form10q-a.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549


FORM 10-Q/A
(Amendment No. 1)

(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, 2010

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 o
Accelerated filer  x
 
Non-accelerated filer o  (Do not check if a smaller reporting company)
Smaller reporting company o


 
 
 
 

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:  39,166,033 shares of common stock, par value $0.01 per share, outstanding on May 4, 2010.

 
2
 

UNIVERSAL INSURANCE HOLDINGS, INC.

TABLE OF CONTENTS

Page No.

PART I: FINANCIAL INFORMATION

 
Explanatory Note
 
4
Item 1.
Financial Statements (Unaudited)
  
     
 
Report of Independent Registered Public Accounting Firm
5
     
 
Condensed Consolidated Balance Sheets as of March 31, 2010 and December 31, 2009
6
     
 
Condensed Consolidated Statements of Operations for the Three-Month Periods Ended March 31, 2010 and 2009
7
     
 
Condensed Consolidated Statements of Stockholders’ Equity for the Three-Month Periods Ended March 31, 2010 and 2009
8
     
 
Condensed Consolidated Statements of Cash Flows for the Three-Month Periods Ended March 31, 2010 and 2009
9
     
 
Notes to Condensed Consolidated Financial Statements
10
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
31
     
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
49
     
Item 4.
Controls and Procedures
50
     
PART II:
OTHER INFORMATION
  
     
Item 1.
Legal Proceedings
52
     
Item 1A.
Risk Factors
52
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
52
     
Item 3.
Defaults Upon Senior Securities
52
     
Item 4.
(Removed and Reserved)
52
     
Item 5.
Other Information
52
     
Item 6.
Exhibits
52
     
Signatures
  
54

 
3
 


Explanatory Note

Universal Insurance Holdings, Inc. (“the Company”) is filing this amendment of its Quarterly Report on Form 10-Q for the quarter ended March 31, 2010 (“Amended Report”) to restate its Condensed Consolidated Financial Statements for the three-month period ended March 31, 2010.  The Company is issuing this restatement to correct an error in the accounting for an other-than-temporary impairment (“OTTI”) of an investment security at March 31, 2010 that was sold at a loss after March 31, 2010, but before the Company filed its Form 10-Q for the quarter.  The Audit Committee, in consultation with management, concluded that the impairment of the investment security should have been reflected in the Company’s financial statements for the quarter ended March 31, 2010.  The net effect resulting from the recording of the impairment of the security in the quarter ended March 31, 2010 on net income, accumulated other comprehensive income, diluted earnings per share, and stockholders’ equity is as follows:
 
 
●
Net income decreased by $1,362,721
 
●
Accumulated other comprehensive income increased by $1,478,917
 
●
Diluted earnings per share decreased by $0.04
 
●
Stockholders' equity increased by $116,197
     
Notes 1, 2, 5 and 15 to the Condensed Consolidated Financial Statements included herein also contain information regarding the nature and effect of the restatement.

For the convenience of the reader, this Amended Report sets forth the Form 10-Q in its entirety.  Other than amending the disclosures relating to the restatement, no attempt has been made in this Amended Report to amend or update other disclosures presented in the original Form 10-Q. Among other things, forward-looking statements made in the original Form 10-Q are not revised to reflect events that occurred or facts that became known to the Company after the filing of the original Form 10-Q and such forward-looking statements should be read in their historical context.
 
The following items of the original Form 10-Q are being amended in this Amended Report as a result of this restatement:
 
Part I – Item 1 – Financial Statements
 
Part I – Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

Part I – Item 4 – Controls and Procedures

Exhibit 31.1 –  Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 31.2 –  Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 32 – Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Title 18, United States Code, Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Exhibit 99.1 – Schedule of Investments

 
4
 

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, 2010 and the related condensed consolidated statements of operations and cash flows for the three-month periods ended March 31, 2010 and 2009.  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 10, 2010, except for the portions of Notes 1,
2, 5 and 15 addressing the error correction as to
which the date is August 9, 2010

 
 
 




 
5
 

PART I -- FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS
UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 
   
(Unaudited and Restated)
        
   
(See Note 1)
    
December 31,
  
ASSETS
  
March 31, 2010
    
2009
  
Cash and cash equivalents
   $ 228,541,314     $ 192,924,291  
Investments
                
  Fixed maturities available for sale, at fair value
     66,368,800       41,389,008  
  Equity securities available for sale, at fair value
     66,087,564       73,408,002  
Real estate, net
     3,293,582       3,289,893  
Prepaid reinsurance premiums
     221,022,592       200,294,241  
Reinsurance recoverables
     65,035,714       91,816,433  
Premiums receivable, net
     38,709,483       37,363,110  
Receivable from securities
     12,148,475       6,259,973  
Other receivables
     4,201,023       5,068,367  
Income taxes recoverable
     3,908,997       3,211,874  
Property and equipment, net
     1,256,876       1,245,858  
Deferred policy acquisition costs, net
     12,436,392       9,464,624  
Deferred income taxes
     12,046,948       11,894,289  
Other assets
     492,641       617,337  
          Total assets
   $ 735,550,401     $ 678,247,300  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
                
LIABILITIES:
                
Unpaid losses and loss adjustment expenses
   $ 131,736,670     $ 127,197,753  
Unearned premiums
     298,317,010       278,370,544  
Advance premium
     23,357,329       17,078,558  
Accounts payable
     3,974,070       3,172,626  
Bank overdraft
     25,460,302       20,297,061  
Reinsurance payable, net
     89,208,479       73,104,595  
Income taxes payable
     489,967       368,968  
Dividends payable
     4,699,927       -  
Other accrued expenses
     19,279,747       20,750,385  
Long-term debt
     24,264,706       24,632,353  
          Total liabilities
     620,788,207       564,972,843  
                 
STOCKHOLDERS' EQUITY:
                
Cumulative convertible preferred stock, $.01 par value
     1,077       1,087  
     Authorized shares - 1,000,000
                
     Issued shares - 107,690 and 108,640
                
     Outstanding shares - 107,690 and 108,640
                
     Minimum liquidation preference - $287,240 and $288,190
                
Common stock, $.01 par value
     408,772       402,146  
     Authorized shares - 55,000,000
                
     Issued shares - 40,877,087 and 40,214,884
                
     Outstanding shares - 39,166,033 and 37,774,765
                
     Treasury shares, at cost - 1,711,054 and 1,809,119 shares
     (7,389,416 )     (7,948,606 )
Common stock held in trust, at cost 0 and 631,000 shares
     -       (511,110 )
Additional paid-in capital
     36,595,977       36,666,914  
Accumulated other comprehensive (loss) income, net of taxes
     (1,193,922 )     563,654  
Retained earnings
     86,339,706       84,100,372  
          Total stockholders' equity
     114,762,194       113,274,457  
          Total liabilities and stockholders' equity
   $ 735,550,401     $ 678,247,300  
 
 
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 OPERATIONS
(Unaudited)
 
   
(Restated see Note 1)
  
   
For the Three
  
   
Months Ended March 31,
  
   
2010
    
2009
  
PREMIUMS EARNED AND OTHER REVENUES
            
     Direct premiums written
   $ 160,099,645     $ 145,212,145  
     Ceded premiums written
     (127,567,966 )     (95,727,857 )
        Net premiums written
     32,531,679       49,484,288  
     Decrease (increase) in net unearned premium
     781,884       (11,726,636 )
     Premiums earned, net
     33,313,563       37,757,652  
     Net investment income
     192,953       324,589  
     Realized gains on investments
     1,287,037       1,111,333  
     Foreign currency gains on investments
     684,247       -  
     Commission revenue
     8,737,871       7,444,849  
     Other revenue
     1,004,253       1,479,377  
                 
Total premiums earned and other revenues
     45,219,924       48,117,800  
                 
OPERATING COSTS AND EXPENSES
                
     Losses and loss adjustment expenses
     23,651,712       20,420,664  
     General and administrative expenses
     10,188,649       7,515,228  
                 
        Total operating costs and expenses
     33,840,361       27,935,892  
                 
INCOME BEFORE INCOME TAXES
     11,379,563       20,181,908  
                 
     Income taxes, current
     3,484,213       8,582,617  
     Income taxes, deferred
     951,102       (838,539 )
        Income taxes, net
     4,435,315       7,744,078  
                 
NET INCOME
   $ 6,944,248     $ 12,437,830  
                 
Basic net income per common share
   $ 0.18     $ 0.33  
Weighted average of common shares
                
     outstanding - Basic
     38,889,176       37,561,341  
                 
Fully diluted net income per share
   $ 0.17     $ 0.31  
Weighted average of common shares
                
     outstanding - Diluted
     40,434,042       39,921,929  
                 
Cash dividend declared per common share
   $ 0.12     $ 0.22  
                 
   
For the Three
  
   
Months Ended March 31,
  
      2010       2009  
Comprehensive Income:
                
     Net income
   $ 6,944,248     $ 12,437,830  
     Change in net unrealized (losses) gains on investments, net of tax
     (1,757,576 )     2,556,141  
                 
Comprehensive Income
   $ 5,186,672     $ 14,993,971  
 
The accompanying notes to condensed consolidated financial statements are an integral part of these statements.
 
 
7
 
 
UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(Unaudited)
 
   
For the Three Months Ended March 31, 2010 (Restated - see Note 1)
  
   
Common Shares
    
Preferred Stock Shares
    
Common Stock Amount
    
Preferred Stock Amount
    
Additional Paid-In Capital
    
Retained Earnings
    
Accumulated Other Comprehensive Income (Loss)
    
Stock Held in Trust
    
Treasury Stock
    
Total Stockholders' Equity
  
                                                                                 
Balance, December 31, 2009
     40,214,884       108,640     $ 402,146     $ 1,087     $ 36,666,914     $ 84,100,372     $ 563,654     $ (511,110 )   $ (7,948,606 )   $ 113,274,457  
                                                                                 
Issuance of common shares
     1,900,206               19,001               1,858,078                               (4,715,261 )     (2,838,182 )
 
                                                                                
Preferred stock conversion
     1,187       (950 )     12       (10 )     (2 )                                     -  
 
                                                                                
Release of shares from SGT
                                     939,900                       511,110       (2,328,858 )     (877,848 )
                                                                                 
Retirement of treasury shares
     (1,239,190 )             (12,388 )             (7,591,863 )                             7,603,310       (941 )
 
                                                                                
Stock compensation plans
                                     477,779                                       477,779  
                                                                                 
Net income-(Restated see Note 1)
                                       6,944,248                               6,944,248  
 
                                                                                
Tax benefit on exercise
   of stock options
                                     4,020,789                                       4,020,789  
 
                                                                                
Amortization of deferred
   compensation
                                     224,382                                       224,382  
                                                                                 
Declaration of dividends
                                             (4,704,915 )                             (4,704,915 )
 
                                                                                
Change in net unrealized
  loss on invest., net of tax
  effect of $1,103,760
                                                     (1,757,576 )                     (1,757,576 )
 
                                                                                
Balance, March 31, 2010
     40,877,087       107,690     $ 408,771     $ 1,077     $ 36,595,977     $ 86,339,705     $ (1,193,922 )   $ -     $ (7,389,415 )   $ 114,762,193  
                                                                                 
   
For the Three Months Ended March 31, 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
                                     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 )
 
                                                                                
Change in net unrealized
  gains on invest., 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  
 
The accompanying notes to condensed consolidated financial statements are an integral part of these statements.

 
8
 

UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
  (Restated see Note 1)        
   
Three Months Ended
    
Three Months Ended
  
   
March 31, 2010
    
March 31, 2009
  
Cash flows from operating activities:
            
Net Income
   $ 6,944,248     $ 12,437,830  
Adjustments to reconcile net income to net cash provided by operating activities:
          
     Bad debt expense
     201,523       380,427  
     Depreciation
     146,812       101,424  
     Amortization of cost of stock options
     477,781       820,156  
     Amortization of restricted stock grants
     224,382       162,519  
     Realized gains on investments
     (1,287,037 )     (1,111,333 )
     Foreign currency gains (losses) on investments
     (683,733 )     17,387  
     Amortization of premium / accretion of discount, net
     107,000       21,520  
     Deferred income taxes
     951,102       (838,539 )
     Tax benefit on exercise of stock options
     (3,174,153 )     -  
     Other
     (15,035 )     130,119  
Net change in assets and liabilities relating to operating activities:
                
     Prepaid reinsurance premiums
     (20,728,351 )     (5,193,314 )
     Reinsurance recoverables
     26,780,719       (1,339,673 )
     Premiums receivable, net
     (1,547,897 )     (6,589,909 )
     Other receivables
     864,550       409,604  
     Income taxes recoverable
     3,323,665       2,482,923  
     Deferred policy acquisition costs, net
     (2,971,768 )     60,022  
     Other assets
     119,315       (105,603 )
     Unpaid losses and loss adjustment expenses
     4,538,917       1,728,768  
     Unearned premiums
     19,946,466       16,919,952  
     Advance premium
     6,278,770       4,376,045  
     Accounts payable
     801,445       626,664  
     Reinsurance payable
     16,103,884       28,036,181  
     Income taxes payable
     120,999       5,989,694  
     Other accrued expenses
     (1,470,638 )     2,947,858  
          Net cash provided by operating activities
     56,052,966       62,470,722  
Cash flows from investing activities:
                
     Purchases of fixed maturities
     (50,426,894 )     (103,439,593 )
     Proceeds from sales of fixed maturities
     25,322,048       -  
     Purchases of equity securities, available for sale
     (35,879,591 )     (65,536,507 )
     Proceeds from sales of equity securities, available for sale
     36,447,190       9,609,255  
     Capital expenditures and building improvements
     (146,484 )     (91,723 )
          Net cash used in investing activities
     (24,683,731 )     (159,458,568 )
Cash flows from financing activities:
                
     Bank overdraft
     5,163,241       1,981,436  
     Preferred stock dividend
     (4,987 )     -  
     Common stock dividend
     -       (3,754,217 )
     Issuance of common stock
     7,000       -  
     Treasury shares on option exercise
     (3,723,972 )     -  
     Tax benefit on exercise of stock options
     3,174,153       -  
     Repayments of loans payable
     (367,647 )     -  
          Net cash provided by (used in) in financing activities
     4,247,788       (1,772,781 )
                 
Net increase (decrease) in cash and cash equivalents
     35,617,023       (98,760,627 )
Cash and cash equivalents at beginning of period
     192,924,291       256,964,637  
Cash and cash equivalents at end of period
   $ 228,541,314     $ 158,204,010  
                 
Non cash items:
                
     Dividends accrued
   $ 4,699,926     $ 4,515,715  
 
The accompanying notes to condensed consolidated financial statements are an integral part of these statements.

 
9
 

UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
(Unaudited)


1.         Nature of Operations and Basis of Presentation

Restatement of Condensed Consolidated Financial Statements

Subsequent to filing its Quarterly Report on Form 10-Q on May 10, 2010, for the quarter ended March 31, 2010, the Company determined that its investment in common stock of Direxion Daily Large Cap Bear 3X Shares (ticker symbol “BGZ”) that was in an unrealized loss position at the end of the Company’s first quarter should have been recorded as an OTTI as a result of a subsequent sale of a portion of the investment, resulting in a loss. Therefore, the Company recorded an OTTI charge of $2,407,680 and is restating its financial statements in this Amended Report.  The Company will continue to monitor the fair value of BGZ, evaluate the Company’s ability and intent to hold the security for anticipated recovery in value and record additional write-downs in value, if warranted, in future periods.
 
The effect of the restatements is as follows:

Consolidated Balance Sheet as of March 31,2010
                  
                   
   
As Reported
    
Adjustment
    
Restated
  
Income taxes recoverable
   $ 3,971,565     $ (62,568 )   $ 3,908,997  
Total assets
   $ 735,612,969     $ (62,568 )   $ 735,550,401  
Income taxes payable
   $ 479,563     $ 10,404     $ 489,967  
Other accrued expenses
   $ 19,468,916     $ (189,169 )   $ 19,279,747  
Total liabilities
   $ 620,966,972     $ (178,765 )   $ 620,788,207  
Accumulated other comprehensive (loss) income, net of taxes
   $ (2,672,839 )   $ 1,478,917     $ (1,193,922 )
Retained earnings
   $ 87,702,426     $ (1,362,720 )   $ 86,339,706  
Total stockholders equity
   $ 114,645,997     $ 116,197     $ 114,762,194  
Total liabilities and stockholders' equity
   $ 735,612,969     $ (62,568 )   $ 735,550,401  
 

 
10
 
 
                   
Consolidated Statement of Operations
                  
   
For the three months ended March 31, 2010
  
                   
   
As Reported
    
Adjustment
    
Restated
  
Realized gains on investments
   $ 3,694,717     $ (2,407,680 )   $ 1,287,037  
Total premiums earned and other revenues
   $ 47,627,604     $ (2,407,680 )   $ 45,219,924  
General and administrative expenses
   $ 10,377,818     $ (189,169 )   $ 10,188,649  
Total operating costs and expenses
   $ 34,029,530     $ (189,169 )   $ 33,840,361  
Income taxes, current
   $ 3,411,241     $ 72,972     $ 3,484,213  
Income taxes, deferred
   $ 1,879,864     $ (928,762 )   $ 951,102  
Income taxes, net
   $ 5,291,105     $ (855,790 )   $ 4,435,315  
Net income
   $ 8,306,969     $ (1,362,721 )   $ 6,944,248  
Basic net income per common share
   $ 0.21     $ (0.03 )   $ 0.18  
Fully diluted net income per share
   $ 0.21     $ (0.04 )   $ 0.17  
Change in net unrealized (losses) gains on investments, net of tax
   $ (3,236,494 )   $ 1,478,918     $ (1,757,576 )
Comprehensive Income:
   $ 5,070,475     $ 116,197     $ 5,186,672  

 
                   
Consolidated Statement of Cash Flows
                  
   
For the three months ended March 31, 2010
  
                   
   
As Reported
    
Adjustment
    
Restated
  
Net income
   $ 8,306,969     $ (1,362,721 )   $ 6,944,248  
Realized gains on investments
   $ (3,694,717 )   $ 2,407,680     $ (1,287,037 )
Deferred income taxes
   $ 1,879,864     $ (928,762 )   $ 951,102  
Income taxes recoverable
   $ 3,261,097     $ 62,568     $ 3,323,665  
Income taxes payable
   $ 110,595     $ 10,404     $ 120,999  
Other accrued expenses
   $ (1,281,469 )   $ (189,169 )   $ (1,470,638 )
 
Certain amounts were also restated and additional disclosures are provided in the footnotes primarily in Note 5 – “Investments”, Note 15 – “Subsequent events”, Item 2 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Item 4 – “Controls and Procedures.”
 
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, 2009 was derived from audited financial statements, but does
 

 
11
 

not include all disclosures required by GAAP.  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.
 
To conform to the 2010 presentation, certain amounts in the prior periods’ consolidated financial statements and notes have been reclassified. Such reclassifications had no effect on net income or stockholders’ equity.
 
2.         Significant Accounting Policies

The Company reported Significant Accounting Policies in our Annual Report on Form 10-K for the year ended December 31, 2009.  The following are new or revised disclosures or disclosures required on a quarterly basis.
 
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 causes a change in our ability or intent to hold a security to maturity or until it recovers in value.
 
The company evaluated its investments classified as available for sale and determined it held one security for which an other-than-temporary impairment existed as of March 31, 2010 which is described in “Note 5. Investments.”
 
Fair Market Value of Financial Instruments.   The Company’s long-term debt was held at a carrying value of $24,264,706 and $24,632,353 as of March 31, 2010 and December 31, 2009, respectively.  The fair value of long-term debt as of March 31, 2010 was estimated based on discounted cash flows utilizing
 

 
12
 

interest rates currently offered for similar products and was determined to be $17,370,433 and $18,299,889 as of March 31, 2010 and December 31, 2009, respectively.
 
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.
 
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 March 31, 2010 and December 31, 2009, 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:
 
      As of March 31,     As of December 31,  
Reinsurer
    
2010
      
2009
  
Everest Reinsurance Company
   $ 204,422,914     $ 208,129,753  
Florida Hurricane Catastrophe Fund
     6,996,189       24,888,534  
                 
   Total
   $ 211,419,103     $ 233,018,287  

As of March 31, 2010 and December 31, 2009, UPCIC did not have any unsecured recoverables from unauthorized reinsurers exceeding 3% of UPCIC’s statutory surplus.

Stock Compensation.  The Company periodically issues restricted common stock and grants options to purchase common stock to its directors, officers and employees.  These restricted stock awards and stock option grants are recorded as compensation expense ratably over their respective vesting periods.
 
 
Recent Accounting Pronouncements
 
In January 2010, the Financial Accounting Standards Board ("FASB ") issued new accounting guidance which expands disclosure requirements relating to fair value measurements.  The guidance adds requirements for disclosing amounts of and reasons for significant transfers into and out of Levels 1 and 2 and requires gross rather than net disclosures about purchases, sales, issuances and settlements relating to Level 3 measurements.  The guidance also provides clarification that fair value measurement disclosures are required for each class of assets and liabilities.  Disclosures about the valuation techniques and inputs used to measure fair value for measurements that fall in either Level 2 or Level 3 are also required.  The Company adopted the provisions of the new guidance as of March 31, 2010 except for disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements, which are required for fiscal years beginning after December 15, 2010.  Disclosures are not required for earlier periods presented for comparative purposes.  The new guidance affects disclosures only; and therefore, the adoption had no impact on the Company’s results of operations or financial position.
 
In February 2010, the FASB amended the subsequent events guidance issued in May 2009 to remove the requirement for SEC filers to disclose a date through which subsequent events have been evaluated in
 

 
13
 

 
both issued and revised financial statements. The amendment was effective upon issuance. The adoption of this guidance did not have an impact on the Company's consolidated financial condition or 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, 2010, UPCIC serviced approximately 544,000 homeowners’ and dwelling fire insurance policies with direct unearned premiums totaling $298,317,010 and in-force premiums of approximately $581,600,000.  At December 31, 2009, UPCIC serviced 541,000 homeowners’ and dwelling fire insurance policies with direct unearned premiums totaling $278,370,544 and in-force premiums of approximately $567,100,000.
 
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:
 
Wind Mitigation Credits
                    
         
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
     1.9 %   $ 6,284,697     $ 487,866,319       1.3 %
12/31/2007
     11.8 %   $ 31,951,623     $ 500,136,287       6.0 %
3/31/2008
     16.9 %   $ 52,398,215     $ 501,523,343       9.5 %
6/30/2008
     21.3 %   $ 74,185,924     $ 508,411,721       12.7 %
9/30/2008
     27.3 %   $ 97,802,322     $ 515,560,249       16.0 %
12/31/2008
     31.1 %   $ 123,524,911     $ 514,011,138       19.4 %
3/31/2009
     36.3 %   $ 158,229,542     $ 530,029,572       23.0 %
6/30/2009
     40.4 %   $ 188,053,342     $ 544,646,437       25.7 %
9/30/2009
     43.0 %   $ 210,291,783     $ 554,378,761       27.5 %
12/31/2009
     45.2 %   $ 219,974,130     $ 556,577,449       28.3 %
3/31/2010
     47.3 %   $ 235,717,892     $ 569,870,173       29.3 %

4.       Reinsurance
 

 
14
 

On March 22, 2010, UPCIC and Segregated Account T25 – Universal Insurance Holdings of White Rock Insurance (SAC) Ltd. (“the T25”) mutually agreed to a Commutation and Settlement Agreement related to the Underlying Property Catastrophe Excess of Loss Reinsurance Contract originally effective June 12, 2009.  A replacement contract was entered into between the parties on March 23, 2010 to maintain consistent and seamless coverage. In conjunction with the commutation, the T25 returned $12,735,734 to the Company that the Company then returned and contributed to UPCIC on March 23, 2010.  The stock of T25 is 100% owned by the Company and the reinsurance transactions between it and UPCIC are eliminated in consolidation.
 
There have been no other material changes, during the period covered by this Report, to the Reinsurance note included in the Company’s Annual Report on Form 10-K, for the year ended December 31, 2009.
 
UPCIC’s in-force policyholder coverage for windstorm exposures as of March 31, 2010 was approximately $115 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.
 
Amounts recoverable from reinsurers are estimated in a manner consistent with the reinsurance contracts.  Reinsurance premiums, losses and loss adjustment expenses (“LAE”) are accounted for on a basis consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. Reinsurance ceding commissions received are deferred and netted against policy acquisition costs and amortized over the effective period of the related insurance policies.
 
UPCIC limits the maximum net loss that can arise from large risks or risks in concentrated areas of exposure by reinsuring (ceding) certain levels of risks with other insurers or reinsurers on an automatic basis under reinsurance contracts.  The reinsurance arrangements are intended to provide UPCIC with the ability to limit its exposure to losses within its capital resources.  Such reinsurance includes quota share, excess of loss and catastrophe forms of reinsurance.  The Company submits the UPCIC reinsurance program for regulatory review to the Florida Office of Insurance Regulation (“OIR”).
 
The Company’s reinsurance arrangements had the following effect on certain items in the condensed consolidated Statements of Operations:
 
 
Three Months Ended March 31, 2010
  
                 
 
Premiums
    
Premiums
    
Loss and Loss
  
 
Written
    
Earned
    
Adjustment
  
             
Expenses
  
Direct
 $ 160,099,645     $ 140,153,178     $ 46,679,867  
Ceded
   (127,567,966 )     (106,839,615 )     (23,028,155 )
                       
Net
 $ 32,531,679     $ 33,313,563     $ 23,651,712  
 

 
15
 

   
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  
 
 
Other Amounts:
 
Prepaid reinsurance premiums and reinsurance recoverables as of March 31, 2010 and December 31, 2009 were as follows:
 
   
As of March 31,
    
As of December 31,
  
   
2010
    
2009
  
             
Prepaid reinsurance premiums
   $ 221,022,592     $ 200,294,241  
                 
Reinsurance recoverable on unpaid losses and LAE
   $ 64,820,752     $ 62,900,913  
Reinsurance recoverable on paid losses
     214,962       28,915,520  
Reinsurance recoverables
   $ 65,035,714     $ 91,816,433  
 
The Company has determined that a right of offset exists between UPCIC 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,
  
   
2010
    
2009
  
Reinsurance payable, net of ceding commissions
            
     due from reinsurers
   $ 138,195,918     $ 105,536,847  
Inuring premiums receivable
     (48,987,439 )     (32,432,252 )
                 
Reinsurance payable, net
   $ 89,208,479     $ 73,104,595  
 
5.           Investments
 
Major sources of net investment income, are summarized as follows:
 

 
16
 

   
For the Three Months Ended March 31,
  
   
2010
    
2009
  
Cash and cash equivalents
   $ 18,454     $ 215,983  
Fixed maturities
     299,629       127,716  
Equity securities
     9,990       96,730  
     Total investment income
     328,073       440,429  
Less investment expenses
     (135,120 )     (115,840 )
                 
          Net investment income
   $ 192,953     $ 324,589  
                 
 
As of March 31, 2010 and December 31, 2009, the Company’s investments consisted of cash and cash equivalents, and investments with carrying values of $360,997,678 and $307,721,301, 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.

Cash and cash equivalents consisted of checking, repurchase and money market accounts with carrying values of $228,541,314 and $192,924,291 as of March 31, 2010 and December 31, 2009, respectively, held at the following financial institutions:

 
17
 
 
   
As of March 31, 2010
  
Financial Institution
  
Cash
    
Money Market Funds
    
Total
    
%
  
                         
U. S. Bank IT&C (1)
   $ 0     $ 71,273,420     $ 71,273,420       31.2 %
Evergreen Investment Management
                                
   Company, L.L.C.
     0       2,909       2,909       0.0 %
SunTrust Bank
     985,291       0       985,291       0.4 %
SunTrust Bank Institutional
                                
   Asset Services
     0       146,812,557       146,812,557       64.3 %
Wachovia Bank, N.A.
     1,004,452               1,004,452       0.4 %
Bank of New York Trust Fund
     0       8,027,000       8,027,000       3.5 %
All Other Banking Institutions
     435,685       0       435,685       0.2 %
    $ 2,425,428     $ 226,115,886     $ 228,541,314       100.0 %
                                 
(1) Funds invested with Evergreen Investment Management Company, L.L.C.
          
                                 
                                 
                                 
   
As of December 31, 2009
  
Financial Institution
  
Cash
    
Money Market Funds
    
Total
    
%
  
                                 
U. S. Bank IT&C (1)
   $ 0     $ 71,977,371     $ 71,977,371       37.3 %
Evergreen Investment Management
     0       26,909       26,909       0.0 %
   Company, L.L.C.
                                
SunTrust Bank
     1,063,785       0       1,063,785       0.5 %
SunTrust Bank Institutional
                                
   Asset Services
     0       102,257,833       102,257,833       53.0 %
Wachovia Bank, N.A.
     489,051       0       489,051       0.3 %
Bank of New York Trust Fund
     0       16,515,181       16,515,181       8.6 %
All Other Banking Institutions
     594,161       0       594,161       0.3 %
    $ 2,146,997     $ 190,777,294     $ 192,924,291       100.0 %
                                 
(1) Funds invested with Evergreen Investment Management Company, L.L.C.
          
 
 
The Company’s investments are classified as available for sale. Available for sale securities are reported at fair value, with unrealized gains and losses excluded from earnings and reported in a separate component of stockholders’ equity, namely Other Comprehensive Income.

During the three-month period ended March 31, 2010, the Company recognized $2,407,680 in OTTI charges related to the Company’s investment in common stock of Direxion Daily Large Cap Bear 3X Shares (ticker symbol “BGZ”). The OTTI charge reflected a write-down to 66% of cost.
 
The following table shows the realized gains and losses for fixed maturities and equity securities for the three-month periods ended March 31, 2010 and 2009.  There were $1,287,037 and $1,111,333 of realized gains for the three-month periods ended March 31, 2010 and 2009, respectively.
 
 
 
18
 
 
   
For the Three Months Ended
  
   
March 31, 2010
    
March 31, 2009
  
   
Realized Gains (Losses)
    
Fair Value at Sale
    
Realized Gains (Losses)
    
Fair Value at Sale
  
Fixed maturities, available for sale
   $ 60,742     $ 5,961,804     $ -     $ -  
Equity securities
     4,109,683       36,486,448       1,111,333       9,683,316  
   Total Realized Gains
   $ 4,170,425     $ 42,448,252     $ 1,111,333     $ 9,683,316  
                                 
Fixed maturities, available for sale
   $ (199,580 )   $ 19,360,244     $ -     $ -  
Equity securities
     (224,128 )     5,849,244       -       -  
Other Investments
     (52,000 )                        
   Total Realized Losses
   $ (475,708 )   $ 25,209,488     $ -     $ -  
       
Net realized gains (losses) on investments
   $ 3,694,717     $ 67,657,740     $ 1,111,333     $ 9,683,316  
 
 
A summary of the amortized cost (fixed maturities), cost (equity securities), estimated fair value, gross unrealized gains, and gross unrealized losses of fixed maturities and equity securities at March 31, 2010 and December 31, 2009 follows. The company’s foreign obligations consist of government bonds of Norway and Switzerland.
 
   
March 31, 2010
   
Amortized Cost
/ Cost
    
Gross
Unrealized
Gains
    
Gross
Unrealized
Losses
    
Estimated Fair Value
Fixed maturities - available for sale:
                      
     US government and agency obligations
   $ 58,239,287     $ 24,853     $ (1,374,277 )   $ 56,889,863
     Foreign obligations
     9,563,143       20,897       (105,103 )     9,478,937
Total fixed maturities - available for sale
   $ 67,802,430     $ 45,750     $ (1,479,380 )   $ 66,368,800
                               
Equity securities:
                              
     Common Stock
   $ 66,594,844     $ 3,413,201     $ (3,920,481 )   $ 66,087,564
Total equity securities
   $ 66,594,844     $ 3,413,201     $ (3,920,481 )   $ 66,087,564
                               
   
December 31, 2009
   
Amortized Cost / Cost
    
Gross Unrealized Gains
    
Gross Unrealized Losses
    
Estimated Fair Value
Fixed maturities - available for sale:
                              
     US government and agency obligations
   $ 42,296,727     $ 37,623     $ (945,342 )   $ 41,389,008
Total fixed maturities - available for sale
   $ 42,296,727     $ 37,623     $ (945,342 )   $ 41,389,008
                               
Equity securities:
                              
     Common Stock
   $ 71,536,033     $ 4,278,432     $ (2,406,463 )   $ 73,408,002
Total equity securities
   $ 71,536,033     $ 4,278,432     $ (2,406,463 )   $ 73,408,002
 

 
19
 

The table below reflects the Company’s unrealized investment losses by investment class, aged for length of time in an unrealized loss position as of March 31, 2010.
 
   
Unrealized Investment Losses
  
   
Less than 12 months
    
12 months or longer
  
   
Number of issues
    
Fair value
    
Unrealized losses
    
Number of issues
    
Fair value
    
Unrealized losses
  
Fixed maturities, available for sale:
                                    
     US government and agency obligations
     5     $ 53,781,866     $ 1,374,277       -     $ -     $ -  
     Foreign obligations
     5       4,318,781       37,966       -       -       -  
                                                 
Total fixed maturities, available for sale
     10     $ 58,100,647     $ 1,412,243       -     $ -     $ -  
                                                 
Equity securities:
                                                
     Common stocks
     44     $ 27,380,793     $ (3,920,481 )     -     $ -     $ -  
Total equity securities
     44     $ 27,380,793     $ (3,920,481 )     -     $ -     $ -  
 
Unrealized losses on fixed maturities, available for sale, are principally related to rising interest rates and changes in credit spreads.  Unrealized losses on equity securities are primarily related to equity market fluctuations.
 
Below is a summary of fixed maturities at March 31, 2010 and December 31, 2009 by contractual or expected periods.
 
Available-for-Sale
  
March 31, 2010
    
December 31, 2009
  
Contractual or Expected Period:
  
Amortized Cost
    
Estimated Fair Value
    
Amortized Cost
    
Estimated Fair Value
  
Due in one year or less
   $ 897,310     $ 896,192     $ -     $ -  
Due after one year through five years
     8,841,591       8,763,721       176,350       180,901  
Due after five years through ten years
     12,879,359