UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)
 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2009

OR

[   ] 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 000-20848

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., Suite 100, Fort Lauderdale, Florida 33309
(Address of principal executive offices)

(954) 958-1200
(Registrant’s telephone number, including area code)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ___

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ____ No __

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See the definitions of “large accelerated filer” and “accelerated filer” in Rule 12b-2 of the Exchange Act.

     Large accelerated filer __     Accelerated filer x           Non-accelerated filer __

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ___ No x

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 38,523,172 shares of common stock, par value $0.01 per share, outstanding on May 5, 2009.

.

UNIVERSAL INSURANCE HOLDINGS, INC.

TABLE OF CONTENTS

 

Page No.

 

 

 

PART I: FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements (Unaudited)

 

 

 

 

 

Report of Independent Registered Public Accounting Firm

3

 

 

 

 

Condensed Consolidated Balance Sheets as of March 31, 2009 and December 31, 2008

4

 

 

 

 

Condensed Consolidated Statements of Operations for the Three-Month Periods Ended March 31, 2009 and 2008

5

 

 

 

 

Condensed Consolidated Statements of Stockholders’ Equity for the Three-Month Periods Ended March 31, 2009 and 2008

6

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Three-Month Periods Ended March 31, 2009 and 2008

7

 

 

 

 

Notes to Condensed Consolidated Financial Statements

8

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

21

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

31

 

 

 

Item 4.

Controls and Procedures

32

 

 

 

PART II:

OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

32

 

 

 

Item 1A.

Risk Factors

33

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

33

 

 

 

Item 3.

Defaults Upon Senior Securities

33

 

 

 

Item 4.

Submission of Matters to a Vote of Security Holders

33

 

 

 

Item 5.

Other Information

33

 

 

 

Item 6.

Exhibits

33

 

 

 

Signatures

 

35

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To The Board of Directors and Stockholders of
Universal Insurance Holdings, Inc. and Subsidiaries
Fort Lauderdale, Florida
 

We have reviewed the accompanying condensed consolidated balance sheet of Universal Insurance Holdings, Inc. and Subsidiaries as of March 31, 2009 and the related condensed consolidated statements of operations and cash flows for the three-month periods ended March 31, 2009 and 2008. These interim financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the accompanying interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.


  
  
  
/s/ Blackman Kallick LLP
  
  
  
Chicago, Illinois
  
May 11, 2009
 

3

PART I -- FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 

   

(Unaudited)

   
   

March 31,

 

December 31,

ASSETS

 

2009

 

2008

Cash and cash equivalents

 

$ 158,204,010

 

$ 256,964,637

Investments

       

Fixed maturities, held to maturity, at amortized cost

 

45,621,548

 

4,334,405

Fixed maturities, available for sale, at fair value

 

65,855,861

 

-

Equity securities, available for sale, at fair value

 

60,425,345

 

1,314,370

Real estate, net

 

3,367,357

 

3,399,609

Prepaid reinsurance premiums

 

178,240,090

 

173,046,776

Reinsurance recoverables

 

45,349,520

 

44,009,847

Premiums receivable, net

 

46,568,202

 

40,358,720

Receivable from securities

 

353,118

 

-

Other receivables

 

2,595,461

 

5,130,402

Property and equipment, net

 

886,676

 

864,125

Deferred policy acquisition costs, net

 

347,924

 

407,946

Deferred income taxes

 

13,372,130

 

14,113,463

Other assets

 

310,509

 

692,612

Total assets

 

$ 621,497,751

 

$ 544,636,912

         

LIABILITIES AND STOCKHOLDERS' EQUITY

       

LIABILITIES:

       

Unpaid losses and loss adjustment expenses

 

$ 89,676,542

 

$ 87,947,774

Unearned premiums

 

275,409,412

 

258,489,460

Accounts payable

 

3,773,924

 

3,147,260

Payable for securities

 

3,305,754

 

1,273,941

Reinsurance payable, net

 

52,020,429

 

23,984,248

Income taxes payable

 

5,989,694

 

-

Dividends payable

 

4,515,715

 

-

Other accrued expenses

 

17,628,300

 

14,680,443

Other liabilities

 

34,917,612

 

28,560,131

Long-term debt

 

25,000,000

 

25,000,000

Total liabilities

 

512,237,382

 

443,083,257

         

STOCKHOLDERS' EQUITY:

       

Cumulative convertible preferred stock, $.01 par value

 

1,087

 

1,387

Authorized shares - 1,000,000

       

Issued shares - 108,640 and 138,640 

       

Outstanding shares - 108,640 and 138,640

       

Minimum liquidation preference - $288,190 and $1,419,700

       

Common stock, $.01 par value

 

402,328

 

401,578

Authorized shares - 55,000,000

       

Issued shares - 40,233,019 and 40,158,019

       

Outstanding shares - 37,617,172 and 37,542,172

       

Treasury shares, at cost - 1,709,847 and 1,709,847 shares

 

(7,381,768)

 

(7,381,768)

Common stock held in trust, at cost - 906,000 shares

 

(733,860)

 

(733,860)

Additional paid-in capital

 

34,569,639

 

33,587,414

Accumulated other comprehensive income, net of taxes

 

2,580,975

 

24,834

Retained earnings

 

79,821,968

 

75,654,070

Total stockholders' equity

 

109,260,369

 

101,553,655

Total liabilities and stockholders' equity

 

$ 621,497,751

 

$ 544,636,912

         
         

The accompanying notes to condensed consolidated financial statements are an integral part of these statements.

4


UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008

(Unaudited)
 

 

For the Three

   

Months Ended March 31,

   

2009

 

2008

PREMIUMS EARNED AND OTHER REVENUES

       

Direct premiums written

 

$ 145,212,145

 

$ 126,667,669

Ceded premiums written

 

(95,727,857)

 

(89,770,703)

Net premiums written

 

49,484,288

 

36,896,966

Increase in net unearned premium

 

(11,726,636)

 

(1,803,571)

Premiums earned, net

 

37,757,652

 

35,093,395

Net investment income

 

324,589

 

1,240,878

Realized gains on investments

 

1,111,333

 

-

Commission revenue

 

7,444,849

 

6,867,187

Other revenue

 

1,479,377

 

1,083,013

         

Total premiums earned and other revenues

 

48,117,800

 

44,284,473

         

OPERATING COSTS AND EXPENSES

       

Losses and loss adjustment expenses

 

20,420,664

 

12,725,862

General and administrative expenses

 

7,515,228

 

8,209,374

         

Total operating costs and expenses

 

27,935,892

 

20,935,236

         

INCOME BEFORE INCOME TAXES

 

20,181,908

 

23,349,237

         

Income taxes, current

 

8,582,617

 

10,557,716

Income taxes, deferred

 

(838,539)

 

(1,516,795)

Income taxes, net

 

7,744,078

 

9,040,921

         

NET INCOME

 

$ 12,437,830

 

$ 14,308,316

         

Basic net income per common share

 

$ 0.33

 

$ 0.39

Weighted average of common shares

       

outstanding – Basic

 

37,561,341

 

36,946,000

         

Fully diluted net income per share

 

$ 0.31

 

$ 0.35

Weighted average of common shares

       

outstanding – Diluted

 

39,921,929

 

41,327,000

         

Cash dividend declared per common share

 

$ 0.22

 

$ 0.10

         
         
   

For the Three

   

Months Ended March 31,

   

2009

 

2008

Comprehensive Income:

       

Net income

 

$ 12,437,830

 

$ 14,308,316

Net unrealized gains on investments, net of tax

 

2,556,141

 

-

         

Comprehensive Income

 

$ 14,993,971

 

$ 14,308,316

         

The accompanying notes to condensed consolidated financial statements are an integral part of these statements.
 
 

5

UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
(Unaudited)

For the Three Months Ended March 31, 2009

 

Common Shares

Preferred Stock Shares

Common Stock Amount

Preferred Stock Amount

Additional Paid-In Capital

Retained Earnings

Accumulated Other Comprehensive Income

Stock Held in Trust

Treasury Stock

Total Stockholders' Equity

Balance,

 

 

 

 

 

 

 

 

 

 

December 31, 2008

40,158,019

138,640

$ 401,578

$ 1,387

$ 33,587,414

$ 75,654,070

$ 24,834

$ (733,860)

$ (7,381,768)

$ 101,553,655

 

 

 

 

 

 

 

 

 

 

 

Preferred stock conversion

75,000

(30,000)

750

(300)

(450)

 

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

Stock compensation
plans

 

 

 

 

820,156

 

 

 

 

820,156

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

12,437,830

 

 

 

12,437,830

 

 

 

 

 

 

 

 

 

 

 

Amortization of deferred
compensation

 

 

 

 

162,519

 

 

 

 

162,519

 

 

 

 

 

 

 

 

 

 

 

Declaration of dividends

 

 

 

 

 

(8,269,932)

 

 

 

(8,269,932)

 

 

 

 

 

 

 

 

 

 

 

Net unrealized gains on
investments, net of
tax effect of $1,595,467

 

 

 

 

 

 

2,556,141

 

 

2,556,141

 

 

 

 

 

 

 

 

 

 

 

Balance,
March 31, 2009

40,233,019

108,640

$ 402,328

$ 1,087

$34,569,639

$ 79,821,968

$ 2,580,975

$ (733,860)

$ (7,381,768)

$ 109,260,369

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended March 31, 2008

Balance,

 

 

 

 

 

 

 

 

 

 

December 31, 2007

39,307,103

138,640

$ 393,072

$ 1,387

$24,779,798

$ 50,724,674

$ -

$ (2,349,000)

$ (974,746)

$ 72,575,185

 

 

 

 

 

 

 

 

 

 

 

Issuance of common
shares

1,516,000

 

15,160

 

2,505,370

 

 

 

(3,407,234)

(886,704)

 

 

 

 

 

 

 

 

 

 

 

Stock compensation
plans

 

 

 

 

1,109,042

 

 

 

 

1,109,042

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

14,308,316

 

 

 

14,308,316

 

 

 

 

 

 

 

 

 

 

 

Tax benefit on exercise
of stock options

 

 

 

 

3,039,081

 

 

 

 

3,039,081

 

 

 

 

 

 

 

 

 

 

 

Amortization of deferred
compensation

 

 

 

 

77,082

 

 

 

 

77,082

 

 

 

 

 

 

 

 

 

 

 

Declaration of dividends

 

 

 

 

 

(3,799,661)

 

 

 

(3,799,661)

 

 

 

 

 

 

 

 

 

 

 

Balance,
March 31, 2008

40,823,103

138,640

$ 408,232

$ 1,387

$ 31,510,373

$ 61,233,329

$ -

$ (2,349,000)

$ (4,381,980)

$ 86,422,341

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes to condensed consolidated financial statements are an integral part of these statements.

6


 

UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)
 

 

Three Months Ended

 

Three Months Ended

 

March 31, 2009

 

March 31, 2008

Cash flows from operating activities

     

Net Income

$ 12,437,830

 

$ 14,308,316

Adjustments to reconcile net income to net cash provided by operating activities:

   

Allowance for doubtful accounts

377,219

 

657,268

Amortization and depreciation

122,944

 

121,751

Amortization of FAS 123R cost of stock options

820,156

 

1,109,042 

Amortization of restricted stock grant

162,519

 

77,082 

Deferred taxes

(1,043,781)

 

(1,516,794)

Tax benefit on exercise of stock options

-

 

(2,513,609)

Other

135,387

 

4,568

Net change in assets and liabilities relating to operating activities:

     

Reinsurance recoverables

(1,339,673)

 

(9,795,546)

Accrued investment income

(487,705)

 

-

Prepaid reinsurance premiums

(5,193,314)

 

(1,160)

Premiums receivable

(6,586,701)

 

(6,073,373)

Other receivables

2,892,527

 

292,702

Deferred acquisition costs, net

60,022

 

-

Other assets

382,103

 

(392,429)

Reinsurance payable

28,036,181

 

39,075,248

Deferred ceding commission, net

-

 

98,720

Other liabilities

6,357,481

 

12,723,135

Accounts payable

(647,277)

 

276,133

Taxes payable

5,989,694

 

10,099,043

Other accrued expenses

2,947,857

 

594,395

Unpaid losses and loss adjustment expenses

1,728,768

 

(1,534,443)

Unearned premiums

16,919,952

 

1,804,730

Net cash provided by operating activities

64,072,189

 

59,414,779

Cash flows from investing activities

     

Purchases of fixed maturities:

     

Held to maturity

(38,281,966)

 

(1,589,040)

Available for sale

(63,665,595)

 

-

Purchases of equity securities, available for sale

(65,258,180)

 

-

Sales of equity securities, available for sale

8,218,865

 

-

Capital expenditures and building improvements

(91,723)

 

(355,218)

Net cash used in investing activities

(159,078,599)

 

(1,944,258)

Cash flows from financing activities

     

Preferred stock dividend

-

 

(12,487)

Common stock dividend

(3,754,217)

 

-

Issuance of common stock

-

 

130,530

Acquisition of treasury stock

-

 

(1,017,234)

Tax benefit on exercise of stock options

-

 

2,513,609

Repayments of loans payable

-

 

(2,820)

Net cash (used in) provided by financing activities

(3,754,217)

 

1,611,598

       

Net (decrease) increase in cash and cash equivalents

(98,760,627)

 

59,082,119

Cash and cash equivalents at beginning of period

256,964,637

 

216,696,704

Cash and cash equivalents at end of period

$ 158,204,010

 

$ 275,778,823

Non cash items:

     

Dividends accrued

$ 4,515,715

 

$ 3,787,174

       

The accompanying notes to condensed consolidated financial statements are an integral part of these statements.
 
 

7

UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
(Unaudited)

1.       Nature of Operations and Basis of Presentation

Nature of Operations

Universal Insurance Holdings, Inc. (the “Company”) was originally incorporated as Universal Heights, Inc. in Delaware in November 1990. The Company changed its name to Universal Insurance Holdings, Inc. on January 12, 2001. The Company, through its wholly owned subsidiary, Universal Insurance Holding Company of Florida, formed Universal Property & Casualty Insurance Company (“UPCIC”) in 1997.

Basis of Presentation

Our unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and include the accounts of Universal Insurance Holdings, Inc. and its subsidiaries. We have made all adjustments that, in our opinion, are necessary for a fair statement of results of the interim periods, and all such adjustments are of a normal recurring nature. All significant intercompany balances and transactions have been eliminated in consolidation. The condensed consolidated financial statements should be read in conjunction with our annual audited consolidated financial statements and related notes. The condensed consolidated balance sheet at December 31, 2008 was derived from audited financial statements, but does not include all disclosures required by GAAP.

Management must make estimates and assumptions that affect amounts reported in our condensed consolidated financial statements and in disclosures of contingent assets and liabilities. Actual results could differ from those estimates.

2.       Significant Accounting Policies

We reported Significant Accounting Policies in our Annual Report on Form 10-K for the year ended December 31, 2008. The following are new or revised disclosures.

 

Securities Held to Maturity. Investments for which the Company has the ability and intent to hold to maturity are reported at amortized cost, adjusted for amortization of premiums or discounts and other-than-temporary declines in fair value. Realized gains and losses are determined using the first in, first out (“FIFO”) method. The securities held to maturity, currently held by the Company, are primarily to satisfy statutory deposits requirements of various states in which the Company is authorized to write insurance policies.

Securities Available for Sale. Investments available-for-sale are stated at fair value on the balance sheet. Unrealized gains and losses are excluded from earnings and are reported as a component of other comprehensive income within stockholders’ equity, net of related deferred income taxes. Realized gains and losses are determined using the FIFO method.

Impairment of Securities. For investments classified as available for sale, the difference between fair value and amortized cost for fixed income securities and cost for equity securities, net of deferred income taxes (as disclosed in Note 5), is reported as a component of accumulated other comprehensive income on the condensed consolidated Balance Sheet and is not reflected in the operating results of any period until reclassified to net income upon the consummation of a transaction with an unrelated third party or when the decline in fair value is deemed other than temporary. The assessment of whether the impairment of a security’s fair value is other than temporary is performed using a portfolio review as well as a case-by-case review considering a wide range of factors.

There are a number of assumptions and estimates inherent in evaluating impairments and determining if they are other than temporary, including: 1) the Company’s ability and intent to hold the investment for a period of time sufficient to allow for an anticipated recovery in value; 2) the expected recoverability of principal and interest; 3) the length of time and extent to which the fair value has been less than amortized cost for fixed income securities or cost for equity securities; 4) the financial condition, near-term and long-term prospects of the issue or issuer, including relevant industry conditions and trends, and implications of rating agency actions and offering prices; and 5) the specific reasons that a security is in a significant unrealized loss position, including market conditions which could affect liquidity. Additionally, once assumptions and estimates are made, any number of changes in facts and circumstances could cause us to subsequently determine that an impairment is other than temporary, including: 1)
 

8

general economic conditions that are worse than previously forecasted or that have a greater adverse effect on a particular issuer or industry sector than originally estimated; 2) changes in the facts and circumstances related to a particular issue or issuer’s ability to meet all of its contractual obligations; and 3) changes in facts and circumstances obtained that causes a change in our ability or intent to hold a security to maturity or until it recovers in value.

The Company performed an evaluation of its investments classified as held to maturity and has determined that, as of March 31, 2009, there were aggregate unrealized losses of $11,436 on held to maturity investments.  The Company performed an evaluation of its investments classified as available for sale and has determined that it held equiy securities as of March 31, 2009 with unrealized losses in the aggregate amount of $1,451,408. The Company held no securities for which impairment is other than temporary.

Fair Market Value of Financial Instruments. Statement of Financial Accounting Standards (“SFAS”) No. 107, Disclosure About Fair Value of Financial Instruments, requires disclosure of the estimated fair value of all financial instruments, including both assets and liabilities unless specifically exempted. The Company uses the following methods and assumptions in estimating the fair value of financial instruments.

Cash equivalents: the carrying amount approximates fair value because of the short maturity of those instruments.

Fixed maturities: the carrying amount for fixed maturities held to maturity securities reported in the condensed consolidated balance sheet represents amortized cost. The fair value of the Company’s held to maturity securities determined using unadjusted quoted market prices is $45,738,751. The carrying amount for fixed maturities classified as available-for-sale represents fair value, which is determined using unadjusted quoted market prices, with unrealized gains and losses excluded from earnings and reported in a separate component of stockholders’ equity, namely Accumulated Other Comprehensive Income.

Equity securities: the Company’s equity securities are classified as “available-for-sale” and are, therefore, carried on the condensed consolidated balance sheet at fair value using unadjusted quoted market prices.

Long-term debt was held at a carrying value of $25,000,000 as of March 31, 2009 and December 31, 2008. The fair value of long-term debt as of March 31, 2009 was estimated based on discounted cash flows utilizing interest rates currently offered for similar products and determined to be $20,235,140.

Concentrations of Credit Risk. Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash and cash equivalents, premiums receivable and reinsurance recoverables.

Concentrations of credit risk with respect to cash on deposit are limited by the Company’s policy of investing excess cash in money market accounts and repurchase agreements backed by the US Government and US 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 Evergreen Investment Management Company, LLC.

The Company maintains depository relationships with SunTrust Bank and Wachovia Bank, N.A. It is the Company’s policy not to have a balance of more than $250,000 for any of its affiliates at either institution on any given day to minimize exposure to a bank failure. Both banks participate in FDIC’s Temporary Liquidity Guarantee Program, which provides unlimited deposit insurance coverage through December 31, 2009 for non-interest bearing transaction accounts. Cash balances in excess of FDIC-insured limits are  transferred daily into custodial accounts with SunTrust Bank where cash is immediately invested into shares of Ridgeworth Institutional US Treasury Securities Money Market.

Concentrations of credit risk with respect to premiums receivable are limited due to the large number of individuals comprising the Company’s customer base. However, the majority of the Company’s revenues are currently derived from products and services offered to customers in Florida, which could be adversely affected by economic downturns, an increase in competition or other environmental changes.

In order to reduce credit risk for amounts due from reinsurers, the Company seeks to do business with financially sound reinsurance companies and regularly evaluates the financial strength of all reinsurers used. UPCIC’s largest reinsurer, Everest Reinsurance Company, has the following ratings from each of the rating agencies: A+ from A.M.

9

Best Company, A+ from Standard and Poor’s Rating Services and Aa3 from Moody’s Investors Service, Inc. As of March 31, 2009 and December 31, 2008, UPCIC’s 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 UPCIC’s statutory surplus:

Reinsurer

As of March 31,
2009

 

As of December 31,
2008

Everest Reinsurance Company

$155,135,698

 

$168,444,284

Florida Hurricane Catastrophe Fund

15,019,351

 

31,445,808

 

 

 

 

Total

$170,155,049

 

$199,890,092

 

 

 

 

As of March 31, 2009 and December 31, 2008, UPCIC did not have any unsecured recoverables from unauthorized reinsurers exceeding 3% of UPCIC’s statutory surplus.

Stock Options. Under SFAS No. 123 (Revised 2004), Share-Based Payment, the compensation expense for the stock compensation plans that has been charged against income before income taxes was $820,156 and $1,109,042 for the three-month periods ended March 31, 2009 and 2008, respectively, with a corresponding deferred income tax benefit of $316,375 and $427,813, respectively. As of March 31, 2009 the total unrecognized compensation cost related to nonvested share-based compensation granted under the stock compensation plans was $942,837. The cost is expected to be recognized over a weighted average period of 0.9 years. The Company periodically issues restricted common stock as compensation. These restricted stock awards are expensed ratably over their respective vesting periods. The Company did not issue restricted common stock during the three-month periods ended March 31, 2009 and 2008.

Recent Accounting Pronouncements

In March 2008, FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS 161”), which amends and expands the disclosure requirements of SFAS 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”), to provide an enhanced understanding of an entity’s use of derivative instruments, how they are accounted for under SFAS 133 and their effect on the entity’s financial position, financial performance and cash flows. The provisions of SFAS 161 are effective as of the beginning of the Company’s 2009 fiscal year. At this time the Company does not use any derivative instruments or hedging activities.

In May 2008, FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”), which identifies the sources of accounting principles and the framework for selecting the principles to be
 
 

10

used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP in the United States. SFAS 162 was issued to clarify that the GAAP hierarchy is directed to entities since it is the entity (not its auditor) that is responsible for selecting accounting principles for financial statements that are presented in conformity with GAAP. The provisions of SFAS 162 are effective 60 days following the SEC’s approval of the PCAOB amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with GAAP.” The Company has determined that this statement will not result in a change in current practice.

Also, in May 2008, FASB issued SFAS No. 163, “Accounting for Financial Guarantee Insurance Contracts” (“SFAS 163”) – an interpretation of FASB No. 60, “Accounting and Reporting by Insurance Enterprises,” which requires an insurance enterprise to recognize a claim liability prior to an event of default (insured event) when there is evidence that credit deterioration has occurred in an insured financial obligation. SFAS 163 also clarifies how FASB No. 60 applies to financial guarantee insurance contracts, including the recognition and measurement to be used to account for premium revenue and claim liabilities. The provisions of SFAS 163 are effective as of the beginning of the Company’s 2009 fiscal year. At this time the Company does not participate in any financial guarantee insurance contracts.portfolio.

 

In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-than-Temporary Impairments” (“FSP FAS 115-2 and FAS 124-2”), which amends the criteria for the recognition of other-than-temporary impairments (“OTTI”) for debt securities and requires that credit losses be recognized in earnings and losses resulting from factors other than credit of the issuer be recognized in other comprehensive income. Prior to adoption, all OTTI are recorded in earnings in the period of recognition. This FSP also expands and increases the frequency of existing disclosures. FSP FAS 115-2 and FAS 124-2 is effective for interim and annual periods ending after June 15, 2009, and requires a cumulative effect adjustment of initially applying the FSP as an adjustment to the opening balance of retained earnings with a corresponding adjustment to accumulated other comprehensive income. The Company is currently assessing the impact this FSP will have on the Company’s financial condition and results of operations.

3.       Insurance Operations

Unearned premiums represent amounts that UPCIC would be required to refund policyholders if their policies were canceled. UPCIC determines unearned premiums by calculating the pro-rata amount that would be due to the policyholders at a given point in time based upon the premiums due for the full policy term. At March 31, 2009, UPCIC was servicing approximately 498,000 homeowners’ and dwelling fire insurance policies with direct unearned premiums totaling $275,409,412 and in-force premiums of approximately $534,300,000.  At December 31, 2008, UPCIC was servicing 461,000 homeowners’ and dwelling fire insurance policies with direct unearned premiums totaling $258,489,460 and in-force premiums of approximately $518,200,000.

The wind mitigation discounts mandated by the Florida Legislature to be effective June 1, 2007 for new business and August 1, 2007 for renewal business have had a significant effect on UPCIC’s premium. The following table reflects the effect of wind mitigation credits received by UPCIC policyholders:
 

       

Reduction of in-force premium

As of

 

Percentage of UPCIC policyholders receiving credits

 

Total credits

 

Percentage of in-force premium

6/1/2007

 

1.9%

 

$     6,284,697

 

1.3%

12/31/2007

 

11.8%

 

$   31,951,623

 

6.4%

3/31/2008

 

16.9%

 

$   52,398,215

 

10.4%

12/31/2008

 

31.1%

 

$ 123,524,911

 

24.0%

3/31/2009

 

36.3%

 

$ 158,229,542

 

29.8%

4.       Reinsurance

There have been no material changes during the period covered by this Report, outside of the ordinary course of the Company’s business, to the Reinsurance note included in the Company’s Annual Report on Form 10-K, for the year ended December 31, 2008.

Amounts recoverable from reinsurers are estimated in accordance with the reinsurance contract. Reinsurance premiums, losses and LAE are accounted for on bases consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts.

The Company’s reinsurance arrangements had the following effect on certain items in the condensed consolidated Statements of Operations:
 
 

11

 

Three Months Ended March 31, 2009

           
 

Premiums

 

Premiums

 

Loss and Loss

 

Written

 

Earned

 

Adjustment

         

Expenses

Direct

$ 145,212,145

 

$ 128,292,195

 

$ 41,324,392

Ceded

(95,727,857)

 

(90,534,543)

 

(20,903,728)

           

Net

$   49,484,288

 

$   37,757,652

 

$ 20,420,664

           

 

Three Months Ended March 31, 2008

           
 

Premiums

 

Premiums

 

Loss and Loss

 

Written

 

Earned

 

Adjustment

         

Expenses

Direct

$ 126,667,669

 

$ 124,862,938

 

$ 24,421,144

Ceded

(89,770,703)

 

(89,769,543)

 

(11,695,282)

           

Net

$   36,896,966

 

$    35,093,395

 

$ 12,725,862

           

Other Amounts:

Prepaid reinsurance premiums and reinsurance recoverables as of March 31, 2009 and December 31, 2008 were as follows:

   

As of March 31,

 

As of December 31,

   

2009

 

2008

         

Prepaid reinsurance premiums

 

$ 178,240,090

 

$ 173,046,776

         

Reinsurance recoverable on unpaid losses and LAE

 

$   44,949,118

 

$   43,228,416

Reinsurance recoverable on paid losses

 

400,402

 

781,431

Reinsurance recoverables

 

$   45,349,520

 

$  44,009,847

         

The Company has determined that a right of offset, as defined in FASB Interpretation No. 39, “Offsetting of Amounts Related to Certain Contracts,” exists between the Company and its reinsurers, under its quota share reinsurance treaties. Reinsurance payable to reinsurers has been offset by ceding commissions and inuring premiums receivable from reinsurers as follows:
 

   

As of March 31,

 

As of December 31,

   

2009

 

2008

Reinsurance payable, net of ceding commissions

       

due from reinsurers

 

$ 93,279,521

 

$ 60,099,512

Inuring premiums receivable

 

(41,259,092)

 

(36,115,264)

         

Reinsurance payable, net

 

$ 52,020,429

 

$ 23,984,248

         

12

5.       Investments
 

Major sources of net investment income are summarized as follows:

 

Three Months Ended,

 

March 31, 2009

 

March 31, 2008

Cash and cash equivalents

$    215,983

 

$ 1,279,079

Fixed maturities

127,716

 

7,657

Equity securities

96,730 

 

-

Total investment income

440,429 

 

1,286,736

Less investment expenses

(115,840)

 

(45,858)

       

Net investment income

$ 324,589

 

$ 1,240,878

       

As of March 31, 2009 and December 31, 2008, the Company’s investments consisted of cash and cash equivalents, and investments with carrying values of $330,106,764 and $262,613,412, respectively.

Concentrations of credit risk with respect to cash on deposit are limited by the Company’s policy of investing excess cash in money market accounts and repurchase agreements backed by the US Government and US 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 Evergreen Investment Management Company, LLC.

The Company maintains depository relationships with SunTrust Bank and Wachovia Bank, N.A. It is the Company’s policy not to have a balance of more than $250,000 for any of its affiliates at either institution on any given day to minimize exposure to a bank failure. Both banks participate in FDIC’s Temporary Liquidity Guarantee Program, which provides unlimited deposit insurance coverage through December 31, 2009 for non-interest bearing transaction accounts. Excess cash is transferred daily into custodial accounts with SunTrust Bank where cash is immediately invested into shares of Ridgeworth Institutional US Treasury Securities Money Market.

Cash and cash equivalents consisted of checking, repurchase and money market accounts with carrying values of $158,204,010 and $256,964,637 as of March 31, 2009 and December 31, 2008, respectively, held at the following financial institutions:
 
 

13

 

As of March 31, 2009

Financial Institution

Cash

Money Market Funds

Total

%

         

U. S. Bank IT&C (1)

0

74,162,209

74,162,209

46.9%

Evergreen Investment Management

       

Company, L.L.C.

0

8,059,669

8,059,669

5.1%

SunTrust Bank

1,053,693

0

1,053,693

0.7%

SunTrust Bank Institutional

       

Asset Services

0

72,691,356

72,691,356

45.9%

Wachovia Bank, N.A.

467,498

0

467,498

0.3%

All Other Banking Institutions

421,152

1,348,433

1,769,585

1.1%

 

1,942,343

156,261,667

158,204,010

100.0%

         

(1) Funds invested with Evergreen Investment Management Company, L.L.C.
 
 

 

As of December 31, 2008

Financial Institution

Cash

Money Market Funds

Total

%

         

U. S. Bank IT&C (1)

0

161,072,107

161,072,107

62.7%

Evergreen Investment Management

0

10,575,615

10,575,615

4.1%

Company, L.L.C.

       

SunTrust Bank Institutional

       

Asset Services

0

81,703,268

81,703,268

31.8%

All Other Banking Institutions

417,830

3,195,817

3,613,647

1.4%

 

417,830

256,546,807

256,964,637

100.0%

         

(1) Funds invested with Evergreen Investment Management Company, L.L.C.
 
 

SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities” addresses the accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities. Investments are classified into three categories: held to maturity, trading securities or available-for-sale. Investments classified as held to maturity include debt securities that the Company has the positive intent and ability to hold to maturity. Held to maturity securities are reported at amortized cost. Investments classified as available-for-sale include debt and equity securities that are not classified as held to maturity or as trading security investments. Available-for-sale securities are reported at fair value, with unrealized gains and losses excluded from earnings and reported in a separate component of shareholders’ equity, namely Other Comprehensive Income. The Company does not hold any trading security investments at March 31, 2008 and December 31, 2008.

The following table shows the realized gains (losses) for equity securities for the three-month periods ended March 31, 2009 and 2008.
 

 

Three-Months Ended

 

March 31, 2009

 

March 31, 2008

 

Gains (Losses)

 

Fair Value at Sale

 

Gains (Losses)

 

Fair Value at Sale

Equity securities

$1,111,333

 

$9,683,316

 

     $           -

 

   $        -

Total realized gains

$1,111,333

 

$9,683,316

 

     $           -

 

   $        -

               

Equity securities

                      -

 

                     -

 

                 -

 

            -

Total realized losses

      $              -

 

      $             -

 

    $           -

 

  $        -

14

A summary of the amortized cost, estimated fair value, gross unrealized gains and losses of fixed maturities and equity securities at March 31, 2009 and December 31, 2008. The Company’s foreign obligations consist of Canadian Government Bonds, Canadian Government Sovereign Notes, and Canadian Treasury Bills.

 

March 31, 2009

 

Amortized Cost

 

Gross Unrealized Gains

 

Gross Unrealized Losses

 

Estimated Fair Value

Fixed maturities - held to maturity:

              

US government and agency obligations

$   4,355,808

 

$    101,804

  

$                    -

 

$    4,457,612

Foreign obligations

41,265,740

 

26,835 

  

(11,436)

 

41,281,139

 

$ 45,621,548

 

$    117,203

 

$                    -

 

$ 45,738,751

               

Fixed maturities - available for sale:

             

US government and agency obligations

$ 63,535,400

 

$ 2,320,461

 

$                    -

 

$ 65,855,861

 

$ 63,535,400

 

$ 2,320,461

 

$                    -

 

$ 65,855,861

               

Equity securities

$ 58,228,659

 

$ 3,648,094

 

 

$ (1,451,408)

 

$ 60,425,345

               
               

 

December 31, 2008

 

Amortized Cost

 

Gross Unrealized Gains

 

Gross Unrealized Losses

 

Estimated Fair Value

Fixed maturities - held to maturity:

             

US government and agency obligations

$ 4,334,405

 

$ 125,760

 

$         -

 

$ 4,460,165

 

$ 4,334,405

 

$ 125,760

 

$         -

 

$ 4,460,165

 

 

 

 

 

 

 

 

Equity securities

$ 1,273,941

 

$   40,738

 

$ (309)

 

$ 1,314,370

The table below reflects the Company’s unrealized investment losses by investment class, aged for length of time in an unrealized loss position.
 

 

Unrealized net losses

 

Less than 12 months

 

12 months or longer

Equity securities:

         

Common stocks

$1,451,408

 

$ 1,451,408

 

     $    -

 

 

 

 

 

 

Total equity securities

$1,451,408

 

$ 1,451,408

 

     $    -

Below is a summary of fixed maturities at March 31, 2009 and December 31, 2008 by contractual or expected periods.

15

 

 

March 31, 2009

 

December 31, 2008

Held-to-maturity

 

Amortized Cost

 

Estimated Fair Value

 

Amortized Cost

 

Estimated Fair Value

Due in one year or less

 

$22,355,238

 

$22,386,928

 

$ 2,626,958

 

$ 2,674,230

Due after one year through five years

 

23,266,310

 

23,351,823

 

1,707,447

 

1,785,935

Due after five years through ten years

 

-

 

-

 

-

 

-

Due after ten years

 

-

 

-

 

-

 

-

 

 

 

 

 

 

 

 

 

Total

 

$45,621,548

 

$45,738,751

 

$ 4,334,405

 

$ 4,460,165

 

 

March 31, 2009

 

December 31, 2008

Available-for-Sale

 

Amortized Cost

 

Estimated Fair Value

 

Amortized Cost

 

Estimated Fair Value

Due in one year or less

 

$                -

 

$                -

 

$                -

 

$                -

Due after one year through five years

 

-

 

-

 

-

 

-

Due after five years through ten years

 

63,535,400

 

65,855,861

 

-

 

-

Due after ten years

 

-

 

-

 

-

 

-

 

 

 

 

 

 

 

 

 

Total

 

$63,535,400

 

$65,855,861

 

$                 -

 

$                 -

The Company has made an assessment of its invested assets for fair value measurement as further described in Note 12 – Fair Value Disclosure.

6.       Loans Payable and Long-Term Debt

Surplus Note

On November 9, 2006, UPCIC entered into a $25.0 million surplus note with the Florida State Board of Administration (“SBA”) under the ICBUI Program. Under the ICBUI program, which was implemented by the Florida legislature to encourage insurance companies to write additional residential insurance coverage in Florida, the SBA matched UPCIC’s funds of $25.0 million that were earmarked for participation in the program. The surplus note brings the current capital and surplus of UPCIC to approximately $98.5 million. The $25.0 million is invested in a U.S. treasury money market account.

The surplus note has a twenty-year term and accrues interest at a rate equivalent to the 10-year U.S. Treasury Bond rate, adjusted quarterly based on the 10-year Constant Maturity Treasury rate. For the first three years of the term of the surplus note, UPCIC is required to pay interest only, although principal payments can be made during this period. Any payment of principal or interest by UPCIC on the surplus note must be approved by the Commissioner of the OIR. Principal repayments are scheduled to be made in equal quarterly installments of $367,647. The first scheduled principal payment is due January 1, 2010.

As of March 31, 2009 and December 31, 2008, the balances due under the surplus note are shown in the Company’s condensed consolidated Balance Sheets as Long-Term Debt with carrying values of $25,000,000.

Repayments of principal are estimated to be as follows as of March 31, 2009:
 


2009

$               0

     

 

2010

1,470,588

 

2011

1,470,588

 

2012

1,470,588

 

2013

1,470,588

 

Thereafter

19,117,648

 

Total

$25,000,000

16

In May 2008, the Florida Legislature passed a law providing participants in the Program an opportunity to amend the terms of their surplus notes based on law changes. The new law contains methods for calculating compliance with the writing ratio requirements that are more favorable to UPCIC than prior law and the prior terms of the existing surplus note. On November 6, 2008, UPCIC and the SBA executed an addendum to the surplus note (“the addendum”) that reflects these law changes. The terms of the addendum were effective July 1, 2008. In addition to other less significant changes, the addendum modifies the definitions of Minimum Required Surplus, Minimum Writing Ratio, Surplus, and Gross Written Premium, respectively, as defined in the original surplus note.

Prior to the effective date of the addendum, UPCIC was in compliance with each of the loan’s covenants as implemented by rules promulgated by the SBA. UPCIC currently remains in compliance with each of the loan’s covenants as implemented by rules promulgated by the SBA. An event of default will occur under the surplus note, as amended, if UPCIC: (i) defaults in the payment of the surplus note; (ii) drops below a net written premium to surplus of 1:1 for three consecutive quarters beginning January 1, 2010 and drops below a gross written premium to surplus ratio of 3:1 for three consecutive quarters beginning January 1, 2010; (iii) fails to submit quarterly filings to the OIR; (iv) fails to maintain at least $50 million of surplus during the term of the surplus note, except for certain situations; (v) misuses proceeds of the surplus note; (vi) makes any misrepresentations in the application for the program; (vii) pays any dividend when principal or interest payments are past due under the surplus note; or (viii) fails to maintain a level of surplus sufficient to cover in excess of UPCIC’s 1-in-100 year probable maximum loss as determined by a hurricane loss model accepted by the Florida Commission on Hurricane Loss Projection Methodology as certified by the OIR annually.

The original surplus note provided for increases in interest rates for failure to meet the Minimum Writing Ratio. Under the terms of the surplus note agreement, at December 31, 2007, the interest rate on the note was increased by 450 basis points. As of June 30, 2008, the additional interest rate on the note was decreased from 450 basis points to 25 basis points. Under the terms of the surplus note, as amended, the net written premium to surplus requirement and gross written premium to surplus requirement have been modified. As of March 31, 2009, UPCIC’s net written premium to surplus ratio and gross written premium to surplus ratio were in excess of the required minimums and, therefore, UPCIC was not subject to increases in interest rates.

Finance Facility

In November 2007, the Company commenced offering premium finance services through Atlas Premium Finance Company, a wholly-owned subsidiary. To fund its operations, Atlas agreed to a Sale and Assignment Agreement with Flatiron Capital Corp., a premier funding partner to the commercial property and casualty insurance industry owned by Wells Fargo Bank, N.A. The agreement provides for Atlas’ sale of eligible premium finance receivables to Flatiron.

Interest Expense

Interest expense, comprised primarily of interest on the surplus note, was $139,778 and $544,321, respectively, for the three-month periods ended March 31, 2009 and 2008.

7.       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. During the three-month periods ended March 31, 2009 and 2008, the Company expensed claims adjusting fees of $90,000 and $60,000, respectively, to Downes and Associates.

8.       Income Tax Provision

Deferred income taxes as of March 31, 2009 and December 31, 2008 are provided for the temporary differences between financial reporting basis and the tax basis of the Company’s assets and liabilities under SFAS 109. The tax effects of temporary differences are as follows:

17

         

As of March 31,

 

As of December 31,

 

 

 

 

 

2009

 

2008

Deferred income tax assets:

 

 

 

 

 

Unearned premiums

 

$  7,496,613

 

$  6,591,903

 

Advanced premiums

 

1,222,589

 

886,088

 

Unpaid losses

 

 

1,342,026

 

1,290,615

 

Regulatory assessments

 

957,691

 

1,662,854

 

Executive compensation

 

-

 

269,942

 

Shareholder compensation

 

268,846

 

409,351

 

Stock option expense per SFAS 123 ( R )

2,835,721

 

2,519,346

 

Accrued wages

 

341,439

 

251,948

 

Allowance for uncollectible receivables

683,247

 

540,049

 

 

 

 

 

     

Total deferred income tax assets

15,148,172

 

14,422,096

 

 

 

 

 

     

Deferred income tax liabilities:

 

     

 

Property and equipment

 

-

 

(26,617)

 

Deferred policy acquisition costs, net

(134,212)

 

(157,365)

 

Restricted stock grant

 

(46,363)

 

(109,056)

 

Unrealized gains on common stock

(1,595,467)

 

(15,595)

 

 

 

 

 

 

 

 

Total deferred income tax liabilities

(1,776,042)

 

(308,633)

 

 

 

 

 

 

 

 

Net deferred income tax asset

 

$ 13,372,130

 

$ 14,113,463

A valuation allowance is deemed unnecessary as of March 31, 2009 and December 31, 2008, respectively because management believes it is probable that the Company will generate substantial taxable income sufficient to realize the tax benefits associated with the net deferred income tax asset shown above in the near future.

Included in income tax is State of Florida income tax at a statutory tax rate of 5.5%.

The Company’s earliest open tax year for purposes of examination of its income tax liability due to taxing authorities is the year ended December 31, 2005. The Company’s U.S. Corporation Income Tax Return for the 2006 tax year is currently undergoing examination by the Internal Revenue Service.

9.       Stockholders’ Equity

Cumulative Preferred Stock

Each share of Series A Preferred Stock is convertible by the Company into 2.5 shares of Common Stock, into an aggregate of 49,875 common shares. Each share of Series M Preferred Stock is convertible by the Company into 1.25 shares of Common Stock, into an aggregate of 110,863 common shares. The Series A Preferred Stock pays a cumulative dividend of $.25 per share per quarter.

Stock Options
 

The Company adopted a 1992 Stock Option Plan (the “Plan”) under which new shares of Common Stock are reserved for issuance upon the exercise of the options. The Plan is designed to serve as an incentive for attracting and retaining qualified and competent employees, officers, directors and consultants of the Company. All employees, officers, directors and consultants of the Company or any subsidiary are eligible to participate in the Plan. The Plan does not specify the number of shares for which options are available for grant. The stock options may be granted over a period not to exceed 10 years and generally vest as of the date of grant or upon certain goals attained.

18

A summary of the option activity for the three-month period ended March 31, 2009 is presented below:
 

   

Options Exercisable

 
         

Aggregate

 

Number

Option Price per Share

Intrinsic

 

of Shares

Low

High

Weighted

Value

Outstanding December 31, 2008

6,650,000

$ 0.50

$ 6.50

$ 3.15

$ 3,795,250

Granted

-

       

Exercised

-

       

Expired

-

       

Outstanding March 31, 2009

6,650,000

$ 0.50

$ 6.50

$ 3.15

$ 8,574,600

Common Stock

The following table summarizes the activity relating to shares of the Company’s common stock during the three-month period ended March 31, 2009:

 

 

 

Issued

Treasury

Shares

Outstanding

 

 

 

Shares

Shares

held in trust

Shares

Balance, as of December 31, 2008

 

40,158,019

(1,709,847)

(906,000)

37,542,172

Preferred stock conversion

 

75,000

   

75,000

 

 

 

       

Balance, as of March 31, 2009

 

40,233,019

(1,709,847)

(906,000)

37,617,172

Stock Issuances

On March 9, 2009, preferred stockholders converted 30,000 shares of Series A Preferred Stock into 75,000 shares of Common Stock.

10.       Earnings Per Share

Earnings per share (“EPS”) amounts are calculated in accordance with SFAS No. 128, “Earnings per Share.” Basic 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 table reconciles the numerator (i.e., income) and denominator (i.e., shares) of the basic and diluted earnings per share computations for net income for the three-months ended March 31, 2009 and 2008.
 
 

19

 

Three Months Ended

 

Three Months Ended

 

March 31, 2009

 

March 31, 2008

 

Income Available to Commom Stockholders

 

Shares

 

Per-Share Amount

 

Income Available to Commom Stockholders

 

Shares

 

Per-Share Amount

                       

Net income

$12,437,830

         

$14,308,316

       

Less: preferred stocks dividends

(10,654) 

         

(12,488)

       

Income available to common stockholders

$12,427,176

 

37,561,341

 

$0.33

 

$14,295,828

 

36,946,000

 

$0.39

                       

Effect of dilutive securities:

                     
                       

Stock options and warrants

0

 

2,144,017

 

(0.02)

 

0

 

3,813,000

 

(0.04)

Preferred stock

10,654

 

216,571

 

-

 

12,488

 

568,000

 

-

Income available to common stockholders and assumed conversion

$12,437,830

 

39,921,929

 

$0.31

 

$14,308,316

 

41,327,000

 

$0.35

11.       Subsequent Events

UPCIC commenced writing homeowners policies in North Carolina on April 20, 2009. On April 24, 2009, UPCIC received approval of its rates and forms from the insurance division of Hawaii's Department of Commerce and Consumer Affairs and will begin writing homeowners’ policies in the State of Hawaii shortly. On May 8, 2009, the Company filed an application to the Texas Department of Insurance to form a separate property and casualty insurance subsidiary to write homeowners coverage in that State.

12.       Fair Value Disclosure

The Company adopted SFAS No. 157, “Fair Value Measurement” (“SFAS 157”), effective January 1, 2008. SFAS 157 defines fair value, establishes a framework for measuring fair value, outlines a fair value hierarchy based on inputs used to measure fair value, and enhances disclosure requirements for fair value measurements. SFAS 157 does not change existing guidance as to whether or not an instrument is carried at fair value. The Company has determined that its fair value measurements are in accordance with the requirements of SFAS 157. Therefore, the implementation of SFAS 157 has not had any impact on the Company’s condensed consolidated financial statements or results of operations.

Financial assets and financial liabilities recorded on the condensed consolidated Balance Sheets at fair value as of March 31, 2009 are categorized in the fair value hierarchy based on the observability of inputs to the valuation techniques as follows:

Level 1:

 

Financial assets and financial liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that the Company can access.

   

Level 2:

 

Financial assets and financial liabilities whose values are based on inputs that utilize other than quoted prices included in Level I that are observable for similar assets, or unobservable inputs that are corroborated by market data.

   

Level 3:

 

Financial assets and financial liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect the Company’s estimates of the assumptions that market participants would use in valuing the financial assets and financial liabilities.

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In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset.
 

The following table presents information about the Company’s invested assets measured at fair value on a recurring basis as of March 31, 2009, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value.

 

 

Fair Value Measurements

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

 

 

 

 

 

 

US government obligations and agencies

 

$  65,855,861

 

$           -

 

$           -

 

$  65,855,861

Equity securities

 

60,425,345

 

-

 

-

 

60,425,345

 

 

 

 

 

 

 

 

 

Total invested assets

 

$ 126,281,206

 

$           -

 

$           -

 

$ 126,281,206

The fair value of the equity securities determined to be Level I inputs are derived from readily available market prices.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis by management of the Company’s condensed consolidated financial condition and results of operations should be read in conjunction with the Company’s Condensed Consolidated Financial Statements and Notes thereto.

Forward-Looking Statements

Certain statements made by the Company’s management may be considered to be “forward-looking statements” within the meaning of the Private Securities Reform Litigation Act of 1995. Forward-looking statements are based on various factors and assumptions that include known and unknown risks and uncertainties. The words “believe,” “expect,” “anticipate,” and “project,” and similar expressions, identify forward-looking statements, which speak only as of the date the statement was made. 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 described in forward-looking statements as a result of the risks set forth in the following discussion and in the section below entitled “Factors Affecting Operation Results and Market Price of Stock,” among others.

Overview

The Company was originally organized as Universal Heights, Inc. in 1990. The Company changed its name to Universal Insurance Holdings, Inc. on January 12, 2001. In April 1997, the Company organized its subsidiary UPCIC as part of its strategy to take advantage of what management believed to be profitable business and growth opportunities in the marketplace. UPCIC was formed to participate in the transfer of homeowners’ insurance policies from the JUA. UPCIC’s application to become a Florida licensed property and casualty insurance company was filed with the OIR on May 14, 1997 and approved on October 29, 1997. UPCIC’s proposal to begin operations through the acquisition of homeowners’ insurance policies issued by the JUA was approved by the JUA on May 21, 1997, subject to certain minimum capitalization and other requirements.

The Company has since evolved into a vertically integrated insurance holding company, which through its various subsidiaries, covers substantially all aspects of insurance underwriting, distribution and claims processing. The Company’s primary product is homeowners’ insurance. The Company’s criteria for selecting insurance policies
 
 

21

includes, but is not limited to, the use of specific policy forms, coverage amounts on buildings and contents and required compliance with local building codes. Also, to improve underwriting and manage risk, the Company utilizes standard industry modeling techniques for hurricane and windstorm exposure. UPCIC’s portfolio as of March 31, 2009 includes approximately 489,000 policies with coverage for wind risks and 9,000 policies without wind risks. The average premium for a policy with wind coverage is approximately $1,084 and the average premium for a policy without wind coverage is approximately $464. UPCIC had in-force premiums of approximately $534.3 million as of March 31, 2009.

The OIR requires applicants to have a minimum capitalization of $5.0 million to be eligible to operate as an insurance company in the State of Florida. Upon being issued an insurance license, companies must maintain capitalization of the greater of ten percent of the insurer’s total liabilities or $4.0 million. If an insurance company’s capitalization falls below the minimum requirements, then the company will be deemed out of compliance with OIR requirements, which could result in revocation of the participant’s license to operate as an insurance company in the State of Florida. UPCIC’s statutory capital and surplus was $98,485,626 at March 31, 2009 and exceeded the minimum capital and surplus requirements. UPCIC is also required to adhere to prescribed premium-to-capital surplus ratios.

The Company has continued to implement its plan to become a financial services company and, through its wholly-owned insurance subsidiaries, has sought to position itself to take advantage of what management believes to be profitable business and growth opportunities in the marketplace.

In an effort to further grow its insurance operations, in 1998 the Company began to solicit business actively in the open market. Through renewal of JUA business combined with business solicited in the market through independent agents, UPCIC was servicing approximately 498,000 homeowners’ and dwelling fire insurance policies as of March 31, 2009. To improve underwriting and manage risk, the Company utilizes standard industry modeling techniques for hurricane and windstorm exposure. To diversify UPCIC’s product lines, UPCIC underwrites inland marine policies. In February 2008, UPCIC filed a request with the National Flood Insurance Program (“NFIP”) to become authorized to write and service flood insurance policies under the WYO Program. Management may consider underwriting other types of policies in the future. Any such program will require OIR approval. See Item 2 below, Competition under “Factors Affecting Operating Results and Market Price of Stock” for a discussion of the material conditions and uncertainties that may affect UPCIC’s ability to obtain additional policies.

UPCIC has applied for expansion to write homeowners’ insurance policies in five additional states. Those states are Texas, Hawaii, Georgia, South Carolina and North Carolina. On July 16, 2008, August 18, 2008, September 30, 2008, and January 29, 2009, UPCIC was licensed to transact insurance business within the States of South Carolina, Hawaii, North Carolina, and Georgia, respectively. The State of North Carolina Department of Insurance has restricted UPCIC to writing no more than $12.0 million of direct premiums in each of the first two full calendar years after which such restriction may be lifted. UPCIC has commenced writing homeowners policies in South Carolina and North Carolina. On April 24, 2009, UPCIC received approval of its rates and forms from the insurance division of Hawaii's Department of Commerce and Consumer Affairs and will begin writing homeowners’ policies in the State of Hawaii shortly. On May 8, 2009, the Company filed an application to the Texas Department of Insurance to form a separate property and casualty insurance subsidiary to write homeowners coverage in that State. In addition, UPCIC has filed to offer flood insurance through the NFIP.

The Company expects that premiums from policy renewals and new business will be sufficient to meet the Company’s working capital requirements beyond the next twelve months.

Critical Accounting Policies and Estimates

Management has reassessed the critical accounting policies as disclosed in the Company’s 2008 Annual Report on Form 10-K, as amended, and determined that no changes, additions or deletions are needed to the policies as disclosed. Also there were no significant changes in the Company’s estimates associated with those policies.

The Company’s financial statements are combined with those of its subsidiaries and are presented on a consolidated basis in accordance with GAAP. UPCIC makes estimates and assumptions that can have a significant effect on amounts and disclosures reported in the Company’s financial statements. The most significant estimate relates to the
 
 

22

reserves for property and casualty insurance unpaid losses and loss adjustment expenses. While the Company believes the estimates are appropriate, the ultimate amounts may differ from the estimates provided. The Company reviews these estimates on, at least, a quarterly basis and reflects any adjustment considered necessary in its current results of operations.

Analysis of Financial Condition - As of March 31, 2009 Compared to December 31, 2008

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. The Company held cash and cash equivalents at March 31, 2009 and December 31, 2008 of $158,204,010 and $256,964,637, respectively.

The Company believes that premiums will be sufficient to meet the Company’s working capital requirements for at least the next twelve months. The Company’s policy is to invest amounts considered to be in excess of current working capital requirements.

The Company used cash and cash equivalents to increase its aggregate fixed maturities and equity securities to $171,902,754 as of March 31, 2009 from $5,648,775 as of December 31, 2008 in order to more conservatively limit its exposure to the volatility in the current banking environment.

The following table summarizes, by type, the carrying values of the Company’s investments:

 

 

As of March 31,

 

As of December 31,

Type of Investment

 

2009

 

2008

Cash and cash equivalents

 

$ 158,204,010

 

$ 256,964,637

Fixed maturities, held to maturity

 

45,621,548

 

4,334,405

Fixed maturities, available for sale

 

65,855,861

 

-

Equity securities, available for sale

 

60,425,345

 

1,314,370

Real estate

 

3,367,357

 

3,399,609

 

 

 

 

 

 

 

$ 333,474,121

 

$ 266,013,021

The Company’s liability for Reinsurance Payable increased $28,036,181 to $52,020,429 during the three-month period ended March 31, 2009 from $23,984,248 as of year-end 2008, primarily due to the timing of settlements with reinsurers.

As of March 31, 2009, the Company had a liability of $5,989,694 for federal and state income taxes, and as of December 31, 2008, the Company had federal and state income taxes recoverable of $2,482,923. The change in the liability consisted primarily of the current year provision for income taxes in the amount of $8,582,617.

Results of Operations - Three Months Ended March 31, 2009 Compared to Three Months Ended March 31, 2008

Net income decreased 13.1% to $12,437,830 for the three-month period ended March 31, 2009 from $14,308,316 for the three-month period ended March 31, 2008. The Company’s earnings per diluted share were $0.31 for the 2009 period versus $0.35 in the same period last year. Even though there was an increase in the number of homeowners’ and dwelling fire insurance policies serviced by the Company and increases in gross premiums written and earned during the three-month period ending March 31, 2009, the Company experienced a decrease in net income during this period due primarily to increases in ceded premiums earned and losses and loss adjustment expenses incurred as described below.

In January 2007, the Florida Legislature passed a law designed to reduce residential catastrophe reinsurance costs and requiring insurance companies to offer corresponding rate reductions to policyholders. The new law expanded the amount of reinsurance available from the FHCF, which is a state-run entity providing hurricane reinsurance to residential insurers at premiums less than the private reinsurance market. The Legislature intended for the new law
 
 

23

to reduce residential insurers’ reinsurance costs by allowing them to directly replace some of their private market reinsurance with less costly FHCF reinsurance. In addition, prices in the private reinsurance market have fallen as reinsurers have had capital displaced by the expanded FHCF.

UPCIC purchased the maximum additional coverage available to the Company under the expanded FHCF, allowing UPCIC to maximize its cost savings from the new law. UPCIC’s mid-2007 rate reductions therefore reflected actual reductions in UPCIC’s operating costs. In addition, UPCIC’s private reinsurance costs in 2007 and 2008 are lower than were included in its rates prior to the 2007 legislation.

Florida’s Legislature also has implemented strategies to improve the ability of residential structures to withstand hurricanes. New construction must meet stronger building codes, and existing homes are eligible for an inspection program that allows homeowners to determine how their homes may be upgraded to mitigate storm damage. An increasing number of insureds are likely to qualify for insurance premium discounts as new homes are built and existing homes are retrofitted. These premium discounts result from homes’ reduced vulnerability to hurricane losses due to the mitigation efforts, which UPCIC takes into account in its underwriting and profitability models.

Gross premiums written increased 14.6% to $145,212,145 during the three-month period ending March 31, 2009 from $126,667,669 in the same period of 2008. As of March 31, 2009 and December 31, 2008, UPCIC was servicing approximately 498,000 and 461,000, respectively, homeowners’ and dwelling fire insurance policies with in-force premiums of approximately $534,300,000 and $518,200,000, respectively.

 

Net premiums earned increased 7.6% to $37,757,652 for the three-month period ended March 31, 2009 from $35,093,395 for the three-month period ended March 31, 2008. The increase is due to an increase in direct premiums earned, net of previously discussed rate decreases and a higher volume of premium discounts in response to a state-required wind mitigation discount program available to policyholders.
   
Net investment income decreased 73.8% to $324,589 for the three-month period ended March 31, 2009 from $1,240,878 for the three-month period ended March 31, 2008.  Net investment income is comprised primarily of interest and dividends.  The decrease is primarily due to a change in the composition of the Company’s investment portfolio during the three-month period ended March 31, 2009.
   
Realized gains on investments increased 100.0% to $1,111,333 for the three-month period ended March 31, 2009 from $0 for the three-month period ended March 31, 2008. The increase is due to the expansion of the Company’s investment portfolio into equity securities and the related sales of certain of these securities.

 

Realized gains on investments increased 100.0% to $1,111,333 for the three-month period ended March 31, 2009 from $0 for the three-month period ended March 31, 2008.  The increase is due to the expansion of the Company's investment portfolio into equity securities and the related sales of these securities.

Commission revenue increased 8.4% to $7,444,849 for the three-month period ended March 31, 2009 from $6,867,187 for the three-month period ended March 31, 2008. Commission revenue is comprised principally of the managing general agent’s policy fee income and service fee income on all new and renewal insurance policies, reinsurance commission sharing agreements, and commissions generated from agency operations. The increase is primarily attributable to a decrease in reinsurance commission sharing of approximately $391,000, and an increase in managing general agent’s policy fee income of approximately $973,000.

Other revenue increased 36.6% to $1,479,377 for the three-month period ended March 31, 2009 from $1,083,013 for the three-month period ended March 31, 2008. The increase is primarily due to fees earned on new payment plans offered to policyholders by UPCIC. UPCIC was not offering such payment plans during the 2008 period.

Net losses and LAE increased 60.5% to $20,420,664 for the three-month period ended March 31, 2009 from $12,725,862 for the three-month period ended March 31, 2008. The net loss and LAE ratios, or net losses and LAE as a percentage of net earned premiums, were 54.1% and 36.3% during the three-month periods ended March 31, 2009 and 2008, respectively, and were comprised of the following components:

 

 

Three months ended March 31, 2009

 

 

Direct

Ceded

Net

Loss and loss adjustment expenses

$  41,324,392

$20,903,728

$20,420,664

Premiums earned

 

$128,292,195

$90,534,543

$37,757,652

Loss & LAE ratios

 

32.2%

23.1%

54.1%

 

 

 

 

 

 

24

 

 

Three months ended March 31, 2008

 

 

Direct

Ceded

Net

Loss and loss adjustment expenses

$  24,421,144

$11,695,282

$12,725,862

Premiums earned

 

$124,862,938

$89,769,543

$35,093,395

Loss & LAE ratios

 

19.6%

13.0%

36.3%

The direct loss and LAE ratio for the three-month period ended March 31, 2009 was 32.2% compared to 19.6% for the three-month period ended March 31, 2008. The increase in the direct loss and LAE ratio is attributable to the increase in direct loss and LAE incurred outpacing the increase in direct earned premium in the 2009 period.

Although total direct premiums earned increased 2.7% in the three-month 2009 period compared to the same period in 2008, the average premium per policy decreased significantly due to the previously described rate decreases and wind mitigation credits. As of March 31, 2009, UPCIC was servicing approximately 498,000 homeowners’ and dwelling fire insurance policies with in-force premiums of approximately $534,300,000, or an average of $1,073 per policy. The comparable average in-force premium per policy as of March 31, 2008 was $1,262. Consequently, as a result of increased net losses and LAE in connection with the servicing of additional policies,  the direct loss and LAE ratio increased significantly for the 2009 period. However, the Company’s loss frequency did not vary significantly during the 2009 period compared to the 2008 period.

The ceded loss and LAE ratio for the three-month period ended March 31, 2009 was 23.1% compared to 13.0% for the three-month period ended March 31, 2008. The ceded loss and LAE ratio was influenced by greater direct incurred loss and LAE ceded under the Company’s quota share reinsurance treaty and higher total reinsurance costs in the 2009 period compared to the 2008 period. Although reinsurance costs have decreased, total reinsurance costs are higher as UPCIC purchased additional coverage in 2008 for the 2008 / 2009 coverage period.

Catastrophes are an inherent risk of the property-liability insurance business which may contribute to material year-to-year fluctuations in UPCIC’s and the Company’s results of operations and financial position. During the three-month periods ended March 31, 2009 and 2008, respectively, neither UPCIC nor the Company experienced any catastrophic events. The level of catastrophe loss experienced in any year cannot be predicted and could be material to the results of operations and financial position of UPCIC and the Company. While management believes UPCIC’s and the Company’s catastrophe management strategies will reduce the severity of future losses, UPCIC and the Company continue to be exposed to catastrophic losses, including catastrophic losses that may exceed the limits of the Company’s reinsurance program.

General and administrative expenses decreased 8.5% to $7,515,228 for the three-month period ended March 31, 2009 from $8,209,374 for the three-month period ended March 31, 2008. The decrease in general and administrative expenses was due to several factors, including an increase in ceding commissions due to greater ceded earned premiums, a decrease in assessment expense due to increased collections of assessments from policyholders, and a decrease in interest expense.

Federal and state income taxes decreased 14.3% to $7,744,078 for the three-month period ended March 31, 2009 from $9,040,921 for the three-month period ended March 31, 2008. Federal and state income taxes were 38.4% of pretax income for the three-month period ended March 31, 2009, and 38.7% for the three-month period ended March 31, 2008. The decrease is primarily due to lower income before income taxes.

Liquidity and Capital Resources

Overview

The Company’s primary sources of cash flow are the receipt of premiums, commissions, policy fees investment income, reinsurance recoverables and short-term loans.

For the three-month periods ended March 31, 2009 and 2008, cash flows provided by operating activities were $64,072,189 and $59,414,779, respectively. Cash flows from operating activities are expected to be positive in both the short-term and reasonably foreseeable future. In addition, the Company’s investment portfolio is highly liquid as it consists of cash, cash equivalents, and readily-marketable securities. Cash flows used in investing activities primarily comprise of purchases of securities in 2009. Cash flows used in financing activities primarily relate to the payment of Company dividends to stockholders in 2009.

25

The Company believes that its current capital resources will be sufficient to meet anticipated working capital requirements for the next twelve months. There can be no assurances, however, that such will be the case.
 

Available Cash

The Company held cash and cash equivalents at March 31, 2009 of $158,204,010. Of that amount, $142,797,623 was held by UPCIC, most of which is available to pay claims or relates to policyholder surplus. Accordingly, cash and cash equivalents in UPCIC are not available to buy back Company stock or pay Company dividends. A portion of those claims paid by the Company would be recoverable through the Company’s catastrophic reinsurance upon presentation to the reinsurer of evidence of claim payment. As of December 31, 2008, the Company held cash and cash equivalents of $256,964,637.

Cash Dividends

On January 16, 2009, the Company’s Board of Directors declared a dividend of $0.10 per share on its outstanding common stock. The dividend was paid on March 4, 2009 to stockholders of record as of February 12, 2009 in the aggregate amount of $3,754,217. On March 4, 2009, the Company’s Board of Directors declared a dividend of $0.12 per share on its outstanding common stock. The dividend was paid on May 4, 2009 to stockholders of record as of April 9, 2009 in the aggregate amount of $4,505,061.

Contractual Obligations

There have been no material changes during the period covered by this Report, outside of the ordinary course of the Company’s business, to the contractual obligations specified in the table of contractual obligations included in the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the Company’s Annual Report on Form 10-K, for the year ended December 31, 2008.

Factors Affecting Operation Results and Market Price of Stock

The Company and its subsidiaries operate in a rapidly changing environment that involves a number of uncertainties, some of which are beyond the Company’s control. This report contains, in addition to historical information, forward looking statements that involve risks and uncertainties. The words “expect,” “estimate,” “anticipate,” “believe,” “intend,” “plan” and similar expressions and variations thereof are intended to identify forward-looking statements. The Company’s actual results could differ materially from those set forth in or implied by any forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those uncertainties discussed below as well as those discussed elsewhere in this report.

Nature of the Company’s Business

Factors affecting the sectors of the insurance industry in which the Company operates may subject the Company to significant fluctuations in operating results. These factors include competition, catastrophe losses and general economic conditions including interest rate changes, as well as 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. Specifically, the homeowners’ insurance market, which comprises the bulk of the Company’s current operations, is influenced by many factors, including state and federal laws, market conditions for homeowners’ insurance and residential plans. Additionally, an economic downturn could result in fewer home sales and less demand for new homeowners seeking insurance.

Historically, the financial performance of the property and casualty insurance industry has tended to fluctuate in cyclical patterns of soft markets followed by hard markets. Although an individual insurance company’s financial performance is dependent on its own specific business characteristics, the profitability of most property and casualty insurance companies tends to follow this cyclical market pattern.

The Company believes that a substantial portion of its future growth will depend on its ability, among other things, to successfully implement its business strategy, including expanding the Company’s product offering by
 
 

26

underwriting and marketing additional insurance products and programs through its distribution network, further penetrating the Florida market by establishing relationships with additional independent agents in order to expand its distribution network and to further disperse its geographic risk and expanding into other geographical areas outside the State of Florida. Any future growth is contingent on various factors, including the availability of adequate capital, the Company’s ability to hire and train additional personnel, regulatory requirements, the competitive environment, and rating agency considerations. There is no assurance that the Company will be successful in expanding its business, that the existing infrastructure will be able to support additional expansion or that any new business will be profitable. Moreover, as the Company expands its insurance products and programs and the Company’s mix of business changes, there can be no assurance that the Company will be able to maintain or improve its profit margins or other operating results. There can also be no assurance that the Company will be able to obtain the required regulatory approvals to offer additional insurance products. UPCIC also is required to maintain minimum surplus to support its underwriting program. The surplus requirement affects UPCIC’s potential growth.
 

Management of Exposure to Catastrophic Losses

UPCIC is exposed to potentially numerous insured losses arising out of single or multiple occurrences, such as natural catastrophes. As with all property and casualty insurers, UPCIC expects to and will incur some losses related to catastrophes and will price its policies accordingly. UPCIC’s exposure to catastrophic losses arises principally out of hurricanes and windstorms. Through the use of standard industry modeling techniques that are susceptible to change, UPCIC manages its exposure to such losses on an ongoing basis from an underwriting perspective. UPCIC also protects itself against the risk of catastrophic loss by obtaining reinsurance coverage as of the beginning of hurricane season on June 1 of each year. UPCIC’s reinsurance program consists of excess of loss, quota share and catastrophe rei