Edgar Filing: UNIVERSAL INSURANCE HOLDINGS, INC.

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 June 30, 2009

[ ] 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 July 29, 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	4

	Condensed Consolidated Balance Sheets as of June 30, 2009 and December 31, 2008	5

	Condensed Consolidated Statements of Operations for the Six-Month and Three-Month Periods Ended June 30, 2009 and 2008	6

	Condensed Consolidated Statements of Stockholders’ Equity for the Six-Month Periods Ended June 3 0, 2009 and 2008	7

	Condensed Consolidated Statements of Cash Flows for the Six-Month Periods Ended June 3 0, 2009 and 2008	8

	Notes to Condensed Consolidated Financial Statements	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	44

Item 4.	Controls and Procedures	46

PART II:	OTHER INFORMATION

Item 1.	Legal Proceedings	46

Item 1A.	Risk Factors	46

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	46

Item 3.	Defaults Upon Senior Securities	46

Item 4.	Submission of Matters to a Vote of Security Holders	46

Item 5.	Other Information	47

Item 6.	Exhibits	47

Signatures		49

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 June 30, 2009 and the related Condensed Consolidated Statements of Operations for the six-month and three-month periods ended June 30, 2009 and 2008 and Cash Flows for each of the six-month periods ended June 30, 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

August 7, 2009

PART I -- FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	(Unaudited)
	June 30,	December 31,
ASSETS	2009	2008
Cash and cash equivalents	$ 168,143,375	$ 256,964,637
Investments
Fixed maturities held to maturity, at amortized cost	-	4,334,405
Fixed maturities available for sale, at fair value	131,272,111	-
Equity securities available for sale, at fair value	77,296,986	1,314,370
Real estate, net	3,354,704	3,399,609
Prepaid reinsurance premiums	210,149,023	173,046,776
Reinsurance recoverables	47,877,216	44,009,847
Premiums receivable, net	49,235,788	40,358,720
Receivable from securities	390,618	-
Accrued investment income	804,511	102,187
Other receivables	2,234,596	2,545,292
Income taxes recoverable	7,659,827	2,482,923
Property and equipment, net	1,065,154	864,125
Deferred policy acquisition costs, net	8,442,050	407,946
Deferred income taxes	5,291,811	14,113,463
Other assets	831,112	692,612
Total assets	$ 714,048,882	$ 544,636,912

LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Unpaid losses and loss adjustment expenses	$ 96,467,046	$ 87,947,774
Unearned premiums	298,075,444	258,489,460
Accounts payable	4,280,709	3,147,260
Bank overdraft	20,647,050	15,699,930
Payable for securities	394,517	1,273,941
Reinsurance payable, net	112,342,116	23,984,248
Dividends payable	4,514,061	-
Other accrued expenses	16,809,416	14,680,443
Other liabilities	16,826,738	12,860,201
Long-term debt	25,000,000	25,000,000
Total liabilities	595,357,097	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	35,219,544	33,587,414
Accumulated other comprehensive income, net of taxes	8,253,810	24,834
Retained earnings	82,930,644	75,654,070
Total stockholders' equity	118,691,785	101,553,655
Total liabilities and stockholders' equity	$ 714,048,882	$ 544,636,912

The accompanying notes to Condensed Consolidated financial statements are an integral part of these statements.

UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	For the Six		For the Three
	Months Ended June 30,		Months Ended June 30,
	2009	2008	2009	2008
PREMIUMS EARNED AND OTHER REVENUES
Direct premiums written	$ 301,984,289	$ 269,585,900	$156,772,144	$142,918,231
Ceded premiums written	(224,366,164)	(183,989,760)	(128,638,307)	(94,219,057)
Net premiums written	77,618,125	85,596,140	28,133,837	48,699,174
(Increase) decrease in net unearned premium	(2,483,735)	(14,338,891)	9,242,901	(12,535,320)
Premiums earned, net	75,134,390	71,257,249	37,376,738	36,163,854
Net investment income	798,482	2,518,702	461,774	1,277,824
Realized gains on investments	1,452,609	-	341,276	-
Foreign currency transaction gains	72,316	-	84,435	-
Commission revenue	15,307,618	13,849,219	7,862,769	6,982,032
Other revenue	2,901,730	2,353,711	1,422,353	1,270,698

Total premiums earned and other revenues	95,667,145	89,978,881	47,549,345	45,694,408

OPERATING COSTS AND EXPENSES
Losses and loss adjustment expenses	44,926,823	30,242,028	24,506,159	17,516,166
General and administrative expenses	18,114,424	17,484,322	10,599,196	9,274,948

Total operating costs and expenses	63,041,247	47,726,350	35,105,355	26,791,114

INCOME BEFORE INCOME TAXES	32,625,898	42,252,531	12,443,990	18,903,294

Income taxes, current	8,949,654	18,037,866	367,037	7,480,150
Income taxes, deferred	3,599,856	(1,291,801)	4,438,395	224,994
Income taxes, net	12,549,510	16,746,065	4,805,432	7,705,144

NET INCOME	$ 20,076,388	$ 25,506,466	$ 7,638,558	$ 11,198,150

Basic net income per common share	$ 0.53	$ 0.68	$ 0.20	$ 0.30
Weighted average of common shares outstanding - Basic	37,589,412	37,421,000	37,617,174	37,897,000

Fully diluted net income per share	$ 0.50	$ 0.62	$ 0.19	$ 0.28
Weighted average of common shares outstanding - Diluted	40,225,815	40,831,000	40,529,702	40,335,000

Cash dividend declared per common share	$ 0.34	$ 0.10	$ 0.12	$ -


	For the Six		For the Three
	Months Ended June 30,		Months Ended June 30,
	2009	2008	2009	2008
Comprehensive Income:
Net income	$ 20,076,388	$ 25,506,466	$ 7,638,558	$ 11,198,150
Net unrealized gains on investments, net of tax	8,228,976	-	5,672,835	-

Comprehensive Income	$ 28,305,364	$ 25,506,466	$ 13,311,393	$ 11,198,150

The accompanying notes to Condensed Consolidated financial statements are an integral part of these statements.

UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2009 AND 2008

(Unaudited)

	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
	For the Six Months Ended June 30, 2009
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					1,306,591					1,306,591

Net income						20,076,388				20,076,388

Amortization of deferred
compensation					325,989					325,989

Declaration of dividends						(12,799,814)				(12,799,814)

Net unrealized gains on
Investments, net of
tax effect of $5,237,392							8,228,976			8,228,976

Balance,
June 30, 2009	40,233,019	108,640	$ 402,328	$ 1,087	$ 35,219,544	$ 82,930,644	$ 8,253,810	$ (733,860)	$ (7,381,768)	$ 118,691,785

	For the Six Months Ended June 30, 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		15,157		2,505,370				(3,407,234)	(886,707)

Release of shares
from SGT					25,330			1,615,140	(4,041,705)	(2,401,235)

Repurchase of treasury
shares									(71,117)	(71,117)

Retirement of treasury
shares	(965,084)		(9,651)		(4,032,054)				4,041,705	-

Stock compensation
plans					2,540,063					2,540,063

Net income						25,506,466				25,506,466

Tax benefit on exercise
of stock options					5,706,780					5,706,780

Amortization of deferred
compensation					154,165					154,165

Declaration of dividends						(3,812,147)				(3,812,147)

Balance,
June 30, 2008	39,858,019	138,640	$ 398,578	$ 1,387	$ 31,679,452	$ 72,418,993	$ -	$ (733,860)	$ (4,453,097)	$ 99,311,453

The accompanying notes to Condensed Consolidated financial statements are an integral part of these statements.

UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Six Months Ended	Six Months Ended
	June 30, 2009	June 30, 2008
Cash flows from operating activities
Net Income	$ 20,076,388	$ 25,506,466
Adjustments to reconcile net income to net cash provided by operating activities:
Allowance for doubtful accounts	788,142	843,789
Depreciation	213,576	227,475
Amortization of FAS 123R cost of stock options	1,306,591	4,799,867
Amortization of restricted stock grant	325,989	154,164
Stock issued for services	-	(2,259,802)
Realized (gains) losses on investments	(1,452,609)	-
Foreign currency transaction gains	(72,316)	-
Net amortization of premium / accretion of discount	109,204	11,417
Deferred taxes	3,599,856	(1,291,801)
Tax benefit on exercise of stock options	-	(4,677,743)
Other	130,119	-
Net change in assets and liabilities relating to operating activities:
Prepaid reinsurance premiums	(37,102,247)	(5,592,443)
Reinsurance recoverables	(3,867,369)	(355,796)
Premiums receivable	(9,665,210)	(1,959,595)
Accrued investment income	(702,324)	(288,324)
Other receivables	178,739	(6,030,807)
Income taxes recoverable	(5,176,904)	-
Deferred acquisition costs, net	(8,034,104)	-
Deferred ceding commission, net	-	282,202
Other assets	(144,759)	(357,436)
Unpaid losses and loss adjustment expenses	8,519,272	469,613
Unearned premiums	39,585,983	19,931,334
Accounts payable	1,133,449	862,789
Bank overdraft	4,947,120	9,665,911
Reinsurance payable	88,357,868	34,544,431
Taxes payable	-	629,416
Other accrued expenses	2,128,973	(2,973,599)
Other liabilities	3,966,539	3,400,349
Net cash provided by operating activities	109,149,966	75,541,877
Cash flows from investing activities
Purchases of fixed maturities:
Held to maturity	-	(1,589,040)
Available for sale	(126,035,995)	-
Purchases of equity securities, available for sale	(78,530,195)	-
Proceeds from sales of equity securities, available for sale	11,005,564	-
Proceeds from sales of fixed maturities, available for sale	4,244,851
Capital expenditures and building improvements	(369,700)	(434,298)
Net cash used in investing activities	(189,685,475)	(2,023,338)
Cash flows from financing activities
Preferred stock dividend	(17,475)	(24,975)
Common stock dividend	(8,268,278)	(3,329,203)
Issuance of common stock		130,530
Acquisition of treasury stock		(3,418,469)
Tax benefit on exercise of stock options		4,677,743
Repayments of loans payable		(2,820)
Net cash used in financing activities	(8,285,753)	(1,967,194)

Net (decrease) increase in cash and cash equivalents	(88,821,262)	71,551,345
Cash and cash equivalents at beginning of period	256,964,637	214,745,606
Cash and cash equivalents at end of period	$ 168,143,375	$ 286,296,951
Non cash items:
Dividends accrued	$ 4,514,061	$ 3,699,116

The accompanying notes to Condensed Consolidated financial statements are an integral part of these statements.

UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 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. Certain financial information that is included in annual financial statements prepared in accordance with GAAP is not required for interim reporting and has been condensed or omitted.

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 policies.

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.

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) 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 cause 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 available for sale and has determined that as of June 30, 2009, it held equity securities with unrealized losses in the aggregate amount of $2,010,685 and fixed maturities with unrealized losses in the aggregate amount of $284,928. 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 classified as held to maturity securities reported in the Condensed Consolidated Balance Sheet represents amortized cost. 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 June 30, 2009 and December 31, 2008. The fair value of long-term debt as of June 30, 2009 was estimated based on discounted cash flows utilizing interest rates currently offered for similar products and determined to be $19,069,200.

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. Best Company, A+ from Standard and Poor’s Rating Services and Aa3 from Moody’s Investors Service, Inc. As of June 30, 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 June 30, 2009	As of December 31, 2008
Everest Reinsurance Company	$154,522,128	$168,444,284
Florida Hurricane Catastrophe Fund	-	31,445,808

Total	$154,522,128	$199,890,092

As of June 30, 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 $1,306,591 and $2,540,063 for the six-month periods ended June 30, 2009, and 2008, respectively, with a

corresponding deferred income tax benefit of $504,017 and $979,829, respectively. As of June 30, 2009 the total unrecognized compensation cost related to nonvested share-based compensation granted under the stock compensation plans was $456,402. The cost is expected to be recognized over a weighted average period of 1.2 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 six-month periods ended June 30, 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 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 because 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.

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.

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 adopted FSP FAS 115-2 and FAS 124-2 in the second quarter of 2009. The adoption of FSP FAS 115-2 and FAS 124-2 did not have an effect on the results of operations or financial position of the Company.

In April 2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are

Not Orderly,” which provides guidelines for making fair value measurements more consistent with the principles presented in FASB No. 157, “Fair Value Measurements”. FSP FAS 157-4 emphasizes that even if there has been a significant decrease in the volume and level of activity for the asset or liability and regardless of the valuation technique(s) used, the objective of a fair value measurement remains the same. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. FSP FAS 157-4 is effective for interim and annual periods ending after June 15, 2009, and shall be applied prospectively. The Company adopted FSP FAS No. 157-4 in the second quarter of 2009. The adoption of FSP FAS 157-4 did not have an effect on the results of operations or financial position of the Company.

In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments”, which requires disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. FSP FAS 107-1 and APB 28-1 requires fair value disclosures on a quarterly basis, providing qualitative and quantitative information about fair value estimates for all those financial instruments not measured on the balance sheet at fair value. FSP FAS 107-1 and APB 28-1 are effective for interim reporting periods ending after June 15, 2009. The Company adopted FSP FAS 107-1 and APB 28-1 in the second quarter of 2009. The adoption of FSP FAS 107-1 and APB 28-1 did not have an effect on the results of operations or financial position of the Company.

In May 2009, FASB issued SFAS No. 165, “Subsequent Events”, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued. SFAS No. 165 requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date – that is, whether that date represents the date the financial statements were issued or were available to be issued. SFAS No. 165 is effective for interim and annual periods ending after June 15, 2009. The Company adopted SFAS No. 165 in the second quarter of 2009. The adoption of SFAS No. 165 did not have an effect on the results of operations or financial position of the Company.

In June 2009, FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles,” – which is a replacement of FASB No. 162, “The Hierarchy of Generally Accepted Accounting Principles (GAAP).” The FASB Accounting Standards Codification will become the source of authoritative U.S. GAAP recognized by the FASB to be applied to nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) promulgated under the authority of the federal securities laws are also sources of authoritative GAAP for SEC registrants. SFAS No. 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. On the effective date of the FASB Accounting Standards Codification, it will supersede all then-existing non-SEC accounting and reporting standards. The Company is currently assessing the impact this SFAS 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 June 30, 2009, UPCIC was servicing approximately 520,000 homeowners’ and dwelling fire insurance policies with direct unearned premiums totaling $298,075,444 and in-force premiums of approximately $550,700,000. 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 negative effect on UPCIC’s premiums and net income. The following table reflects the effect of wind mitigation credits received by UPCIC policyholders:

		Reduction of in-force premium (only policies including wind coverage)
Date	Percentage of UPCIC policyholders receiving credits	Total credits	In-force premium	Percentage reduction of in-force premium
6/1/2007	1.90%	$ 6,284,697	$ 487,866,319	1.27%
12/31/2007	11.80%	$ 31,951,623	$ 500,136,287	6.00%
3/31/2008	16.90%	$ 52,398,215	$ 501,523,343	9.46%
6/30/2008	21.30%	$ 74,185,924	$ 508,411,721	12.73%
12/31/2008	31.10%	$ 123,524,911	$ 514,011,138	19.38%
3/31/2009	36.30%	$ 158,229,542	$ 530,029,572	22.99%
6/30/2009	40.40%	$ 188,053,342	$ 544,646,437	25.67%

4. Reinsurance

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.

UPCIC limits the maximum net loss that can arise from large risks or risks in concentrated geographic areas of exposure by reinsuring (ceding) certain levels of risks with other insurers or reinsurers on an automatic basis under general reinsurance contracts known as “treaties.” The reinsurance arrangements are intended to provide UPCIC with the ability to maintain its exposure to loss within its capital resources. Such reinsurance includes quota share, excess of loss and catastrophe forms of reinsurance. The Company submits the UPCIC reinsurance program for regulatory review to the Florida Office of Insurance Regulation (“OIR”).

UPCIC’s in-force policyholder coverage for windstorm exposures as of June 30, 2009 was approximately $111.1 billion. In the normal course of business, UPCIC also seeks to reduce the risk of loss that may arise from catastrophes or other events that cause unfavorable underwriting results by reinsuring certain levels of risk in various areas of exposure with other insurance enterprises or reinsurers.

2009 Reinsurance Program

Quota Share

Effective June 1, 2009, UPCIC entered into a quota share reinsurance treaty with Everest Reinsurance Company (“Everest Re”). Everest Re has the following ratings from each of the rating agencies: A+ from A.M. Best Company, A+ from Standard and Poor’s Rating Services and Aa3 from Moody’s Investors Service, Inc. Under the quota share treaty, through May 31, 2010, UPCIC cedes 50% of its gross written premiums, losses and LAE for policies with coverage for wind risk, with a ceding commission payable to UPCIC equal to 25% of ceded gross written premiums. In addition, the quota share treaty has a limitation for any one occurrence of 58% of gross premiums earned, not to exceed $160,000,000 (of which UPCIC’s net liability in a first event scenario is $50,000,000 ($75,000,000 net of

$25,000,000 retained by the Company under the excess catastrophe contract, effective June 12, 2009, described in the “Excess Catastrophe” section below), in a second event scenario is $16,000,000 and in a third event scenario is $16,000,000) and a limitation from losses arising out of events that are assigned a catastrophe serial number by the Property Claims Services (“PCS”) office of 175% of gross premiums earned, not to exceed $480,000,000.

Excess Per Risk

Effective June 1, 2009 through May 31, 2010, UPCIC entered into a multiple line excess per risk agreement with various reinsurers. Under the multiple line excess per risk agreement, UPCIC obtained coverage of $1,400,000 in excess of $600,000 ultimate net loss for each risk and each property loss, and $1,000,000 in excess of $300,000 for each casualty loss. A $7,000,000 aggregate limit applies to the term of this agreement.

Effective June 1, 2009 through May 31, 2010, UPCIC entered into a property per risk excess agreement covering ex-wind only policies. Under the property per risk excess agreement, UPCIC obtained coverage of $400,000 in excess of $200,000 for each property loss. A $2,400,000 aggregate limit applies to the term of the contract.

The total cost of the Company's multiple line excess reinsurance program effective June 1, 2009 through May 31, 2010 is $3,000,000 of which the Company's cost is 50%, or $1,500,000, and the quota share reinsurers' cost is the remaining 50%. The total cost of the Company's property per risk reinsurance program effective June 1, 2009 through May 31, 2010 is $400,000.

Excess Catastrophe

Effective June 1, 2009 through May 31, 2010, under excess catastrophe contracts, UPCIC obtained catastrophe coverage of $627,000,000 in excess of $160,000,000 covering certain loss occurrences including hurricanes. The coverage of $627,000,000 in excess of $160,000,000 has a second full limit available to the Company; additional premium is calculated pro rata as to amount and 100% as to time, as applicable.

Effective June 1, 2009 through May 31, 2010, UPCIC purchased a reinstatement premium protection contract which reimburses UPCIC for its cost to reinstate the catastrophe coverage of the first $352,000,000 (part of $627,000,000) in excess of $160,000,000.

Effective June 12, 2009 through May 31, 2010, under an excess catastrophe contract, UPCIC obtained catastrophe coverage of $50,000,000 in excess of $110,000,000 (placed 50%) covering certain loss occurrences including hurricanes. Loss occurrence is defined as all individual losses directly occasioned by any one disaster, accident or loss or series of disasters, accidents or losses arising out of one event, which occurs in the State of Florida. The Company is the reinsurer under this contract through a segregated account set up by an unrelated company. Accordingly, the Company’s aggregate net liability in a first event scenario is UPCIC’s $50,000,000 (as noted above in the “Quota Share” section) and the $25,000,000 coverage provided by the Company. The intercompany transactions relating to the contract have been eliminated in consolidation.

Effective June 1, 2009 through May 31, 2010, UPCIC also obtained subsequent catastrophe event excess of loss reinsurance to cover certain levels of UPCIC’s net retention through two catastrophe events including hurricanes, as follows:

	2^nd Event	3^rd Event
Coverage	$118,000,000 in excess of $42,000,000 each loss occurrence subject to an otherwise recoverable amount of $118,000,000 (placed 50%)	$128,000,000 in excess of $32,000,000 each loss occurrence subject to an otherwise recoverable amount of $256,000,000 (placed 100%)
Deposit premium (100%)	$21,240,000	$10,240,000
Minimum premium (100%)	$16,992,000	$8,192,000
Premium rate -% of total insured value	0.019309%	0.009309%

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, FHCF would reimburse the Company, for each loss occurrence during the contract year for 90% of the ultimate loss paid by the Company in excess of the Company’s retention plus 5% of the reimbursed losses to cover loss adjustment expenses. 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, 2009 to May 31, 2010, UPCIC purchased the traditional FHCF coverage and did not purchase the Temporary Increase in Coverage Limit Option offered to insurers by the FHCF. The estimated coverage is 90% of $1,134,600,000 in excess of $429,000,000. The premium for this coverage is $64,232,626.

Also at June 1, 2009, the FHCF made available, and the Company 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 Program (the “ICBUI Program”) offered by the FHCF, such as UPCIC. This particular layer of coverage at June 1, 2009 is $10,000,000 in excess of $28,200,000. The premium for this coverage is $5,000,000.

On May 29, 2009, the Florida State Board of Administration (“SBA”) published its most recent estimate of the FHCF’s loss reimbursement capacity in the Florida Administrative Weekly. The SBA estimated that the FHCF’s total loss reimbursement capacity under current market conditions for the 2009 - 2010 contract year is projected to be $15.830 billion over the 12-month period following the estimate. The SBA also referred to its report entitled, “May 2009 Estimated Loss Reimbursement Capacity” (“Report”) as providing greater detail regarding the FHCF’s loss reimbursement capacity. The Report estimated that the FHCF’s minimum 12-month loss reimbursement capacity is $12.460 billion and its maximum 12-month loss reimbursement capacity is $17.960 billion. UPCIC elected to purchase the FHCF Mandatory Layer of Coverage for the 2009 - 2010 contract year, which corresponds to FHCF loss reimbursement capacity of $17.175 billion. By law, the FHCF’s obligation to reimburse insurers is limited to its actual claims-paying capacity. In addition, the cost of UPCIC’s reinsurance program may increase should UPCIC deem it necessary to purchase additional private market reinsurance due to reduced estimates of the FHCF’s loss reimbursement capacity.

The total cost of UPCIC’s private catastrophe reinsurance program effective June 1, 2009 through May 31, 2010 is $155,258,800 of which UPCIC’s cost is 50%, or $77,629,400, and the quota share reinsurers’ cost is the remaining 50%. The total cost of UPCIC’s private catastrophe reinsurance layer effective June 12, 2009 through May 31, 2010 is $17,500,000 which is eliminated in consolidation. In addition, UPCIC purchases reinstatement premium protection as described above which amounts to $22,312,747. The cost of subsequent event catastrophe reinsurance is $15,740,000. The estimated premium UPCIC plans to cede to the FHCF for the 2009 hurricane season is $64,232,626 of which UPCIC’s cost is 50%, or $32,116,313, 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 ICBUI Program, the premium for which is $5,000,000, of which UPCIC’s cost is 50%, or $2,500,000, and the quota share reinsurers’ cost is the remaining 50%.

Effective June 1, 2009 through December 31, 2009, the Company obtained $60,000,000 of coverage via a catastrophe risk-linked transaction contract in the event UPCIC’s catastrophe coverage is exhausted. The total cost of the Company’s risk-linked transaction contract is $11,160,000.

UPCIC is responsible for losses related to catastrophic events with incurred losses in excess of coverage provided by UPCIC’s reinsurance program and for losses that otherwise are not covered by the reinsurance program, which could have a material adverse effect on UPCIC’s and the Company’s business, financial condition and results of operations. As of June 30, 2009, UPCIC had coverage to approximately the 114-year Probable Maximum Loss (PML). 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 114-year PML represents a 0.877% Annual Probability of Exceedance). 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.

2008 Reinsurance Program

Quota Share

Effective June 1, 2008, UPCIC entered into a quota share reinsurance treaty with Everest Re. Under the quota share treaty, through May 31, 2009, UPCIC ceded 50% of its gross written premiums, losses and LAE for policies with coverage for wind risk, with a ceding commission payable to UPCIC equal to 31% of ceded gross written premiums. In addition, the quota share treaty has a limitation for any one occurrence of 55% of gross premiums earned, not to exceed $150,000,000 (of which UPCIC’s net liability in a first event scenario is $70,000,000, in a second event scenario is $14,800,000 and in a third event scenario is $15,000,000) and a limitation from losses arising out of events that are assigned a catastrophe serial number by the PCS office of 164% of gross premiums earned, not to exceed $450,000,000.

Excess Per Risk

Effective June 1, 2008 through May 31, 2009, UPCIC entered into a multiple line excess per risk agreement with various reinsurers. Under the multiple line excess per risk agreement, UPCIC obtained coverage of $1,300,000 in excess of $500,000 ultimate net loss for each risk and each property loss, and $1,000,000 in excess of $300,000 for each casualty loss. A $7,800,000 aggregate limit applies to the term of this agreement. Additionally under this agreement, no property claim shall be made until UPCIC has retained the first $1,300,000 of potential recovery.

Effective June 1, 2008 through May 31, 2009, UPCIC entered into a property per risk excess agreement covering ex-wind only policies. Under the property per risk excess agreement, UPCIC obtained coverage of $300,000 in excess of $200,000 for each property loss. A $2,100,000 aggregate limit applies to the term of the contract.

Excess Catastrophe

Effective June 1, 2008 through May 31, 2009, under an excess catastrophe contract, UPCIC obtained catastrophe coverage of $399,000,000 in excess of $150,000,000 covering certain loss occurrences including hurricanes.

	First Layer	Second Layer	Third Layer
Coverage	$140,000,000 in excess of $150,000,000 each loss occurrence (placed 100%)	$134,000,000 in excess of $290,000,000 each loss occurrence (placed 100%)	$125,000,000 in excess of $424,000,000 each loss occurrence (placed 100%)
Deposit premium	$48,300,000	$24,120,000	$14,375,000
Minimum premium	$38,640,000	$19,296,000	$11,500,000
Premium rate -% of total insured value	0.050837%	0.025387%	0.015130%

Loss occurrence is defined as all individual losses directly occasioned by any one disaster, accident or loss or series of disasters, accidents or losses arising out of one event, which occurs in the State of Florida. The contract contains a provision for one reinstatement in the event coverage is exhausted. An additional premium will be calculated pro rata as to amount and 100% as to time.

Effective June 1, 2008 through May 31, 2009, UPCIC purchased a reinstatement premium protection contract which reimburses UPCIC for its cost to reinstate the catastrophe coverage of the first $274,000,000 in excess of $150,000,000.

Also, effective June 1, 2008, UPCIC also obtained subsequent catastrophe event excess of loss reinsurance to cover certain levels of UPCIC’s net retention through two catastrophe events including hurricanes, as follows:

	2^nd Event	3^rd Event

Coverage	$110,400,000 in excess of $39,600,000 each loss occurrence subject to an otherwise recoverable amount of $110,400,000 (placed 50%)	$120,000,000 in excess of $30,000,000 each loss occurrence subject to an otherwise recoverable amount of $240,000,000 (placed 50%)
Deposit premium (100%)	$16,560,000	$7,800,000
Minimum premium (100%)	$13,248,000	$6,240,000
Premium rate -% of total insured value	0.017430%	0.008210%

UPCIC also obtained coverage from the FHCF, which is administered by the SBA. Under the reimbursement agreement, FHCF would reimburse the Company, with respect to each loss occurrence during the contract year for 90% of the ultimate loss paid by the Company in excess of the Company’s retention plus 5% of the reimbursed losses to cover loss adjustment expenses. 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, 2008 to May 31, 2009, the SBA made available through the 2007 passage of House Bill 1A an additional $12 billion (Temporary Increase in Coverage Limit - TICL) of Florida Hurricane Catastrophe Fund coverage for the 2008 wind season. UPCIC purchased both the traditional FHCF coverage as well as the TICL FHCF coverage for the contract year June 1, 2008 to May 31, 2009. As of December 31, 2008, the estimated coverage is 90% of $1,514,348,584 in excess of $305,438,476. The premium for this coverage is $59,077,813.

Also at June 1, 2008, the FHCF made available, and the Company 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 UCBUI Program offered by the FHCF, such as UPCIC. This particular layer of coverage at June 1, 2008 is $10,000,000 in excess of $29,600,000. The premium for this coverage is $5,000,000.

The total cost of UPCIC’s underlying catastrophe private reinsurance program effective June 1, 2008 through May 31, 2009 is $86,795,000 of which UPCIC’s cost is 50%, or $43,397,500, and the quota share reinsurers’ cost is the remaining 50%. In addition, UPCIC purchases reinstatement premium protection as described above which amounts to $12,266,483. The cost of subsequent event catastrophe reinsurance is $12,180,000. The estimated premium UPCIC plans to cede to the FHCF for the 2008 hurricane season is $59,077,813 of which UPCIC’s cost is 50%, or $29,538,907, 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 ICBUI Program, the premium for which is $5,000,000, of which UPCIC’s cost is 50%, or $2,500,000, and the quota share reinsurers’ cost is the remaining 50%.

Effective June 1, 2008 through December 31, 2008, the Company obtained $60,000,000 of coverage via a catastrophe risk-linked transaction contract in the event UPCIC’s catastrophe coverage is exhausted or UPCIC is unable to successfully collect from the FHCF for losses involving the Temporary Increase in Coverage Limits. The total cost of the Company’s risk-linked transaction contract is $10,260,000.

Effective July 1, 2008 through May 31, 2009, under an excess catastrophe contract, UPCIC obtained an additional $90,000,000 of catastrophe coverage via a new top layer of 90% of $100,000,000 in excess of $549,000,000 covering certain loss occurrences including hurricanes. The contract contains a provision for one reinstatement in the event coverage is exhausted; additional premium is calculated pro rata as to amount and 100% as to time. The total cost of this new top layer is $7,200,000 of which UPCIC’s cost is 50%, or $3,600,000, and the quota share reinsurers’ cost is the remaining 50%.

Also effective July 1, 2008 through May 31, 2009, UPCIC secured an additional $80,000,000 of third event catastrophe coverage via a new layer of 80% of $100,000,000. The total cost of this new layer is $4,000,000 of which UPCIC’s cost is 50%, or $2,000,000, 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 UPCIC’s reinsurance program and for losses that otherwise are not covered by the reinsurance program, which could have a material adverse effect on UPCIC’s and the Company’s business, financial condition and results of operations. At the start of the hurricane season on June 1, 2008, UPCIC had coverage to approximately the 133-year PML. With the additional catastrophic coverage via the new top layer effective July 1, 2008, UPCIC would have had coverage to approximately the 145-year PML. 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 133-year PML represents a 0.752% Annual Probability of Exceedance and the 145-year PML represents a 0.690% Annual Probability of Exceedance). 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.

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

	Six Months Ended June 30, 2009			Six Months Ended June 30, 2008

	Premiums	Premiums	Loss and Loss	Premiums	Premiums	Loss and Loss
	Written	Earned	Adjustment	Written	Earned	Adjustment
			Expenses			Expenses
Direct	$301,984,289	$262,398,307	$90,929,142	$269,585,900	$249,654,565	$60,198,535
Ceded	(224,366,164)	(187,263,917)	(46,002,319)	(183,989,760)	(178,397,316)	(29,956,507)

Net	$ 77,618,125	$ 75,134,390	$44,926,823	$ 85,596,140	$ 71,257,249	$30,242,028

	Three Months Ended June 30, 2009			Three Months Ended June 30, 2008

	Premiums	Premiums	Loss and Loss	Premiums	Premiums	Loss and Loss
	Written	Earned	Adjustment	Written	Earned	Adjustment
			Expenses			Expenses
Direct	$156,772,144	$134,106,112	$49,604,750	$142,918,231	$124,791,627	$35,777,390
Ceded	(128,638,307)	(96,729,374)	(25,098,591)	(94,219,057)	(88,627,773)	(18,261,224)

Net	$ 28,133,837	$ 37,376,738	$24,506,159	$ 48,699,174	$ 36,163,854	$17,516,166

Other Amounts:

Prepaid reinsurance premiums and reinsurance recoverables as of June 30, 2009 and December 31, 2008 were as follows:

	As of June 30,	As of December 31,
	2009	2008

Prepaid reinsurance premiums	$ 210,149,023	$ 173,046,776

Reinsurance recoverable on unpaid losses and LAE	$ 47,541,418	$ 43,228,416
Reinsurance recoverable on paid losses	335,798	781,431
Reinsurance recoverables	$ 47,877,216	$ 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 June 30,	As of December 31,
	2009	2008
Reinsurance payable, net of ceding commissions
due from reinsurers	$ 134,532,457	$ 60,099,512
Inuring premiums receivable	(22,190,341)	(36,115,264)

Reinsurance payable, net	$ 112,342,116	$ 23,984,248

5. Investments

Major sources of net investment income, are summarized as follows:

	For the Six Months Ended June 30,
	2009	2008
Cash and cash equivalents	$ 231,859	$ 2,632,519
Fixed maturities	700,984	(15,979)
Equity securities	187,116	-
Total investment income	1,119,959	2,616,540
Less investment expenses	(321,477)	(97,838)

Net investment income	$ 798,482	$ 2,518,702

As of June 30, 2009 and December 31, 2008, the Company’s investments consisted of cash, cash equivalents, and investments with carrying values of $376,712,472 and $262,613,412, respectively.

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 $168,143, 375 and $256,964,637 as of June 30, 2009 and December 31, 2008, respectively, held at the following financial institutions:

	As of June 30, 2009
Financial Institution	Cash	Money Market Funds	Total	%

U. S. Bank IT&C (1)	0	73,799,499	73,799,499	43.9%
Evergreen Investment Management
Company, L.L.C.	0	3,626,809	3,626,809	2.1%
SunTrust Bank	889,549	0	889,549	0.5%
SunTrust Bank Institutional
Asset Services	0	79,458,525	79,458,525	47.3%
Wachovia Bank, N.A.	465,154	0	465,154	0.3%
The Bank of New York Mellon	0	8,025,000	8,025,000	4.8%
All Other Banking Institutions	420,407	1,458,432	1,878,839	1.1%
	1,775,110	166,368,265	168,143,375	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 June 30, 2009 and December 31, 2008.

During the six-month period ended June 30, 2009, the Company sold US Treasury Notes, originally intended to be held to maturity, and purchased US Treasury Inflation Index Bonds in order to reduce the effects of inflation on the Company's overall investment portfolio. These US Treasury Notes had a carrying value of $4,170,864, were sold for $4,244,851 and a gain of $73,987 was recognized. The Company reclassified its held to maturity securities being carried at an amortized cost of $57,773,720 to available for sale securities and recorded net unrealized losses of $85,965 concurrently with the sale of the US Treasury Notes.

The following table shows the realized gains for fixed maturities and equity securities for the six-month and three-month periods ended June 30, 2009. There were no realized gains for the six-month and three-month periods ended June 30, 2008.

	Six Months Ended
	June 30, 2009
	Gains	Fair Value at Sale
Fixed maturities, available for sale	$ 73,987	$ 4,244,851
Equity securities	1,378,622	11,396,182
Total realized gains	$ 1,452,609	$ 15,641,033

Net realized gains on investments	$ 1,452,609	$ 15,641,033

	Three Months Ended
	June 30, 2009
	Gains	Fair Value at Sale
Fixed maturities, available for sale	$ 73,987	$ 4,244,851
Equity securities	267,289	1,712,866
Total realized gains	$ 341,276	$ 5,957,717

Net realized gains on investments	$ 341,276	$ 5,957,717

A summary of the amortized cost, estimated fair value, gross unrealized gains and losses of fixed maturities and equity securities at June 30, 2009 and December 31, 2008 follows. The Company’s foreign obligations consist of Canadian Government Bonds, Canadian Government Sovereign Notes, and Canadian Treasury Bills.

	June 30, 2009
	Amortized Cost	Gross Unrealized Gains	Gross Unrealized Losses	Estimated Fair Value
Fixed maturities - available for sale:
Foreign obligations	57,596,183	194,370	(284,746)	57,505,807
US government and agency obligations	$ 72,412,114	$ 1,354,372	$ (182)	$ 73,766,304
Total fixed maturities - available for sale	$ 130,008,297	$ 1,548,742	$ (284,928)	$ 131,272,111

Equity securities	$ 68,649,395	$ 10,658,276	$ (2,010,685)	$ 77,296,986


	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
Total fixed maturities - held to maturity	$ 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
Fixed maturities, available for sale:
US government and agency obligations	$ 182	$ 182	$ -
Foreign obligations	284,746	284,746	-

Total fixed maturities, available for sale	$ 284,928	$ 284,928	$ -

Equity securities:
Common stocks	$ 2,010,685	$ 2,010,685	$ -

Total equity securities	$ 2,010,685	$ 2,010,685	$ -

Below is a summary of fixed maturities at June 30, 2009 and December 31, 2008 by contractual or expected periods.

	June 30, 2009		December 31, 2008
Held-to-maturity	Amortized Cost	Estimated Fair Value	Amortized Cost	Estimated Fair Value
Due in one year or less	$ -	$ -	$ 2,626,958	$ 2,674,230
Due after one year through five years	-	-	1,707,447	1,785,935
Due after five years through ten years	-	-	-	-
Due after ten years	-	-	-	-

Total	$ -	$ -	$ 4,334,405	$ 4,460,165

	June 30, 2009		December 31, 2008
Available-for-Sale	Amortized Cost	Estimated Fair Value	Amortized Cost	Estimated Fair Value
Due in one year or less	$ 21,379,860	$ 21,485,340	$ -	$ -
Due after one year through five years	39,461,333	39,271,423	-	-
Due after five years through ten years	69,167,104	70,515,348	-	-
Due after ten years	-	-	-	-