | Percent of Total | |||||||||||||
Debt Securities: |
||||||||||||||||
US government agency obligations |
$ | 3,595 | 3.7 | % | $ | 130,116 | 57.9 | % | ||||||||
Equity Securities: |
||||||||||||||||
Common stock: |
||||||||||||||||
Metals and mining |
33,537 | 34.7 | % | 25,752 | 11.5 | % | ||||||||||
Other |
1,315 | 1.4 | % | 362 | 0.2 | % | ||||||||||
Exchange-traded and mutual
funds: |
||||||||||||||||
Metals and mining |
33,634 | 34.8 | % | 42,209 | 18.8 | % | ||||||||||
Agriculture |
18,761 | 19.4 | % | 14,877 | 6.6 | % | ||||||||||
Energy |
2,215 | 2.3 | % | 5,559 | 2.5 | % | ||||||||||
Indices |
| 0.0 | % | 4,613 | 2.0 | % | ||||||||||
Other |
2,888 | 3.0 | % | 1,044 | 0.5 | % | ||||||||||
Total equity securities |
92,350 | 95.5 | % | 94,416 | 42.1 | % | ||||||||||
Non-hedge derivatives |
739 | 0.8 | % | 182 | 0.0 | % | ||||||||||
Total |
$ | 96,684 | 100.0 | % | $ | 224,714 | 100.0 | % | ||||||||
The Company recorded $9.6 million and $7.1 million of unrealized losses on trading securities
in earnings during the three and six-month periods ended June 30, 2011. Prior to July 1, 2010,
investment securities were classified as held-to-maturity or available-for-sale with an
Other-Than-Temporary loss of $2.4 million reflected in earnings during the six-month period ended
June 30, 2010.
4. Reinsurance
UPCIC seeks to reduce the risk of loss by reinsuring certain levels of risk in various areas
of exposure with other insurance enterprises or reinsurers, generally, as of the beginning of the
hurricane season on June 1 of each year. UPCICs reinsurance program consists of excess of loss,
quota share and catastrophe reinsurance, subject to the terms and conditions of the applicable
agreements. UPCIC is responsible for insured losses related to catastrophes and other events in
excess of coverage provided by its reinsurance program. UPCIC also remains responsible for the
settlement of insured losses notwithstanding the failure of any of its reinsurers to make payments
otherwise due to UPCIC.
UPCICs in-force policyholder coverage for windstorm exposures as of June 30, 2011 was
approximately $128 billion.
Amounts recoverable from reinsurers are estimated in a manner consistent with the reinsurance
contracts. Reinsurance premiums, losses and loss adjustment expenses (LAE) are accounted for on a
basis consistent with those used in accounting for the original policies issued and the terms of
the reinsurance contracts. Reinsurance ceding commissions received are deferred and netted against
policy acquisition costs and amortized over the effective period of the related insurance policies.
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Table of Contents
The Companys reinsurance arrangements had the following effect on certain items in the Condensed
Consolidated Statements of Income (in thousands):
Three Months Ended June 30, 2011 | Three Months Ended June 30, 2010 | |||||||||||||||||||||||
Premiums | Premiums | Loss and Loss | Premiums | Premiums | Loss and Loss | |||||||||||||||||||
Written | Earned | Adjustment | Written | Earned | Adjustment | |||||||||||||||||||
Expenses | Expenses | |||||||||||||||||||||||
Direct |
$ | 213,479 | $ | 170,134 | $ | 53,360 | $ | 208,020 | $ | 150,600 | $ | 50,345 | ||||||||||||
Ceded |
(145,798 | ) | (120,610 | ) | (27,508 | ) | (121,304 | ) | (109,240 | ) | (25,510 | ) | ||||||||||||
Net |
$ | 67,681 | $ | 49,524 | $ | 25,852 | $ | 86,716 | $ | 41,360 | $ | 24,835 | ||||||||||||
Six Months Ended June 30, 2011 | Six Months Ended June 30, 2010 | |||||||||||||||||||||||
Premiums | Premiums | Loss and Loss | Premiums | Premiums | Loss and Loss | |||||||||||||||||||
Written | Earned | Adjustment | Written | Earned | Adjustment | |||||||||||||||||||
Expenses | Expenses | |||||||||||||||||||||||
Direct |
$ | 386,654 | $ | 334,721 | $ | 106,491 | $ | 368,119 | $ | 290,754 | $ | 97,026 | ||||||||||||
Ceded |
(269,689 | ) | (237,193 | ) | (54,454 | ) | (248,872 | ) | (216,080 | ) | (48,539 | ) | ||||||||||||
Net |
$ | 116,965 | $ | 97,528 | $ | 52,037 | $ | 119,247 | $ | 74,674 | $ | 48,487 | ||||||||||||
The following prepaid reinsurance premiums and reinsurance recoverables are reflected in the
Condensed Consolidated Balance Sheets (in thousands):
As of | As of | |||||||
June 30, 2011 | December 31, 2010 | |||||||
Prepaid reinsurance premiums |
$ | 253,582 | $ | 221,086 | ||||
Reinsurance recoverable on unpaid losses and LAE |
$ | 76,307 | $ | 79,114 | ||||
Reinsurance recoverable on paid losses |
896 | 438 | ||||||
Reinsurance recoverables |
$ | 77,203 | $ | 79,552 | ||||
The Company has determined that a right of offset exists between UPCIC and its reinsurers.
Reinsurance payable to reinsurers has been offset by ceding commissions and inuring premiums
receivable from reinsurers as follows (in thousands):
As of | As of | |||||||
June 30, 2011 | December 31, 2010 | |||||||
Reinsurance payable, net of ceding commissions |
||||||||
due from reinsurers |
$ | 140,530 | $ | 75,553 | ||||
Inuring premiums receivable |
(48,026 | ) | (37,607 | ) | ||||
Reinsurance payable,net |
$ | 92,504 | $ | 37,946 | ||||
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Segregated Account T25
The Company owns and maintains a segregated account, Segregated Account T25 Universal Insurance
Holdings of White Rock Insurance (SAC) Ltd. (T25) established by a third-party reinsurer in
accordance with Bermuda law. T25 enters into underlying excess catastrophe contracts with UPCIC for
the purpose of assuming the risk of certain policies issued by UPCIC, covering certain loss
occurrences including hurricanes. The Company secures the obligations of T25 to UPCIC under these
contracts by contributing the amount of T25s liability for losses, net of UPCICs required premium
payments, to a trust account as collateral. The collateral will be used to pay any claims that may
arise in the event of the occurrence of covered events. Transactions related to this arrangement
are eliminated in consolidation, however, and the amount of collateral is held in trust for the
benefit of UPCIC until the occurrence of a covered event, expiration or termination of the agreement between
T25 and UPCIC.
On May 31, 2011, T25 and UPCIC mutually agreed to a Commutation and Settlement Agreement related to
the underlying Property Catastrophe Excess of Loss Reinsurance Contract that was effective January
1, 2011. A replacement contract was entered into between the parties on June 1, 2011 as part of
UPCICs reinsurance program in effect for the period June 1, 2011, through May 31, 2012. In
conjunction with entering into the replacement contract, the Company contributed additional funds
to T25 due to the increased reinsurance coverage and collateral requirements. The amount of
collateral in the trust account at June 30, 2011 was $31 million.
5. Insurance Operations
The Companys primary product is homeowners insurance currently offered by UPCIC in four
states, including Florida, which represented 98% of policies-in-force as of June 30, 2011 and
December 31, 2010. As of June 30,
2011 and December 31, 2010, 32% of the policies-in-force are in Miami-Dade, Broward and Palm Beach
counties.
Deferred Policy Acquisition Costs
The following table provides the beginning and ending balances and the changes in deferred
policy acquisition costs (DPAC), net of deferred ceding commission (DCC), for the periods
presented.
15
Table of Contents
For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
DPAC, beginning of period |
$ | 51,860 | $ | 49,342 | $ | 50,128 | $ | 43,971 | ||||||||
Capitalized costs
during the period |
30,507 | 28,912 | 56,792 | 53,703 | ||||||||||||
Amortization of DPAC (1)
during the period |
(23,238 | ) | (20,103 | ) | (47,791 | ) | (39,523 | ) | ||||||||
DPAC, end of period |
$ | 59,129 | $ | 58,151 | $ | 59,129 | $ | 58,151 | ||||||||
DCC, beginning of period |
$ | (41,721 | ) | $ | (36,906 | ) | $ | (40,682 | ) | $ | (34,506 | ) | ||||
Ceding commissions written
during the period |
(26,457 | ) | (25,853 | ) | (47,888 | ) | (45,642 | ) | ||||||||
Earned Ceding Commissions
during the period |
21,075 | 18,650 | 41,467 | 36,039 | ||||||||||||
DCC, end of period |
$ | (47,103 | ) | $ | (44,109 | ) | $ | (47,103 | ) | $ | (44,109 | ) | ||||
DPAC (DCC), net, beginning of
period |
$ | 10,139 | $ | 12,436 | $ | 9,446 | $ | 9,465 | ||||||||
Capitalized costs, net
during the period |
4,050 | 3,059 | 8,904 | 8,061 | ||||||||||||
Amortization of DPAC (DCC), net
during the period (1) |
(2,163 | ) | (1,453 | ) | (6,324 | ) | (3,484 | ) | ||||||||
DPAC (DCC), net, end of period |
$ | 12,026 | $ | 14,042 | $ | 12,026 | $ | 14,042 | ||||||||
(1) | Includes amortization of agent commissions of $18.6 million and $16.0 million for the three months ended June 30, 2011 and 2010 and $36.7 million and $30.5 million for the six months ended June 30, 2011 and 2010, respectively. |
Liability for Unpaid Losses and Loss Adjustment Expenses
Set forth in the following table is the change in liability for unpaid losses and LAE for the
periods presented.
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Table of Contents
For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Balance at beginning of period |
$ | 158,249 | $ | 131,737 | $ | 158,928 | $ | 127,198 | ||||||||
Less reinsurance recoverable |
78,611 | 64,821 | 79,114 | 62,901 | ||||||||||||
Net balance at beginning of period |
79,638 | 66,916 | 79,814 | 64,297 | ||||||||||||
Incurred related to: |
||||||||||||||||
Current year |
25,587 | 25,024 | 51,923 | 48,841 | ||||||||||||
Prior years |
265 | (190 | ) | 114 | (355 | ) | ||||||||||
Total incurred |
25,852 | 24,834 | 52,037 | 48,486 | ||||||||||||
Paid related to: |
||||||||||||||||
Current year |
12,817 | 14,339 | 14,875 | 17,523 | ||||||||||||
Prior years |
13,606 | 11,959 | 37,909 | 29,808 | ||||||||||||
Total paid |
26,423 | 26,298 | 52,784 | 47,331 | ||||||||||||
Net balance at end of period |
79,068 | 65,452 | 79,068 | 65,452 | ||||||||||||
Plus reinsurance recoverable |
76,307 | 63,451 | 76,307 | 63,451 | ||||||||||||
Balance at end of period |
$ | 155,375 | $ | 128,903 | $ | 155,375 | $ | 128,903 | ||||||||
Regulatory Requirements
The Companys regulated subsidiaries, UPCIC and American Platinum Property and Casualty
Insurance Company (APPCIC), are subject to regulations and standards of the Florida Office of
Insurance Regulation (OIR). These standards require the subsidiaries to maintain specified levels
of statutory capital and restrict the timing and amount of dividends and other distributions that
may be paid to the Company. Except in the case of extraordinary dividends, these standards
generally permit dividends to be paid from statutory unassigned surplus of the regulated subsidiary
and are limited based on the regulated subsidiarys level of statutory net income and statutory
capital and surplus. These dividends are referred to as ordinary dividends and generally can be
paid without prior regulatory approval. If the dividend, together with other
dividends paid within the preceding twelve months, exceeds a specified statutory limit or is paid
from sources other than earned surplus, the entire dividend is generally considered an
extraordinary dividend and must receive prior regulatory approval.
In 2011, based on the 2010 statutory net income and statutory capital and surplus levels, the
maximum amount of ordinary dividends which could be paid is $2.5 million from UPCIC and $1.2
million from APPCIC. For the six months ended June 30, 2011, no dividends were paid from UPCIC or
APPCIC to the Company.
The Florida Insurance Code requires companies to maintain capitalization equivalent to the greater
of ten percent of the insurers total liabilities or $5.0 million. Ten percent of UPCICs total
liabilities were $42.5 million and $32.9 million at June 30, 2011 and December 31, 2010,
17
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respectively. Ten percent of APPCICs total liabilities were $84 thousand and $83 thousand at June
30, 2011 and December 31, 2010, respectively. UPCICs statutory capital and surplus was $108.6
million and $115.9 million at June 30, 2011 and December 31, 2010, respectively. APPCICs
statutory capital and surplus was $10.7 million and $11.3 million at June 30, 2011 and December 31,
2010, respectively. At such dates, both UPCIC and APPCIC met the Florida capitalization
requirement. UPCIC and APPCIC are also required to adhere to prescribed premium-to-capital surplus
ratio and have met those requirements at such dates.
6. Share-Based Compensation
Stock Options
The Company recognized stock-based compensation expense as follows (in thousands):
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Compensation expense: |
||||||||||||||||
Stock options |
$ | 202 | $ | 975 | $ | 456 | $ | 1,453 | ||||||||
Non-vested shares |
319 | 232 | 463 | 456 | ||||||||||||
Total |
$ | 521 | $ | 1,207 | $ | 919 | $ | 1,909 | ||||||||
Deferred tax benefits: |
||||||||||||||||
Stock options |
$ | 78 | $ | 376 | $ | 176 | $ | 561 | ||||||||
Non-vested shares |
| 89 | | 176 | ||||||||||||
Total |
$ | 78 | $ | 465 | $ | 176 | $ | 737 | ||||||||
Total unrecognized compensation expense related to stock options was $2.6 million at June 30,
2011, which will be recognized over a weighted-average period of approximately 1.8 years. Total
unrecognized compensation expense related to non-vested shares of Company common stock was $1.9
million at June 30, 2011, which will be recognized over a weighted-average period of approximately
1.2 years.
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Table of Contents
The following table provides certain information related to stock options and non-vested shares (in
thousands, except per share data):
Three Months Ended June 30, 2011 | ||||||||||||||||||||||||
Stock Options | Non-vested Shares | |||||||||||||||||||||||
Weighted | Weighted | |||||||||||||||||||||||
Weighted | Average | Average Grant | ||||||||||||||||||||||
Number of | Average | Aggregate | Remaining | Number of | Date Fair | |||||||||||||||||||
Shares | Exercise Price | Intrinsic Value | Term | Shares | Value | |||||||||||||||||||
Outstanding as of March 31,
2011 |
5,385 | $ | 4.68 | 201 | $ | 5.84 | ||||||||||||||||||
Granted |
1,495 | $ | 4.70 | 600 | $ | 5.61 | ||||||||||||||||||
Forfeited |
| | | | ||||||||||||||||||||
Exercised |
| | | | ||||||||||||||||||||
Vested |
| | | | ||||||||||||||||||||
Expired |
| | | | ||||||||||||||||||||
Outstanding as of
June 30, 2011 |
6,880 | $ | 4.68 | $ | 3,498 | 3.2 | 801 | $ | 5.67 | |||||||||||||||
Exercisable as of
June 30, 2011 |
5,285 | $ | 4.66 | $ | 3,498 | 2.2 | ||||||||||||||||||
Six Months Ended June 30, 2011 | ||||||||||||||||||||||||
Stock Options | Non-vested Shares | |||||||||||||||||||||||
Weighted | Weighted | |||||||||||||||||||||||
Weighted | Average | Average Grant | ||||||||||||||||||||||
Number of | Average | Aggregate | Remaining | Number of | Date Fair | |||||||||||||||||||
Shares | Exercise Price | Intrinsic Value | Term | Shares | Value | |||||||||||||||||||
Outstanding as of December 31, 2010 |
5,385 | $ | 4.68 | 300 | $ | 5.84 | ||||||||||||||||||
Granted |
1,495 | $ | 4.70 | 600 | $ | 5.61 | ||||||||||||||||||
Forfeited |
| | | | ||||||||||||||||||||
Exercised |
| | | | ||||||||||||||||||||
Vested |
| | (99 | ) | $ | 5.84 | ||||||||||||||||||
Expired |
| | | | ||||||||||||||||||||
Outstanding as of June 30, 2011 |
6,880 | $ | 4.68 | $ | 3,498 | 3.2 | 801 | $ | 5.67 | |||||||||||||||
Exercisable as of June 30, 2011 |
5,285 | $ | 4.66 | $ | 3,498 | 2.2 | ||||||||||||||||||
7. Stockholders Equity
Dividends
On January 6, 2011, the Company declared a dividend of $0.10 per share on its outstanding common
stock paid on April 7, 2011 to the Companys shareholders of record at the close of business on
March 11, 2011.
8. Related Party Transactions
Downes and Associates, a multi-line insurance adjustment corporation based in Deerfield Beach,
Florida, performs certain claims adjusting work for UPCIC. Downes and Associates is owned by Dennis
Downes, who is the father of Sean P. Downes, Chief Operating Officer and Senior Vice President of
UPCIC. The Company expensed claims adjusting fees to Downes and Associates, as follows (in
thousands):
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Table of Contents
June 30, | ||||||||
2011 | 2010 | |||||||
Three months |
$ | 170 | $ | 120 | ||||
Six months |
$ | 430 | $ | 240 |
9. Income Taxes
The following table reconciles the statutory federal income tax rate to the Companys effective tax
rate:
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Statutory federal income tax rate |
35.0 | % | 35.0 | % | 35.0 | % | 35.0 | % | ||||||||
Increases resulting from: |
||||||||||||||||
Disallowed meals & entertainment |
0.1 | % | 0.2 | % | 0.1 | % | 0.3 | % | ||||||||
Disallowed compensation |
2.0 | % | 0.5 | % | 1.2 | % | 0.6 | % | ||||||||
State income tax, net of federal tax
benefit (1) |
3.6 | % | 3.6 | % | 3.6 | % | 3.6 | % | ||||||||
Other, net (2) |
1.8 | % | -0.4 | % | 0.8 | % | -0.5 | % | ||||||||
Effective tax rate |
42.5 | % | 38.9 | % | 40.7 | % | 39.0 | % | ||||||||
(1) | Included in income tax is State of Florida income tax at a statutory tax rate of 5.5%. | |
(2) | Other, net, includes estimated penalties and interest of 1.8% and 0.7% for the three and six months periods ended June 30, 2011, respectively regarding an underpayment of estimated taxes in 2011. |
10. Earnings Per Share
Basic earnings per share (EPS) is based on the weighted average number of shares outstanding for
the period, excluding any dilutive common share equivalents. Diluted EPS reflects the potential
dilution that could occur if securities to issue common stock were exercised.
The following tables reconcile the numerator (i.e., income) and denominator (i.e., shares) of the
basic and diluted earnings per share computations for net income for the three and six-month
periods ended June 30, 2011 and 2010 (in thousands, except per share data):
20
Table of Contents
Three Months Ended | Three Months Ended | |||||||||||||||||||||||
June 30, 2011 | June 30, 2010 | |||||||||||||||||||||||
Income | ||||||||||||||||||||||||
Available to | ||||||||||||||||||||||||
Per-Share | Common | Per-Share | ||||||||||||||||||||||
Net Income | Shares | Amount | Stockholders | Shares | Amount | |||||||||||||||||||
Net income |
$ | 7,549 | $ | 10,767 | ||||||||||||||||||||
Less: preferred stock
dividends |
(5 | ) | (5 | ) | ||||||||||||||||||||
Income available to common
stockholders |
$ | 7,544 | 39,187 | $ | 0.19 | $ | 10,762 | 39,167 | $ | 0.27 | ||||||||||||||
Effect of dilutive securities: |
||||||||||||||||||||||||
Stock-based compensation |
970 | | 1,119 | |||||||||||||||||||||
Preferred stock |
5 | 488 | 5 | 160 | ||||||||||||||||||||
Income available to common
stockholders and assumed
conversion |
$ | 7,549 | 40,645 | $ | 0.19 | $ | 10,767 | 40,446 | $ | 0.27 | ||||||||||||||
Six Months Ended | Six Months Ended | |||||||||||||||||||||||
June 30, 2011 | June 30, 2010 | |||||||||||||||||||||||
Income | ||||||||||||||||||||||||
Available to | ||||||||||||||||||||||||
Per-Share | Common | Per-Share | ||||||||||||||||||||||
Net Income | Shares | Amount | Stockholders | Shares | Amount | |||||||||||||||||||
Net income |
$ | 21,447 | $ | 17,711 | ||||||||||||||||||||
Less: preferred stock
dividends |
(10 | ) | (10 | ) | ||||||||||||||||||||
Income available to common
stockholders |
$ | 21,437 | 39,187 | $ | 0.55 | $ | 17,701 | 39,029 | $ | 0.45 | ||||||||||||||
Effect of dilutive securities: |
||||||||||||||||||||||||
Stock-based compensation |
981 | | 1,252 | |||||||||||||||||||||
Preferred stock |
10 | 489 | 10 | 160 | ||||||||||||||||||||
Income available to common
stockholders and assumed
conversion |
$ | 21,447 | 40,657 | $ | 0.53 | $ | 17,711 | 40,441 | $ | 0.44 | ||||||||||||||
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Table of Contents
11. Other Comprehensive Income
The components of other comprehensive income on a pre-tax and after-tax basis are as follows (in
thousands):
Three Months | Six Months | |||||||||||||||||||||||
Ended June 30, 2010 | Ended June 30, 2010 | |||||||||||||||||||||||
Pretax | Tax | After-tax | Pretax | Tax | After-tax | |||||||||||||||||||
Unrealized gains, on investments,
net, arising during the periods |
$ | 5,869 | $ | (2,264 | ) | $ | 3,605 | $ | 4,979 | $ | (1,921 | ) | $ | 3,058 | ||||||||||
Less: reclassification adjustments of
realized gains on investments |
4,457 | (1,719 | ) | 2,738 | 8,152 | (3,145 | ) | 5,007 | ||||||||||||||||
Plus: Other-than-temporary impairment
of investments |
| | | (2,408 | ) | 929 | (1,479 | ) | ||||||||||||||||
Less: reclassification adjustments of
foreign currency gains on investments |
125 | (49 | ) | 76 | 809 | (312 | ) | 497 | ||||||||||||||||
Other comprehensive income (loss) |
$ | 1,287 | $ | (496 | ) | $ | 791 | $ | (1,574 | ) | $ | 607 | $ | (967 | ) | |||||||||
There were no amounts of other comprehensive income for the three and six month periods ended June
30, 2011.
12. Commitments and Contingencies
Employment Agreements
The Company has employment agreements with certain employees which are in effect as of June 30,
2011. The agreements provide for minimum salaries, which may be subject to annual percentage
increases, and non-equity incentive compensation for certain executives based on pre-tax or net
income levels attained by the Company. The agreements also provide for payments contingent upon the
occurrence of certain events. The following table provides the amount of commitments and contingent
payments the Company is obligated to pay in the form of salaries and non-equity incentive
compensation under these agreements (in thousands):
As of June 30, 2011 | ||||||||
Non-equity | ||||||||
incentive | ||||||||
Salaries | compensation | |||||||
Commitments |
$ | 16,567 | $ | 13,159 | ||||
Contingent payments upon certain events: |
||||||||
Termination |
$ | 6,421 | $ | 5,302 | ||||
Change in control |
$ | 14,445 | $ | 9,354 | ||||
Death |
$ | 8,610 | $ | 8,672 | ||||
Disability |
$ | 5,149 | $ | 3,303 |
Operating Leases
The Company has leases for certain computer equipment, software and office space. The Company
reported in its Annual Report on Form 10-K for the year ended December 31, 2010 a schedule of
future minimum rental payments required under the non-cancelable operating leases.
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Litigation
Certain lawsuits have been filed against the Company. These lawsuits involve matters that are
routine litigation incidental to the claims aspect of the Companys business for which estimated
losses are included in Unpaid Losses and Loss Adjustment Expenses in the Companys Consolidated
Financial Statements. In the opinion of management, these lawsuits are not material
individually or in the aggregate to the Companys financial position. Accruals made or assessments
of materiality of disclosure related to probable or possible losses do not consider any anticipated
insurance proceeds.
13. Fair Value Measurements
GAAP defines fair value as the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants as of the measurement date. GAAP
describes three approaches to measuring the fair value of assets and liabilities: the market
approach, the income approach and the cost approach. Each approach includes multiple valuation
techniques. GAAP does not prescribe which valuation technique should be used when measuring fair
value, but does establish a fair value hierarchy that prioritizes the inputs used in applying the
various techniques. Inputs broadly refer to the assumptions that market participants use to make
pricing decisions, including assumptions about risk. Level 1inputs are given the highest priority
in the hierarchy while Level 3 inputs are given the lowest priority. Assets and liabilities carried
at fair value are classified in one of the following three categories based on the nature of the
inputs to the valuation technique used:
| Level 1 Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities in active markets as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. | |
| Level 2 Observable market-based inputs or unobservable inputs that are corroborated by market data. | |
| Level 3 Unobservable inputs that are not corroborated by market data. These inputs reflect managements best estimate of fair value using its own assumptions about the assumptions a market participant would use in pricing the asset or liability. |
Summary of significant valuation techniques for assets measured at fair value on a recurring basis
Level 1
Cash equivalents: Comprise actively traded money market funds that have daily quoted net asset
values for identical assets that the Company can access.
U.S. government obligations and agencies: Comprise U.S. Treasury Notes. Valuation is based on
unadjusted quoted prices for identical assets in active markets that the Company can access.
Common stock: Comprise actively traded, exchange-listed U.S. and international equity securities.
Valuation is based on unadjusted quoted prices for identical assets in active markets that the
Company can access.
Exchange traded and mutual funds: Comprise actively traded funds. Valuation is based on daily
quoted net asset values for identical assets in active markets that the Company can access.
Level 2
U.S. government obligations and agencies: Comprise U.S. Treasury Inflation Index Bonds. The primary
inputs to the valuation include quoted prices for identical assets in inactive markets or similar
assets in active or inactive markets, contractual cash flows, benchmark yields and credit spreads.
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Exchange-traded derivatives: The primary inputs to the valuation include quoted prices or quoted
net asset values for identical or similar assets in markets that are not active.
As required by GAAP, assets and liabilities are classified in their entirety based on the lowest
level of input that is significant to the fair value measurement. The Companys assessment of the
significance of a particular input to the fair value measurement requires judgment, and may affect
their placement within the fair value hierarchy levels.
The following tables set forth by level within the fair value hierarchy the Companys assets that
were accounted for at fair value on a recurring basis as of June 30, 2011 and December 31, 2010 (in
thousands):
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As of June 30, 2011 | ||||||||||||||||
Fair Value Measurements | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Cash equivalents |
$ | 352,464 | $ | | $ | | $ | 352,464 | ||||||||
Investment securities (trading): |
||||||||||||||||
Debt securities: |
||||||||||||||||
US government obligations and agencies |
177 | 3,418 | | 3,595 | ||||||||||||
Equity securities: |
||||||||||||||||
Common stock: |
||||||||||||||||
Metals and mining |
33,537 | | | 33,537 | ||||||||||||
Other |
1,315 | | | 1,315 | ||||||||||||
Exchange-traded and mutual funds: |
||||||||||||||||
Metals and mining |
33,634 | | | 33,634 | ||||||||||||
Agriculture |
18,761 | | | 18,761 | ||||||||||||
Energy |
2,215 | | | 2,215 | ||||||||||||
Indices |
| | | | ||||||||||||
Other |
2,888 | | | 2,888 | ||||||||||||
Total equity securities |
92,350 | | | 92,350 | ||||||||||||
Non-hedge exchange-traded derivatives
(other assets) |
| 739 | | 739 | ||||||||||||
Total |
$ | 444,991 | $ | 4,157 | $ | | $ | 449,148 | ||||||||
As of December 31, 2010 | ||||||||||||||||||||
Fair Value Measurements | ||||||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||
Cash equivalents |
$ | 145,121 | $ | | $ | | $ | 145,121 | ||||||||||||
Investment securities (trading): |
||||||||||||||||||||
Debt securities: |
||||||||||||||||||||
US government obligations and agencies |
179 | 129,937 | | 130,116 | ||||||||||||||||
Equity securities: |
||||||||||||||||||||
Common stock: |
||||||||||||||||||||
Metals and mining |
25,752 | | | 25,752 | ||||||||||||||||
Other |
362 | | | 362 | ||||||||||||||||
Exchange-traded and mutual funds: |
||||||||||||||||||||
Metals and mining |
42,209 | | | 42,209 | ||||||||||||||||
Agriculture |
14,877 | | | 14,877 | ||||||||||||||||
Energy |
5,559 | | | 5,559 | ||||||||||||||||
Indices |
4,613 | | | 4,613 | ||||||||||||||||
Other |
1,044 | | | 1,044 | ||||||||||||||||
Total equity securities |
94,416 | | | 94,416 | ||||||||||||||||
Non-hedge exchange-traded derivatives
(other assets) |
| 182 | | 182 | ||||||||||||||||
Total |
$ | 239,716 | $ | 130,119 | $ | | $ | 369,835 | ||||||||||||
The Company did not have any transfers between Level 1 and Level 2 for the six-month periods
ended June 30, 2011 and 2010.
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The following table summarizes the carrying value, net unrealized gains (losses) and estimated fair
values of the Companys financial instruments that are not carried at fair value (in thousands).
As of June 30, 2011 | ||||||||||||
Fair Value Measurements | ||||||||||||
Net unrealized | Estimated Fair | |||||||||||
Carrying value | Gains/(Losses) | Value | ||||||||||
Assets: |
||||||||||||
Cash |
$ | 4,275 | $ | | $ | 4,275 | ||||||
$ | 4,275 | $ | | $ | 4,275 | |||||||
Liabilities: |
||||||||||||
Long-term debt |
$ | 22,427 | $ | (5,021 | ) | $ | 17,405 | |||||
$ | 22,427 | $ | (5,021 | ) | $ | 17,405 | ||||||
As of December 31, 2010 | ||||||||||||
Fair Value Measurements | ||||||||||||
Net unrealized | Estimated Fair | |||||||||||
Carrying value | Gains/(Losses) | Value | ||||||||||
Assets: |
||||||||||||
Cash |
$ | 2,464 | $ | | $ | 2,464 | ||||||
$ | 2,464 | $ | | $ | 2,464 | |||||||
Liabilities: |
||||||||||||
Long-term debt |
$ | 23,162 | $ | (4,063 | ) | $ | 19,099 | |||||
$ | 23,162 | $ | (4,063 | ) | $ | 19,099 | ||||||
The carrying value of cash approximates fair value due to its liquid nature.
The carrying value of long term debt was determined from the expected cash flows discounted using
the interest rate quoted by the issuer of the note, the State Board of Administration of Florida
(SBA) which is below prevailing rates quoted by private lending institutions. However, as the
Companys use of funds from the surplus note is limited by the terms of the agreement, the Company
has determined the interest rate quoted by the SBA to be appropriate for purposes of establishing
the fair value of the note.
14. Subsequent Events
The Company performed an evaluation of subsequent events through the date the Financial Statements
were issued and determined there were no recognized or unrecognized subsequent events that would
require an adjustment or additional disclosure in the Financial Statements as of June 30, 2011.
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Unless the context otherwise requires, all references to we, us, our, and Company refer to
Universal Insurance Holdings, Inc. and its subsidiaries. You should read the following discussion
together with our unaudited condensed consolidated financial statements and the related notes
thereto included in Part I, Item 1Financial Statements. Operating results for any one quarter
are not necessarily indicative of results to be expected for any other quarter or for the year.
Forward-Looking Statements
In addition to historical information, the following discussion may contain forward-looking
statements within the meaning of the Private Securities Reform Litigation Act of 1995. The words
expect, estimate, anticipate, believe, intend, project, plan and similar expressions
and variations thereof-, speak only as of the date the statement was made and are intended to
identify forward-looking statements. Forward-looking statements are based on various factors and
assumptions that include known and unknown risks and uncertainties. Such statements may include,
but not be limited to, projections of revenues, income or loss, expenses, plans, as well as
assumptions relating to the foregoing. Forward-looking statements are inherently subject to risks
and uncertainties, some of which cannot be predicted or quantified. Future results could differ
materially from those in the following discussion and those described in forward-looking statements
as a result of the risks set forth in the section below entitled Cautionary Note Regarding
Forward-Looking Statements.
Overview
We are a vertically integrated insurance holding company performing all aspects of insurance
underwriting, distribution and claims. Through our wholly owned subsidiaries, including Universal
Property & Casualty Insurance Company (UPCIC), we are principally engaged in the property and
casualty insurance business offered primarily through a network of independent agents. Our primary
product is homeowners insurance currently offered in four states, including the State of Florida,
which represented 98% of the 591 thousand policies-in-force as of June 30, 2011 and 98% of the 584
thousand policies-in-force as of December 31, 2010. As for the geographic distribution of business
within Florida as of June 30, 2011 and December 31, 2010, 32% of the policies-in-force are in
Miami-Dade, Broward and Palm Beach Counties. Risk from catastrophic losses is managed through the
use of reinsurance agreements.
We generate revenues primarily from the collection of premiums and the investment of those
premiums. Other significant sources of revenue include commissions collected from reinsurers and
policy fees.
Recent Developments
UPCIC filed a premium rate change for homeowners insurance programs with the Florida Office of
Insurance Regulators (OIR) on November 5, 2010. The rate increase, which will result in an
average rate increase of approximately 14.9 percent statewide, was approved by the OIR on February
3, 2011. The effective dates for the rate increase are February 7, 2011 for new business and March
28, 2011 for renewal business. We expect the approved premium rate increases to have a positive
effect on premiums written and earned in future months as new and renewal policies are written at
the higher rates.
On January 6, 2011, we declared a dividend of $0.10 per share on our outstanding common stock to be
paid on April 7, 2011 to our shareholders of record at the close of business on March 11, 2011.
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During the second quarter, American Platinum Property and Casualty Insurance Company (APPCIC,)
received approval of its rate filing from the OIR. APPCIC intends to write homeowners multi-peril
and inland marine insurance on Florida homes valued in excess of $1 million, which are limits and
coverages currently not targeted by UPCIC.
During the second quarter, UPCIC completed its 2011-2012 reinsurance program effective
June 1, 2011. The following is a description of that program.
2011-2012 Reinsurance Program
Quota Share
Effective June 1, 2011 through May 31, 2012, UPCIC entered into a quota share reinsurance contract
with Everest Re. Everest Re has the following ratings from each of the rating agencies: A+ from
A.M. Best Company, A+ from Standard and Poors Rating Services and Aa3 from Moodys Investors
Service, Inc. Under the quota share contract, UPCIC cedes 50% of its gross written premiums, losses
and loss adjustment expenses (LAE) for policies with coverage for wind risk with a ceding
commission equal to 25% of ceded gross written premiums. In addition, the quota share contract has
a limitation for any one occurrence not to exceed $34.8 million (of which UPCICs net liability on
the first $34.8 million of losses in a first event scenario is $17.4 million, in a second event
scenario is $17.4 million and in a third event scenario is $30 million) and a limitation from
losses arising out of events that are assigned a catastrophe serial number by the Property Claims
Services (PCS) office not to exceed $69.6 million. The contract requires UPCIC to reassume 100%
of the attritional loss and LAE activity from 30% to 37.5% of gross written premium and has a
limitation for LAE not to exceed 30% of indemnity losses paid during the contract period. Further,
the contract limits the amount of premium which can be deducted for inuring reinsurance to $288
million, excluding reinstatement premiums, or $326 million, including reinstatement premiums, if
any.
Excess Per Risk
Effective June 1, 2011 through May 31, 2012, UPCIC entered into a multiple line excess per risk
contract with various reinsurers. Under the multiple line excess per risk contract, UPCIC obtained
coverage of $1.4 million in excess of $600 thousand ultimate net loss for each risk and each
property loss, and $1 million in excess of $300 thousand for each casualty loss. A $7 million
aggregate limit applies to the term of the contract.
Effective June 1, 2011 through May 31, 2012, UPCIC entered into a property per risk excess contract
covering ex-wind only policies. Under the property per risk excess contract, UPCIC obtained
coverage of $400 thousand in excess of $200 thousand for each property loss. A $2 million aggregate
limit applies to the term of the contract.
The total cost of our multiple line excess reinsurance program effective June 1, 2011 through May
31, 2012 is $4,000,000 of which our cost is 50%, or $2,000,000, and the quota share reinsurers
cost is the remaining 50%. The total cost of our property per risk reinsurance program effective
June 1, 2011 through May 31, 2012 is $575,000.
Excess Catastrophe
Effective June 1, 2011 through May 31, 2012, under excess catastrophe contracts, UPCIC obtained
catastrophe coverage of $541.3 million in excess of $185 million covering certain loss occurrences
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including hurricanes. The coverage of $541.3 million in excess of $185 million has a second full
limit available to UPCIC. Additional premium is calculated pro rata as to amount and 100% as to
time, as applicable.
Effective June 1, 2011 through May 31, 2012, UPCIC purchased reinstatement premium protection which
reimburses UPCIC for its cost to reinstate the catastrophe coverage of the first $399.3 million
(part of $541.3 million) in excess of $185 million.
Effective June 1, 2011 through May 31, 2012, under an excess catastrophe contract specifically
covering risks located in Georgia, North Carolina and South Carolina, UPCIC obtained catastrophe
coverage of 50% of $24.8 million in excess of $10 million and 100% of $20 million in excess of
$34.8 million covering certain loss occurrences including hurricanes. Both coverages have a second
full limit available to UPCIC. Additional premium is calculated pro rata as to amount and 100% as
to time, as applicable. The cost of UPCICs excess catastrophe contracts specifically covering
risks in Georgia, North Carolina and South Carolina is $3.9 million.
Effective June 1, 2011 through May 31, 2012, UPCIC also obtained subsequent catastrophe event
excess of loss reinsurance to cover certain levels of UPCICs net retention through three
catastrophe events including hurricanes, as follows:
2nd Event | 3rd Event | |||||||
Coverage
|
$140,200,000 in excess of $44,800,000 each loss occurrence subject to an otherwise recoverable amount of $140,200,000 (placed 100%) |
$155,000,000 in excess of $30,000,000 each loss occurrence subject to an otherwise recoverable amount of $310,000,000 (placed 100%) |
||||||
Deposit premium (100%)
|
$ | 27,759,600 | $ | 11,935,000 | ||||
Minimum premium (100%)
|
$ | 22,207,680 | $ | 9,548,000 | ||||
Premium rate -% of
total insured value
|
0.021863 | % | 0.009400 | % |
UPCIC also obtained coverage from the Florida Hurricane Catastrophe Fund (FHCF), which is
administered by the Florida State Board of Administration (SBA). Under the reimbursement
agreement, the FHCF would reimburse UPCIC, for each loss occurrence during the contract year, for
90% of the ultimate loss paid by UPCIC in excess of its retention plus 5% of the reimbursed losses
to cover loss adjustment expenses, subject to an aggregate contract limit. A covered event means
any one storm declared to be a hurricane by the National Hurricane Center for losses incurred in
Florida, both while it is a hurricane and through subsequent downgrades. For the contract year
June 1, 2011 to May 31, 2012, UPCIC purchased the traditional FHCF coverage and did not purchase
the Temporary Increase in
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Coverage Limit Option offered to insurers by the FHCF. UPCICs initial estimate of its traditional
FHCF coverage is 90% of $1.193 billion in excess of $465 million. The estimated premium for this
coverage is $74,600,526. The final amount of UPCICs traditional FHCF coverage for the contract
year will be determined by the FHCF based upon UPCICs exposures in-force as of June 30, 2011, as
reported by UPCIC to the FHCF by September 1, 2011.
Also at June 1, 2011, the FHCF made available, and UPCIC obtained, $10,000,000 of additional
catastrophe excess of loss coverage with one free reinstatement of coverage to carriers qualified
as Limited Apportionment Companies or companies that participated in the Insurance Capital Build-Up
Incentive (ICBUI) Program offered by the FHCF, such as UPCIC. This particular layer of coverage
at June 1, 2011 is $10,000,000 in excess of $34,800,000. The premium for this coverage is
$5,000,000.
On May 27, 2011, the SBA published its most recent estimate of the FHCFs loss reimbursement
capacity in the Florida Administrative Weekly. The SBA estimated that the FHCFs total loss
reimbursement capacity under current market conditions for the 2011 2012 contract year is
projected to be $18.551 billion over the 12-month period following the estimate. The SBA also
referred to its report entitled, May 2011 Estimated Claims Paying Capacity Report (Report) as
providing greater detail regarding the FHCFs loss reimbursement capacity. The Report estimated
that the FHCFs loss reimbursement capacity range is $18.25 billion $20.25 billion. UPCIC elected
to purchase the FHCF Mandatory Layer of Coverage for the 2011 2012 contract year, which
corresponds to FHCF loss reimbursement capacity of $17 billion. By law, the FHCFs obligation to
reimburse insurers is limited to its actual claims-paying capacity. The aggregate cost of UPCICs
reinsurance program may increase should UPCIC deem it necessary to purchase additional private
market reinsurance due to reduced estimates of the FHCFs loss reimbursement capacity.
The total cost of UPCICs multiple line excess and property per risk reinsurance program effective
June 1, 2011 through May 31, 2012 is $4.575 million, of which UPCICs cost is $2.575 million, and
the quota share reinsurers cost is the remaining $2 million. The total cost of UPCICs underlying
excess catastrophe contract with T25 (see below) is $111.4 million, subject to a potential return
premium of $83.4 million, which is eliminated in consolidation. The total cost of UPCICs private
catastrophe reinsurance program effective June 1, 2011 through May 31, 2012 is $135.8 million, of
which UPCICs cost is 50%, or $67.9 million, and the quota share reinsurers cost is the remaining
50%. In addition, UPCIC purchases reinstatement premium protection as described above, the cost of
which is $22.4 million. UPCICs cost of the subsequent catastrophe event excess of loss reinsurance
is $19.8 million. The estimated premium that UPCIC plans to cede to the FHCF for the 2011 hurricane
season is $74.6 million of which UPCICs cost is 50%, or $37.3 million, and the quota share
reinsurers cost is the remaining 50%. UPCIC is also participating in the additional coverage
option for Limited Apportionment Companies or companies that participated in the Insurance Capital
Build-Up Incentive Program offered by the FHCF, the premium for which is $5 million, of which
UPCICs cost is 50%, or $2.5 million, and the quota share reinsurers cost is the remaining 50%.
UPCIC is responsible for losses related to catastrophic events with incurred losses in excess of
coverage provided by UPCICs reinsurance program and for losses that otherwise are not covered by
the reinsurance program, which could have a material adverse effect on UPCICs and our business,
financial condition and results of operations. UPCICs private market reinsurance costs are subject
to increases or decreases if changes in its earned premiums or the total insured value under its
in-force policies as of August 31, 2011, are outside of ranges specified in certain of its
reinsurance contracts.
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UPCIC estimates based upon its in-force exposures as of June 1, 2011, it had coverage to
approximately
the 125-year Probable Maximum Loss (PML), modeled using AIR CLASIC/2 v.11.0, long term, without
demand surge. Recently, AIR updated its catastrophe model and outlook of risk with the release of
its new version, AIR CLASIC/2 v12.04. UPCIC estimates, based on its in-force exposures as of June
1, 2011, that it had coverage to approximately the 88-year PML, modeled using AIR CLASIC/2 v.12.04,
long term, without demand surge. Additionally, from time to time, UPCIC uses estimates from other
catastrophe modeling vendors to estimate its PML. UPCIC estimates based upon its in-force exposures
as of June 1, 2011, that it had coverage to approximately the 129-year PML, modeled using RMSs new
release of its RiskLink model, v11, long term, without loss amplification. PML is a general concept
applied in the insurance industry for defining high loss scenarios that should be considered when
underwriting insurance risk. Catastrophe models produce loss estimates that are qualified in terms
of dollars and probabilities. Probability of exceedance or the probability that the actual loss
level will exceed a particular threshold is a standard catastrophe model output. For example, the
100-year PML represents a 1.00% Annual Probability of Exceedance (the 125-year, 88-year and
129-year PML represents a 0.80%, 1.14% and 0.78% Annual Probability of Exceedance, respectively,
for AIR v11.0, AIR v12.04 and RMS v11). It is estimated that the 100-year PML is likely to be
equaled or exceeded in one year out of 100 on average, or 1 percent of the time. It is the 99th
percentile of the annual loss distribution.
UPCIC limits the maximum net loss that can arise from large risks or risks in concentrated areas of
exposure by reinsuring (ceding) certain levels of risks with other insurers or reinsurers on an
automatic basis under reinsurance contracts. The reinsurance arrangements are intended to provide
UPCIC with the ability to limit its exposure to losses within its capital resources. Such
reinsurance includes quota share, excess of loss and catastrophe forms of reinsurance. UPCIC
submits the reinsurance program for regulatory review to the OIR.
Other than the changes in operating assets and liabilities described in the Analysis of Financial
Condition contained herein, the implementation of the 2011-2012 reinsurance program did not have a
material impact on our Consolidated Financial Statements for the
second quarter of 2011, nor did any such impact differ materially
from the impact of the 2010-2011 reinsurance program on the
Consolidated Financial Statements for the second quarter of 2010. However, there could be a material adverse impact on our Financial Statements in the
event of catastrophic losses in the future.
With the implementation of our 2011-2012 reinsurance program, we
retained a maximum, pre-tax
net liability of $157.6 million for the first catastrophic event up to $1.8 billion of losses.
Refer to the table on page 29 for information with respect to subsequent catastrophic events
coverage. If catastrophic losses result in a net operating loss for the 2011 tax year, we can carry
back the net operating loss to the 2010 and 2009 tax years and recover all, or a portion of,
income taxes paid in those years.
In addition to coverage obtained by UPCIC under the reinsurance programs, the ultimate parent of
UPCIC obtained $60,000,000 of coverage via a catastrophe risk-linked transaction contract,
effective June 1, 2011 through December 31, 2011, in the event UPCICs catastrophe coverage is
exhausted. The total cost of the risk-linked transaction contract is $8,662,500.
Segregated Account T25
Universal Insurance Holdings Inc. owns and maintains a segregated account, Segregated Account T25 -
Universal Insurance Holdings of White Rock Insurance (SAC) Ltd. (T25) established by a
third-party reinsurer in accordance with Bermuda law. T25 enters into underlying excess catastrophe
contracts with UPCIC for the purpose of assuming the risk of certain policies issued by UPCIC,
covering certain loss occurrences including hurricanes. Universal Insurance Holdings Inc. secures
the obligations of T25 to UPCIC under these contracts by contributing the amount of T25s liability
for losses, net of UPCICs required premium payments, to a trust account as collateral. The
collateral will be used to pay any claims that may arise in the event of the occurrence of covered
events. Transactions related to this arrangement are eliminated in consolidation; however, the
amount of collateral is held in trust for the benefit of UPCIC until the occurrence of a covered
event, expiration or termination of the agreement between T25 and UPCIC.
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On May 31, 2011, T25 and UPCIC mutually agreed to a Commutation and Settlement Agreement related to
the underlying Property Catastrophe Excess of Loss Reinsurance Contract that was effective January
1, 2011. A replacement contract was entered into between the parties on June 1, 2011 as part of
UPCICs reinsurance program in effect for the period June 1, 2011, through May 31, 2012. In
conjunction with entering into the replacement contract, Universal Insurance Holdings Inc.
contributed additional funds to T25 due to the increased reinsurance coverage and collateral
requirements. The amount of collateral in the trust account at June 30, 2011 was $31 million.
Results of Operations Three Months Ended June 30, 2011 Compared to Three Months Ended June 30, 2010
The following table summarizes changes in each component of our Statement of Income for the three
months ended June 30, 2011 compared to the same period in 2010 (in thousands):
Three Months Ended | ||||||||||||||||
June 30, | Change | |||||||||||||||
2011 | 2010 | $ | % | |||||||||||||
PREMIUMS EARNED AND OTHER REVENUES |
||||||||||||||||
Direct premiums written |
$ | 213,479 | $ | 208,020 | $ | 5,459 | 2.6 | % | ||||||||
Ceded premiums written |
(145,798 | ) | (121,304 | ) | (24,494 | ) | 20.2 | % | ||||||||
Net premiums written |
67,681 | 86,716 | (19,035 | ) | -22.0 | % | ||||||||||
(Increase) decrease in net unearned premium |
(18,157 | ) | (45,356 | ) | 27,199 | NM | ||||||||||
Premiums earned, net |
49,524 | 41,360 | 8,164 | 19.7 | % | |||||||||||
Net investment income |
(21 | ) | 118 | (139 | ) | -117.8 | % | |||||||||
Net realized gains on investments |
2,960 | 4,457 | (1,497 | ) | -33.6 | % | ||||||||||
Net unrealized losses on investments |
(9,640 | ) | | (9,640 | ) | |||||||||||
Net foreign currency gains (losses) on
investments |
| 125 | (125 | ) | NM | |||||||||||
Commission revenue |
4,941 | 4,244 | 697 | 16.4 | % | |||||||||||
Policy fees |
4,402 | 4,540 | (138 | ) | -3.0 | % | ||||||||||
Other revenue |
1,506 | 1,016 | 490 | 48.2 | % | |||||||||||
Total premiums earned and other revenues |
53,672 | 55,860 | (2,188 | ) | -3.9 | % | ||||||||||
OPERATING COSTS AND EXPENSES |
||||||||||||||||
Losses and loss adjustment expenses |
25,852 | 24,835 | 1,017 | 4.1 | % | |||||||||||
General and administrative expenses |
14,699 | 13,389 | 1,310 | 9.8 | % | |||||||||||
Total operating costs and expenses |
40,551 | 38,224 | 2,327 | 6.1 | % | |||||||||||
INCOME BEFORE INCOME TAXES |
13,121 | 17,636 | (4,515 | ) | -25.6 | % | ||||||||||
Income taxes, current |
9,622 | 8,172 | 1,450 | 17.7 | % | |||||||||||
Income taxes, deferred |
(4,050 | ) | (1,303 | ) | (2,747 | ) | 210.8 | % | ||||||||
Income taxes, net |
5,572 | 6,869 | (1,297 | ) | -18.9 | % | ||||||||||
NET INCOME |
$ | 7,549 | $ | 10,767 | $ | (3,218 | ) | -29.9 | % | |||||||
The increase in net earned premiums of $8.2 million, or 19.7% was due to an increase in the
number of policies written generated by our agent network and rate increases which became effective
in February 2011 as well as those that became effective in the latter part of 2009. These rate
increases have had a positive effect on premium generated by renewal policies. The benefit from
these factors was partially offset by an increase in the number of policies-in-force eligible for
wind mitigation credits.
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The following table reflects the effect of wind mitigation credits received by UPCIC
policyholders (in thousands):
Reduction of in-force premium (only policies including | ||||||||||||||||
wind coverage) | ||||||||||||||||
Percentage of UPCIC | Percentage | |||||||||||||||
policyholders | reduction of | |||||||||||||||
Date | receiving credits | Total credits | In-force premium | in-force premium | ||||||||||||
6/1/2007 |
1.9 | % | $ | 6,285 | $ | 487,866 | 1.3 | % | ||||||||
12/31/2007 |
11.8 | % | $ | 31,952 | $ | 500,136 | 6.0 | % | ||||||||
3/31/2008 |
16.9 | % | $ | 52,398 | $ | 501,523 | 9.5 | % | ||||||||
6/30/2008 |
21.3 | % | $ | 74,186 | $ | 508,412 | 12.7 | % | ||||||||
9/30/2008 |
27.3 | % | $ | 97,802 | $ | 515,560 | 16.0 | % | ||||||||
12/31/2008 |
31.1 | % | $ | 123,525 | $ | 514,011 | 19.4 | % | ||||||||
3/31/2009 |
36.3 | % | $ | 158,230 | $ | 530,030 | 23.0 | % | ||||||||
6/30/2009 |
40.4 | % | $ | 188,053 | $ | 544,646 | 25.7 | % | ||||||||
9/30/2009 |
43.0 | % | $ | 210,292 | $ | 554,379 | 27.5 | % | ||||||||
12/31/2009 |
45.2 | % | $ | 219,974 | $ | 556,557 | 28.3 | % | ||||||||
3/31/2010 |
47.8 | % | $ | 235,718 | $ | 569,870 | 29.3 | % | ||||||||
6/30/2010 |
50.9 | % | $ | 281,386 | $ | 620,277 | 31.2 | % | ||||||||
9/30/2010 |
52.4 | % | $ | 291,306 | $ | 634,285 | 31.5 | % | ||||||||
12/31/2010 |
54.2 | % | $ | 309,858 | $ | 648,408 | 32.3 | % | ||||||||
3/31/2011 |
55.8 | % | $ | 325,511 | $ | 660,303 | 33.0 | % | ||||||||
6/30/2011 |
56.4 | % | $ | 322,640 | $ | 673,951 | 32.4 | % |
Net unrealized losses on investments of $9.6 million recorded during the three months ended
June 30, 2011 reflect the net decrease in value of investment securities held in our trading
portfolio as of June 30, 2011. We will continue to record future changes in the market value of
our trading portfolio directly to earnings as unrealized gains and losses on investments. During
2010, management evaluated the trading activity of our investment portfolio, investing strategy,
and overall investment program. As a result of this evaluation, we reclassified the
available-for-sale portfolio as a trading portfolio effective July 1, 2010. Since July 1, 2010,
changes in the market value of our trading portfolio are recorded directly to revenues as
unrealized gains or losses on investments. In previous periods, the changes in unrealized gains and
losses on the available-for-sale portfolio were appropriately included in Other Comprehensive
Income rather than current period income.
Commission revenue is comprised principally of reinsurance commission sharing agreements. The
increase in commission revenue of $697 thousand is due to an increase in the amount of ceded
premiums.
The
increase in other revenues of $490 thousand is primarily due to a higher volume of
policyholders participating in our installment payment plan program offered by UPCIC.
The increase in net losses and LAE of $1 million was primarily related to the servicing of
additional policies due to the growth in policy count on a year-over-year basis.
The net loss and LAE ratios, or net losses and LAE as a percentage of net earned premiums, were
52.2% and 60.0% during the three-month periods ended June 30, 2011 and 2010, respectively, and were
comprised of the following components (in thousands):
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Three months ended June 30, 2011 | ||||||||||||
Direct | Ceded | Net | ||||||||||
Loss and loss
adjustment expenses |
$ | 53,360 | $ | 27,508 | $ | 25,852 | ||||||
Premiums earned |
$ | 170,134 | $ | 120,610 | $ | 49,524 | ||||||
Loss & LAE ratios |
31.4 | % | 22.8 | % | 52.2 | % |
Three months ended June 30, 2010 | ||||||||||||
Direct | Ceded | Net | ||||||||||
Loss and loss
adjustment expenses |
$ | 50,345 | $ | 25,510 | $ | 24,835 | ||||||
Premiums earned |
$ | 150,600 | $ | 109,240 | $ | 41,360 | ||||||
Loss & LAE ratios |
33.4 | % | 23.4 | % | 60.0 | % |
The reduction in the direct loss and LAE ratio reflects an increase in earned premiums and
favorable loss experience.
General and administrative expenses increased by $1.3 million due to an increase in the
amortization of deferred acquisition costs of $710 thousand and an increase in other general
administrative expenses of $600 thousand. The increase in amortization of deferred acquisition
costs is primarily in response to an
increase in commissions paid on direct premium and the associated premium taxes thereon.
Commissions and premium taxes are directly related to the volume of direct premium. As noted
previously, direct written premium has increased by $5.5 million in response to an increase in the
number of policies-in-force and the increase in in-force premium per policy. Increased expenses of
$3.1 million were partially offset by an increase in ceding commissions of $2.4 million. The
increase in other general administrative expenses includes increases
related to Florida Insurance Guarantee
Association assessments of $1.4 million, legal fees of $243 thousand due to corporate planning
matters, and interest expense of $112 thousand, offset by decreases in stock-based compensation of
$686 thousand, performance bonuses of $440 thousand and equipment expenses of $119 thousand.
Income tax expense decreased by $1.3 million as a result of a $4.5 million decrease in taxable
income. Our effective tax rate increased to 42.5% for the three months ended June 30, 2011 from
38.9% for the same period in the prior year to primarily as a result of estimated penalties and
interest recorded during the second quarter of 2011 from the underpayment of federal and state
income taxes. We have limited our payments of estimated income taxes during 2011 due to the
uncertainty of potential losses during the current hurricane season and the effect of those
potential losses on pre-tax earnings and our ultimate income tax liability for the year.
The decrease in net income of $3.2 million is primarily attributable to the performance of the
trading portfolio partially offset by benefits derived from an increase in the number of
policies-in-force during the three-month period ended June 30, 2011 compared to the same period in
2010, and an improvement in loss experience.
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Results of Operations Six Months Ended June 30, 2011 Compared to Six Months Ended June 30, 2010
The following table summarizes changes in each component of our Statement of Income for the six
months ended June 30, 2011 compared to the same period in 2010 (in thousands):
Six Months Ended June 30, | Change | |||||||||||||||
2011 | 2010 | $ | % | |||||||||||||
PREMIUMS EARNED AND OTHER REVENUES |
||||||||||||||||
Direct premiums written |
$ | 386,654 | $ | 368,119 | $ | 18,535 | 5.0 | % | ||||||||
Ceded premiums written |
(269,689 | ) | (248,872 | ) | (20,817 | ) | 8.4 | % | ||||||||
Net premiums written |
116,965 | 119,247 | (2,282 | ) | -1.9 | % | ||||||||||
(Increase) decrease in net unearned premium |
(19,437 | ) | (44,573 | ) | 25,136 | NM | ||||||||||
Premiums earned, net |
97,528 | 74,674 | 22,854 | 30.6 | % | |||||||||||
Net investment income |
236 | 311 | (75 | ) | -24.1 | % | ||||||||||
Net realized gains on investments |
6,612 | 8,152 | (1,540 | ) | -18.9 | % | ||||||||||
Net unrealized losses on investments |
(7,052 | ) | | (7,052 | ) | |||||||||||
Net foreign currency gains (losses) on
investments |
71 | 809 | (738 | ) | -91.2 | % | ||||||||||
Other-than-temporary impairment of
investments |
| (2,408 | ) | 2,408 | NM | |||||||||||
Commission revenue |
9,121 | 9,046 | 75 | 0.8 | % | |||||||||||
Policy fees |
8,575 | 8,476 | 99 | 1.2 | % | |||||||||||
Other revenue |
2,914 | 2,020 | 894 | 44.3 | % | |||||||||||
Total premiums earned and other revenues |
118,005 | 101,080 | 16,925 | 16.7 | % | |||||||||||
OPERATING COSTS AND EXPENSES |
||||||||||||||||
Losses and loss adjustment expenses |
52,037 | 48,487 | 3,550 | 7.3 | % | |||||||||||
General and administrative expenses |
29,771 | 23,578 | 6,193 | 26.3 | % | |||||||||||
Total operating costs and expenses |
81,808 | 72,065 | 9,743 | 13.5 | % | |||||||||||
INCOME BEFORE INCOME TAXES |
36,197 | 29,015 | 7,182 | 24.8 | % | |||||||||||
Income taxes, current |
18,359 | 11,656 | 6,703 | 57.5 | % | |||||||||||
Income taxes, deferred |
(3,609 | ) | (352 | ) | (3,257 | ) | 925.3 | % | ||||||||
Income taxes, net |
14,750 | 11,304 | 3,446 | 30.5 | % | |||||||||||
NET INCOME |
$ | 21,447 | $ | 17,711 | $ | 3,736 | 21.1 | % | ||||||||
The increase in net earned premiums of $22.9 million, or 30.6% was due to an increase in the
number of policies written generated by our agent network and rate increases which became effective
in February 2011, as well as those that became effective in the latter part of 2009. These rate
increases have had a positive effect on premiums generated by renewal policies. This benefit was
partially offset by an increase in the number of policies-in-force eligible for, and receiving wind
mitigation credits. See Results of Operations Three Months Ended June 30, 2011 Compared to
Three Months Ended June 30, 2010 for a table reflecting the effect of wind mitigation credits
received by UPCIC policyholders.
Net unrealized losses reflect a reduction in market value of investment securities held in the
trading portfolio at June 30, 2011. We will continue to record future changes in the market value
of our trading portfolio directly to earnings as unrealized gains and losses on investments. All
investment securities held at June 30, 2010 were classified as available for sale with net
unrealized losses reflected in Accumulated Other Comprehensive Income in the
Condensed Consolidated Statement of Financial Condition.
During the six months ended June 30, 2010, we recorded $2.4 million of other than temporary losses
for certain securities that were available for sale. Effective July 1, 2010, we transferred all
securities classified as available for sale to the trading portfolio and recognized all unrealized
gains and losses in earnings thereafter.
The decrease of $738 thousand in foreign currency gains from $809 thousand to $71 thousand is due
primarily to a lower volume of investment securities denominated in foreign currencies.
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The increase in other revenues of $894 thousand is due primarily to a higher volume of
policyholders participating in our installment payment plan program offered by UPCIC.
The increase in net losses and LAE of $3.6 million, or 7.3%, was primarily related to the servicing
of additional policies due to the growth in policy count on a year-over-year basis.
The net loss and LAE ratios, or net losses and LAE as a percentage of net earned premiums, were
53.4% and 64.9% during the six-month periods ended June 30, 2011 and 2010, respectively, and were
comprised of the following components (in thousands):
Six months ended June 30, 2011 | ||||||||||||
Direct | Ceded | Net | ||||||||||
Loss and loss adjustment
expenses |
$ | 106,491 | $ | 54,454 | $ | 52,037 | ||||||
Premiums earned |
$ | 334,721 | $ | 237,193 | $ | 97,528 | ||||||
Loss & LAE ratios |
31.8 | % | 23.0 | % | 53.4 | % |
Six months ended June 30, 2010 | ||||||||||||
Direct | Ceded | Net | ||||||||||
Loss and loss adjustment
expenses |
$ | 97,026 | $ | 48,539 | $ | 48,487 | ||||||
Premiums earned |
$ | 290,754 | $ | 216,080 | $ | 74,674 | ||||||
Loss & LAE ratios |
33.4 | % | 22.5 | % | 64.9 | % |
The improvement in the direct loss and LAE ratio for the six-month period ended June 30, 2011,
compared to the same period in the prior year, was the result of an increase in earned premiums and
favorable loss experience.
General and administrative expenses increased by $6.2 million due to an increase in the
amortization of deferred acquisition costs of $2.8 million and an increase in other general
administrative expenses of $3.4 million. The increase in amortization of deferred acquisition costs
is primarily in response to an increase in commissions paid on direct premium and the associated
premium taxes thereon. Commissions and premium taxes are directly related to the volume of direct
premium. As noted previously, direct written premium has increased by $18.5 million in response to
an increase in the number of policies-in-force and the increase in in-force premium per policy.
Increased expenses of $8.2 million were partially offset by an increase in ceding commissions of
$5.4 million. The increase in other general and administrative expenses includes increases related to
Florida Insurance Guarantee Association assessments of $1.3 million, legal fees of $584 thousand
due to corporate planning matters, performance bonuses of $408 thousand, and insurance of $169
thousand.
Income taxes increased by $3.4 million, or 30.5% primarily as a result of an increase in
pre-tax income. The effective tax rate increased to 40.7% for the six months ended June 30,
2011 from 39.0% for the same period in the prior year primarily as a result of estimated penalties
and interest recorded in the second quarter of 2011 from the underpayment of federal and state
income taxes. We have limited our payments of estimated income taxes during 2011 due to the
uncertainty of potential losses during the current hurricane season and the effect of those
potential losses on pre-tax earnings and our ultimate income tax liability for the year.
The increase in net income of $3.7 million, or 21.1%, is primarily attributable to the
increase in net premiums earned, partially offset by losses incurred in the investment securities
trading portfolio.
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Analysis of Financial Condition As of June 30, 2011 Compared to December 31, 2010
We believe that premiums will be sufficient to meet our working capital requirements for at least
the next twelve months.
Our policy is to invest amounts considered to be in excess of current working capital
requirements. We reduced our aggregate investment securities to $95.9 million as of June 30, 2011
from $224.5 million as of December 31, 2010 in response to market conditions. We have a receivable
of $20.5 million at June 30, 2011 for securities sold that have not yet settled compared to $17.6
million at December 31, 2010.
The following table summarizes, by type, the carrying values of investments (in thousands):
As of June 30, | As of December 31, | |||||||
Type of Investment | 2011 | 2010 | ||||||
Cash and cash equivalents |
$ | 356,739 | $ | 147,585 | ||||
Debt securities |
3,595 | 130,116 | ||||||
Equity securities |
92,350 | 94,416 | ||||||
Non-hedge derivatives |
739 | 182 | ||||||
Total Investments |
$ | 453,423 | $ | 372,299 | ||||
Prepaid reinsurance premiums represent ceded unearned premiums related to our catastrophe and
quota share reinsurance programs. The increase of $32.5 million to $253.6 million during the six
months ended June 30, 2011 was primarily due to an increase in prepaid reinsurance premiums for
catastrophe reinsurance coverage, as previously described in Recent Developments, 2011-2012
Reinsurance Program, and an increase in quota share reinsurance premiums commensurate with the
increase in direct written premium. Premiums for catastrophe reinsurance coverage are earned over
the respective contract periods which are generally effective from June 1, 2011 through May 31,
2012.
Premiums receivable represent amounts due from policyholders. The increase of $8.4
million to $52 million during the six months ended June 30, 2011 was due to the growth in direct
written premiums and an increase in the number of policyholders participating in the installment
payment plan program offered by UPCIC.
Unearned premiums represent the portion of written premiums that will be earned pro rata in the
future. The increase of $51.9 million to $380.3 million during the six months ended June 30, 2011
was due to growth in, and timing of, direct written premiums.
Advance premiums represent premiums paid prior to the date they are contractually due. The increase
of $6.0 million to $25.8 million during the six months ended June 30, 2011 was due to an increase
in
aggregate collections from policyholders on renewal policies with effective dates after the balance
sheet date.
Reinsurance payable, net, represents our liability to reinsurers for ceded written premiums, net of
ceding commissions and inuring premiums receivable. The increase of $54.6 million to $92.5 million during the six months ended
June 30, 2011 was primarily due to the timing of settlements with reinsurers and amounts not yet
due to reinsurers for catastrophe reinsurance coverage, as previously described in Recent
Developments, 2011-2012 Reinsurance Program.
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Liquidity and Capital Resources
Liquidity
Liquidity is a measure of a companys ability to generate sufficient cash flows to meet its short
and long-term obligations.
The balance of cash and cash equivalents as of June 30, 2011 was $356.7 million compared to $147.6
million at December 31, 2010. Most of this amount is available to pay claims in the event of a
catastrophic event pending reimbursement amounts recoverable under reinsurance agreements. The
source of liquidity for possible claim payments consists of the collection of net premiums after
deductions for expenses, reinsurance recoverables and short-term loans.
We hold collateral in a trust account for the benefit of UPCIC until the occurrence of a
covered event, expiration or termination of the agreement between T25 and UPCIC. The amount of collateral in
the trust account at June 30, 2011 was $31 million.
The Companys liquidity requirements primarily include potential payments of catastrophe loses, the payment of dividends to shareholders, and
interest and principal payments on debt obligations. The declaration and payment of future dividends to
shareholders will be at the discretion of our Board of Directors and will depend upon many factors,
including our operating results, financial condition, capital requirements and any regulatory
constraints.
Our insurance operations provide liquidity in that premiums are generally received months or even
years before losses are paid under the policies sold. Historically, cash receipts from operations,
consisting of insurance premiums, commissions, policy fees and investment income, have provided
more than sufficient funds to pay loss claims and operating expenses. We maintain substantial
investments in highly liquid, marketable securities. Liquidity can also be generated by funds
received upon the sale of marketable securities in our investment portfolio.
Effective July 1, 2010, we elected to classify our securities investment portfolio as trading.
Accordingly, purchases and sales of investment securities are included in cash flows from
operations beginning July 1, 2010. We generated $215.2 million in cash from operations during the
six months ended June 30, 2011 compared to $97 million of cash generated by operating activities
for the six months ended June 30, 2010. The generation of cash during the six months ended June 30,
2011 reflects proceeds from sales of investment securities, net of purchases of $126.5 million.
UPCIC is responsible for losses related to catastrophic events with incurred losses in excess of
coverage provided by UPCICs reinsurance programs and for losses that otherwise are not covered by
the reinsurance programs, which could have a material adverse effect on UPCICs and our business,
financial condition, results of operations and liquidity (see Note 4 for a discussion of the
2011-2012 reinsurance program and Note 3 to our Consolidated Financial Statements in Part II, Item
8 of Form 10-K for the Year Ended December 31, 2010 for a discussion of the 2008-2009, 2009-2010,
and 2010-2011 reinsurance programs).
Funds generated from operations have generally been sufficient to meet liquidity requirements and
we expect that in the future funds from operations will continue to meet such requirements. There
can be no assurances, however, that this will be the case.
Capital Resources
Capital resources provide protection for policyholders, furnish the financial strength to support
the business of underwriting insurance risks and facilitate continued business growth. At June 30,
2011, we had total capital of $180.6 million comprised of shareholders equity of $158.2 million
and total debt of
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$22.4 million. Our debt-to-total-capital ratio and debt-to-equity ratio were 12.4% and 14.1%,
respectively, at June 30, 2011.
At June 30, 2011, UPCIC was in compliance with all of covenants under its surplus note and its
total adjusted capital was in excess of regulatory requirements.
Cash Dividends
On January 6, 2011, we declared a dividend of $0.10 per share on our outstanding common stock to be
paid on April 7, 2011 to the shareholders of record at the close of business on March 11, 2011.
Contractual Obligations
There have been no material changes during the period covered by this Quarterly Report on Form
10-Q, outside of the ordinary course of business, to the contractual obligations specified in the
table of contractual obligations included in Part 1, Item 7, Managements Discussion and Analysis
of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for
the year ended December 31, 2010.
Critical Accounting Policies and Estimates
There have been no material changes during the period covered by this Quarterly Report on Form 10-Q
to Critical Accounting Policies and Estimates previously disclosed in Part II, Item 7,
Managements Discussion and Analysis of Financial Condition and Results of Operations included in
our Annual Report on Form 10-K for the year ended December 31, 2010.
Related Parties
See Note 8 Related Party Transactions in our Notes to Condensed Consolidated Financial Statements
for information about related parties.
Cautionary Note Regarding Forward-Looking Statements
We operate in a rapidly changing environment that involves a number of uncertainties, some of which
are beyond our control. Certain statements made in this report that reflect managements
expectations regarding future events are forward looking in nature and, accordingly are subject to
risks and uncertainties. These forward-looking statements are only current expectations about
future events. Actual results could differ materially from those set forth in or implied by any
forward-looking statement. Factors that could cause or contribute to such differences include, but
are not limited to, risk factors set forth in filings with the Securities and Exchange Commission,
including our annual and quarterly reports. The following is a summary of uncertainties which were
disclosed in greater detail in Factors Affecting Operating Results and Market Price of Stock in
our Annual Report on Form 10-K for the year ended December 31, 2010.
| Industry risks relating to fluctuating operating results caused by competition, catastrophe losses, general economic conditions including interest rate changes and market conditions, legislative initiatives, the regulatory environment, the frequency of litigation, the size of judgments, severe weather conditions, climate changes or cycles, the role of federal or state government in the insurance market, judicial or other authoritative interpretations of laws and policies, and the availability and cost of reinsurance. |
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| Our ability to manage our exposure to catastrophic losses. | ||
| Risks related to our dependence upon third party developers of models to estimate hurricane losses and the reasonableness of assumptions or scenarios incorporated into the models which may be provided by third parties or management. | ||
| Risks related to our dependence upon third parties to perform certain functions including, but not limited to the purchase of reinsurance and risk management analysis. We also rely on reinsurers to limit the amount of risk retained under our policies and to increase our ability to write additional risks. | ||
| Our ability to obtain reinsurance to the same extent and at the same cost as currently in place and minimize the loss of potential profits by ceding premiums to reinsurers. | ||
| Credit risk, including certain concentrations with respect to our reinsurers, in light of our primary liability for the full amount of the risk underlying the reinsurance agreements. | ||
| Risks related to the ability of the Florida Hurricane Catastrophe Fund (FHCF) to provide reimbursements at levels requested and relied upon by us or as timely as required by our claims payments to policyholders. In addition, the cost of our reinsurance program may increase should we deem it necessary to purchase additional private market reinsurance due to reduced estimates of the FHCFs claims-paying capacity. | ||
| Risks that laws, contracts or requirements relating to the FHCF may not be interpreted in a manner consistent with UPCICs understandings or will change in the future. | ||
| Our ability to estimate and maintain adequate liabilities to pay claims for losses and loss adjustment expenses. | ||
| Adverse regulation or legislation. | ||
| Our ability to implement sufficient and timely rate adjustments to provide aggregate premiums commensurate with expected losses. | ||
| Risks related to our dependence upon the efforts of key individuals. | ||
| Our ability to compete in a highly competitive industry. | ||
| Our ability to maintain our financial stability rating provided by Demotech, Inc. |
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk is the potential for economic losses due to adverse changes in fair value of financial
instruments. Our primary market risk exposures are related to our investment portfolio and include
interest rates, equity prices and commodity prices, and to a lesser extent, our debt obligations.
Investments in debt and equity securities held in trading are carried on the balance sheet at fair
value. Our investment portfolio as of June 30, 2011 was comprised of approximately 4% debt
securities and 96% equity securities, all of which were held for trading. Our investment portfolio
as of December 31, 2010 was comprised approximately of 57% fixed income securities and 43% equity
securities, all of which were held for trading. The surplus note, as previously described in
Liquidity and Capital Resources, accrues interest at an adjustable rate based on the 10-year
Constant Maturity Treasury rate.
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Our investment objective is to maximize total rate of return after federal income taxes while
maintaining liquidity and minimizing risk. Our investment portfolio is managed by an investment
committee consisting of all current directors in accordance with guidelines established by the OIR.
The committee reviews the managements investment policies on a regular basis. The current
investment policy limits investment in non-investment grade fixed maturity securities (including
high-yield bonds), and limits total investments in preferred stock and common stock. We comply with
applicable laws and regulations, which further restrict the type, quality and concentration of
investments. In general, these laws and regulations permit investments, within specified limits and
subject to certain qualifications, in federal, state and municipal obligations, corporate bonds,
preferred and common equity securities and real estate mortgages.
Interest Rate Risk
Interest rate risk is the sensitivity of a fixed-rate instrument to changes in interest rates. When
interest rates rise, the fair value of our fixed-rate instruments decline.
The following table provides information about our fixed income investments, which are sensitive to
changes in interest rates. The table presents cash flows of principal amounts and related weighted
average interest rates by expected maturity dates for investments held in trading at June 30, 2011
and December 31, 2010 (in thousands):
As of June 30, 2011 | ||||||||||||||||||||||||||||||||
Total | ||||||||||||||||||||||||||||||||
2011 | 2012 | 2013 | 2014 | 2015 | Thereafter | Amortized Cost | Fair Value | |||||||||||||||||||||||||
US government and agency
obligations |
$ | | $ | 173 | $ | | $ | | $ | | 3,035 | $ | 3,208 | $ | 3,595 | |||||||||||||||||
average interest rate |
2.6 | % | 2.0 | % | 4.6 | % | 4.6 | % |
As of December 31, 2010 | ||||||||||||||||||||||||||||||||
Total | ||||||||||||||||||||||||||||||||
2010 | 2011 | 2012 | 2013 | 2014 | Thereafter | Amortized Cost | Fair Value | |||||||||||||||||||||||||
US government and agency
obligations |
$ | | $ | | $ | 174 | $ | | $ | | $ | 137,792 | $ | 137,966 | $ | 130,116 | ||||||||||||||||
average interest rate |
2.6 | % | 1.3 | % | 3.9 | % | 3.9 | % |
United States government and agency securities are rated from AAA to Aaa by Moodys Investors
Service, Inc., and AAA by Standard and Poors Company.
Equity and Commodity Price Risk
Equity and commodity price risk is the potential for loss in fair value of investments in common
stock, exchange-traded funds (ETF), and mutual funds from adverse changes in the prices of those
instruments.
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The following table provides information about the composition of equity and commodity securities
held in the Companys investment portfolio (in thousands):
As of June 30, 2011 | As of December 31, 2010 | |||||||||||||||
Fair Value | Percent of Total | Fair Value | Percent of Total | |||||||||||||
Common stock: |
||||||||||||||||
Metals and mining |
$ | 33,537 | 36.4 | % | $ | 25,752 | 27.3 | % | ||||||||
Other |
1,315 | 1.4 | % | 362 | 0.4 | % | ||||||||||
Exchange-traded and
mutual funds: |
||||||||||||||||
Metals and mining |
33,634 | 36.4 | % | 42,209 | 44.7 | % | ||||||||||
Agriculture |
18,761 | 20.3 | % | 14,877 | 15.7 | % | ||||||||||
Energy |
2,215 | 2.4 | % | 5,559 | 5.9 | % | ||||||||||
Indices |
| 0.0 | % | 4,613 | 4.9 | % | ||||||||||
Other |
2,888 | 3.1 | % | 1,044 | 1.1 | % | ||||||||||
Total |
$ | 92,350 | 100.0 | % | $ | 94,416 | 100.0 | % | ||||||||
A hypothetical decrease of 10% in the market prices of each of the equity and commodity
securities held at June 30, 2011 and December 31, 2010, would have resulted in a decrease of $9.2
million and $9.4 million, respectively, in the fair value of the equity securities portfolio.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company carried out an evaluation under the supervision and with the participation of the
Companys management, including the Companys Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of the Companys disclosure controls and
procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 as of the period
covered by this report. Based on that evaluation, the Companys Chief Executive Officer and Chief
Financial Officer have concluded that disclosure controls and procedures were effective as of June
30, 2011 to ensure that information required to be disclosed by the Company in its reports that it
files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the SECs rules and forms.
Changes in Internal Control Over Financial Reporting
There was no change in the Companys internal controls over financial reporting that occurred
during the period covered by this report that has materially affected, or is reasonably likely to
materially affect, the Companys internal control over financial reporting.
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Table of Contents
PART II OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in certain lawsuits. In the opinion of management, none of these lawsuits:
(1) involve claims for damages exceeding 10% of the Companys cash and invested assets, (2) involve
matters that are not routine litigation incidental to the claims aspect of its business, (3)
involve bankruptcy, receivership or similar proceedings, (4) involve material Federal, state, or
local environmental laws; (5) potentially involve more than $100 thousand in sanctions and a
governmental authority is a party, or (6) are material proceedings to which any director, officer,
affiliate of the Company, beneficial owner of more than 5% of any class of voting securities of the
Company, or security holder is a party adverse to the Company or has a material interest adverse to
the Company.
Item 1A. Risk Factors
Due to the implementation of our 2011-2012 reinsurance program, we retained a maximum,
pre-tax net liability of $157.6 million for the first catastrophic event up to $1.8 billion of losses.
Refer to the table on page 29 for information with respect to subsequent catastrophic events
coverage. If catastrophic losses result in a net operating loss for the 2011 tax year, we can carry
back the net operating loss to the 2010 and 2009 tax years and recover all, or a portion of,
income taxes paid in those years.
In the
opinion of management, there have been no other material changes during the period covered by this Quarterly Report on Form 10-Q
to the risk factors previously disclosed in Part I, Item 1A, Risk Factors, included in the
Companys Annual Report on Form 10-K for the year ended December 31, 2010.
Item 6. Exhibits
Exhibit No. | Exhibit | |
3.1
|
Registrants Restated Amended and Restated Certificate of Incorporation (1) | |
3.2
|
Certificate of Designation for Series A Convertible Preferred Stock dated October 11, 1994 (2) | |
3.3
|
Certificate of Designations, Preferences, and Rights of Series M Convertible Preferred Stock dated August 13, 1997 (3) | |
3.4
|
Certificate of Amendment of Amended and Restated Certificate of Incorporation dated October 19, 1998 (2) | |
3.5
|
Certificate of Amendment of Amended and Restated Certificate of Incorporation dated December 18, 2000 (2) | |
3.6
|
Certificate of Amendment of Certificate of Designations of the Series A Convertible Preferred Stock dated October 29, 2001 (2) | |
3.7
|
Certificate of Amendment of Amended and Restated Certificate of Incorporation dated December 7, 2005 (4) | |
3.8
|
Certificate of Amendment of Amended and Restated Certificate of Incorporation dated May 18, 2007 (4) | |
3.9
|
Amended and Restated Bylaws (5) |
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Table of Contents
Exhibit No. | Exhibit | |
31.1
|
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2
|
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32
|
Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to Title 18, United States Code, Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
99.1
|
Schedule of Investments | |
101.INS-XBRL
|
Instance Document | |
101.SCH-XBRL
|
Taxonomy Extension Schema Document | |
101.CAL-XBRL
|
Taxonomy Extension Calculation Linkbase Document | |
101.LAB-XBRL
|
Taxonomy Extension Label Linkbase Document | |
101.PRE-XBRL
|
Taxonomy Extension Presentation Linkbase Document |
In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to the Quarterly Report on Form 10-Q shall not be deemed to be filed for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be part of any registration statement or other document filed under the Securities Act or Exchange Act, except as shall be expressly set forth by specific reference in such filing. | ||
(1) | Incorporated by reference to the Registrants Registration Statement on Form S-1 (File No. 33-51546) declared effective on December 14, 1992 | |
(2) | Incorporated by reference to the Registrants Annual Report on Form 10-KSB for the year ended December 31, 2002 | |
(3) | Incorporated by reference to the Registrants Annual Report on Form 10-KSB/A for the year ended April 30, 1997 | |
(4) | Incorporated by reference to the Registrants Quarterly Report on Form 10-QSB for period ended June 30, 2007 | |
(5) | Incorporated by reference to the Registrants Current Report on Form 8-K dated January 8, 2007 |
44
Table of Contents
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
UNIVERSAL INSURANCE HOLDINGS, INC. |
||||
Date: August 5, 2011 | /s/ Bradley I. Meier | |||
Bradley I. Meier, President and Chief Executive Officer | ||||
/s/ George R. De Heer | ||||
George R. De Heer, Chief Financial Officer | ||||
(Principal Accounting Officer) |
45