Edgar Filing: UNIVERSAL INSURANCE HOLDINGS, INC.

a10q.htm

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, 2010

[ ] 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 August 4, 2010.

UNIVERSAL INSURANCE HOLDINGS, INC.

TABLE OF CONTENTS

Page No.

PART I: FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)

	Report of Independent Registered Public Accounting Firm	3

	Condensed Consolidated Balance Sheets as of June 30, 2010 and December 31, 2009	4

	Condensed Consolidated Statements of Operations for the Six-Month and Three-Month Periods Ended June 30, 2010 and 2009	5

	Condensed Consolidated Statements of Stockholders’ Equity for the Six-Month and Three-Month Periods Ended June 30, 2010 and 2009	6

	Condensed Consolidated Statements of Cash Flows for the Six-Month Periods Ended June 30, 2010 and 2009	7

	Notes to Condensed Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30

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

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, 2010 and the related condensed consolidated statements of operations for the six-month and three month periods ended June 30, 2010 and 2009 and cash flows for each of the six-month periods ended June 30, 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

August 9, 2010

PART I -- FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

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

	(Unaudited)
	June 30,			December 31,
ASSETS	2010			2009
Cash and cash equivalents	$	262,444,768		$	192,924,291
Investments
Fixed maturities available for sale, at fair value		60,447,710			41,389,008
Equity securities available for sale, at fair value		77,477,064			73,408,002
Real estate, net		4,335,589			3,289,893
Prepaid reinsurance premiums		233,086,613			200,294,241
Reinsurance recoverables		63,235,510			91,816,433
Premiums receivable, net		49,351,405			37,363,110
Receivable from securities		14,669,988			6,259,973
Other receivables		2,629,577			5,068,367
Income taxes recoverable		-			3,211,874
Property and equipment, net		1,197,645			1,245,858
Deferred policy acquisition costs, net		14,041,890			9,464,624
Deferred income taxes		12,853,266			11,894,289
Other assets		1,020,164			617,337
Total assets	$	796,791,189		$	678,247,300

LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Unpaid losses and loss adjustment expenses	$	128,903,761		$	127,197,753
Unearned premiums		355,735,699			278,370,544
Advance premium		20,058,953			17,078,558
Accounts payable		4,822,714			3,172,626
Bank overdraft		22,573,228			20,297,061
Reinsurance payable, net		86,815,057			73,104,595
Income taxes payable		3,786,298			368,968
Dividend payable to shareholder		3,916,724			-
Payable for securities		3,821,527			-
Other accrued expenses		18,855,334			20,750,385
Long-term debt		23,897,059			24,632,353
Total liabilities		673,186,354			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		37,802,927			36,666,914
Accumulated other comprehensive (loss) income, net of taxes		(403,247	)		563,654
Retained earnings		93,184,722			84,100,372
Total stockholders' equity		123,604,835			113,274,457
Total liabilities and stockholders' equity	$	796,791,189		$	678,247,300

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,
	2010	2009		2010	2009
PREMIUMS EARNED AND OTHER REVENUES
Direct premiums written	$ 368,119,332	$ 301,984,289	$	208,019,687	$156,772,144
Ceded premiums written	(248,872,199)	(224,366,164)		(121,304,233)	(128,638,307)
Net premiums written	119,247,133	77,618,125		86,715,454	28,133,837
(Increase) decrease in net unearned premium	(44,572,783)	(2,483,735)		(45,354,667)	9,242,901
Premiums earned, net	74,674,350	75,134,390		41,360,787	37,376,738
Net investment income	310,571	798,482		117,619	461,774
Realized gains on investments	8,152,024	1,452,609		4,457,307	341,276
Foreign currency transaction gains	809,050	72,316		124,803	84,435
Other-than-temporary impairment of investments	(2,407,680)	-		-	-
Commission revenue	17,521,299	15,307,618		8,783,428	7,862,769
Other revenue	2,020,332	2,901,730		1,016,078	1,422,353

Total premiums earned and other revenues	101,079,946	95,667,145		55,860,022	47,549,345

OPERATING COSTS AND EXPENSES
Losses and loss adjustment expenses	48,486,605	44,926,823		24,834,893	24,506,159
General and administrative expenses	23,577,980	18,114,424		13,389,331	10,599,196

Total operating costs and expenses	72,064,585	63,041,247		38,224,224	35,105,355

INCOME BEFORE INCOME TAXES	29,015,361	32,625,898		17,635,798	12,443,990

Income taxes, current	11,656,144	8,949,654		8,171,931	367,037
Income taxes, deferred	(351,761)	3,599,856		(1,302,863)	4,438,395
Income taxes, net	11,304,383	12,549,510		6,869,068	4,805,432

NET INCOME	$ 17,710,978	$ 20,076,388	$	10,766,730	$ 7,638,558

Basic net income per common share	$ 0.45	$ 0.53	$	0.27	$ 0.20
Weighted average of common shares
outstanding - Basic	$ 39,028,976	$ 37,589,412	$	39,167,241	$ 37,617,174

Fully diluted net income per share	$ 0.44	$ 0.50	$	0.27	$ 0.19
Weighted average of common shares
outstanding - Diluted	$ 40,440,773	$ 40,225,815	$	40,445,975	$ 40,529,702

Cash dividend declared per common share	$ 0.22	$ 0.34	$	0.10	$ 0.12


	For the Six			For the Three
	Months Ended June 30,			Months Ended June 30,
	2010	2009		2010	2009
Comprehensive Income:
Net income	$ 17,710,978	$ 20,076,388	$	10,766,730	$ 7,638,558
Change in net unrealized (losses) gains on investments, net of tax	(966,901)	8,228,976		790,675	5,672,835

Comprehensive Income	$ 16,744,077	$ 28,305,364	$	11,557,405	$ 13,311,393

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, 2010 AND 2009 (Unaudited)

	Common Shares			Preferred Stock Shares			Common Stock Amount			Preferred Stock Amount			Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive (Loss) Income			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						19,002						1,858,078												(4,715,261	)		(2,838,181	)
Preferred stock
conversion		1,187			(950	)		12			(10	)		(2	)														-

Release of shares
from SGT														939,900									511,110			(2,328,859	)		(877,849	)

Retirement of treasury shares		(1,239,190	)					(12,388	)					(7,591,863	)											7,603,310			(941	)

Stock compensation
plans														1,453,006															1,453,006

Net income																	17,710,978												17,710,978

Excess tax benefits from stock-based compensation														4,020,789															4,020,789

Amortization of deferredcompensation														456,105															456,105

Declaration of dividends																	(8,626,628	)											(8,626,628	)

Change in net unrealized loss on invest., net of tax effect of $(607,216)																				(966,901	)								(966,901	)

Balance,
June 30, 2010		40,877,087			107,690		$	408,772		$	1,077		$	37,802,927		$	93,184,722		$	(403,247	)	$	-		$	(7,389,416	)	$	123,604,835

	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	)

Change in net unrealized gains on invest., net of tax effect of $1,595,467																				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

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, 2010			June 30, 2009
Cash flows from operating activities:
Net Income	$	17,710,978		$	20,076,388
Adjustments to reconcile net income to net cash provided by operating activities:
Bad debt expense		629,816			788,142
Depreciation		298,025			213,576
Amortization of cost of stock options		1,453,006			1,306,591
Amortization of restricted stock grants		456,105			325,989
Realized gains on investments		(8,152,024	)		(1,452,609	)
Foreign currency gains on investments		(842,375	)		(72,316	)
Other-than-temporary impairment of investments		2,407,680			-
Amortization of premium / accretion of discount, net		271,010			109,204
Deferred income taxes		8,827			3,599,856
Other		(15,035	)		130,119
Net change in assets and liabilities relating to operating activities:
Prepaid reinsurance premiums		(32,792,372	)		(37,102,247	)
Reinsurance recoverables		28,580,923			(3,867,369	)
Premiums receivable, net		(12,618,111	)		(9,665,210	)
Accrued investment income		(80,003	)		(702,324	)
Other receivables		2,518,613			178,739
Income taxes recoverable		3,211,876			(5,176,904	)
Deferred policy acquisition costs, net		(4,577,266	)		(8,034,104	)
Other assets		(425,268	)		(144,759	)
Unpaid losses and loss adjustment expenses		1,706,008			8,519,272
Unearned premiums		77,365,154			39,585,983
Advance premium		2,980,395			3,966,539
Accounts payable		1,650,088			1,133,449
Reinsurance payable		13,710,463			88,357,868
Income taxes payable		3,417,329			-
Other accrued expenses		(1,895,051	)		2,128,973
Net cash provided by operating activities		96,978,791			104,202,846
Cash flows from investing activities:
Proceeds from sale of property		15,108			-
Purchase of real estate		(1,016,921	)		-
Building improvements		(93,955	)		-
Purchases of fixed maturities		(129,140,469	)		(126,035,995	)
Proceeds from sales of fixed maturities		116,237,712			4,244,851
Purchases of equity securities, available for sale		(80,730,225	)		(78,530,195	)
Proceeds from sales of equity securities, available for sale		70,680,944			11,005,564
Capital expenditures and building improvements		(184,706	)		(369,700	)
Net cash used in investing activities		(24,232,512	)		(189,685,475	)
Cash flows from financing activities:
Bank overdraft		2,276,167			4,947,120
Preferred stock dividend		(9,975	)		(17,475	)
Common stock dividend		(4,699,926	)		(8,268,278	)
Issuance of common stock		7,000			-
Treasury shares on option exercise		(3,723,972	)		-
Excess tax benefits from stock-based compensation		3,660,198			-
Repayments of loans payable		(735,294	)		-
Net cash used in in financing activities		(3,225,802	)		(3,338,633	)

Net increase (decrease) in cash and cash equivalents		69,520,477			(88,821,262	)
Cash and cash equivalents at beginning of period		192,924,291			256,964,637
Cash and cash equivalents at end of period	$	262,444,768		$	168,143,375

Non cash items:
Dividends accrued	$	3,916,724		$	4,514,061

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, 2010

(Unaudited)

1. Nature of Operations and Basis of Presentation

Restatement of Condensed Consolidated Financial Statements – March 31, 2010

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 Other-Than-Temporary Impairment (“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 restated its financial statements on Form 10-Q/A for the quarter ended March 31, 2010.

The following presents the adjustments included in the amended statements of the three-month period ended March 31, 2010.

	As Reported 3/31/2010			Adjustment			As Restated 3/31/2010
Net Income	$	8,306,969		$	(1,362,721	)	$	6,944,248
Accumulated other comprehensive (loss)		(2,672,839	)		1,478,917			(1,193,922	)
Stockholders' equity		114,645,997			116,197			114,762,194

The Company’s results for the second quarter reported herein are inclusive of the Company’s restatement of its Condensed Consolidated Financial Statements for the three-month period ended March 31, 2010, as filed in the Company’s Form 10-Q/A for the quarter ended March 31, 2010.

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 for the year ended December 31, 2009. The condensed consolidated balance sheet at December 31, 2009 was derived from audited financial statements, but does 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 performed evaluations of its investments classified as available for sale and has determined it held no securities for which impairment is other-than-temporary as of June 30, 2010.

Fair Market Value of Financial Instruments. The Company’s long-term debt was held at a carrying value of $23,897,059 and $24,632,353 as of June 30, 2010 and December 31, 2009, respectively. The fair value of long-term debt as of June 30, 2010 was estimated based on discounted cash flows utilizing interest rates currently offered for similar products and was determined to be $17,066,879 and $18,299,889 as of June 30, 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 June 30, 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 June 30,		As of December 31
Reinsurer	2010		2009
Everest Reinsurance Company	$	229,629,621	$	208,129,753
Florida Hurricane Catastrophe Fund		-		24,888,534

Total	$	229,629,621	$	233,018,287

As of June 30, 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 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 June 30, 2010, UPCIC serviced approximately 566,000 homeowners’ and dwelling fire insurance policies with direct unearned premiums totaling $355,735,699 and in-force premiums of approximately $633,800,000. 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		47.8	%	$	235,717,892	$	569,870,173		29.3	%
6/30/2010		50.9	%	$	281,386,124	$	620,276,858		31.2	%

4. Reinsurance

On May 31 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 effective March 23, 2010. A replacement contract was entered into between the parties on June 1, 2010 as part of UPCIC’s reinsurance program in effect for the period June 1, 2010, through May 31, 2011. In conjunction with the commutation and entering into a new contract, the Company contributed additional capital to T25 due to the increased reinsurance coverage and collateral requirements of the replacement contract, effective June 1, 2010. The Company is the account owner of T25 under Bermuda law, and the reinsurance transactions between T25 and UPCIC are eliminated in consolidation.

UPCIC’s in-force policyholder coverage for windstorm exposures as of June 30, 2010 was approximately $123 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.

2010 Reinsurance Program

Quota Share

Effective June 1, 2010, UPCIC entered into a quota share reinsurance contract with Everest Re. Everest Re has the following ratings from each of the rating agencies: A+ from A.M. Best Company, A+ from Standard and Poor’s Rating Services and Aa3 from Moody’s Investors Service, Inc. Under the quota share contract, through May 31, 2011, UPCIC cedes 50% of its gross written premiums, losses and LAE for policies with coverage for wind risk with a ceding commission equal to 25% of ceded gross written premiums. In addition, the quota share contract has a limitation for any one occurrence of 56% of Gross Premiums Earned, not to exceed $160,000,000 (of which UPCIC's net liability on the first $160,000,000 of losses in a first event scenario is $22,500,000, in a second event scenario is $13,150,000 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 Property Claims Services ("PCS") office of 140% of Gross Premiums Earned, not to exceed $400,000,000.

Excess Per Risk

Effective June 1, 2010 through May 31, 2011, UPCIC entered into a multiple line excess per risk contract with various reinsurers. Under the multiple line excess per risk contract, UPCIC obtained coverage of $1,400,000 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 the contract.

Effective June 1, 2010 through May 31, 2011, UPCIC entered into a property per risk excess contract covering ex-wind only policies. Under the property per risk excess contract, UPCIC obtained coverage of $400,000 in excess of $200,000 for each property loss. A $2,000,000 aggregate limit applies to the term of the contract.

The total cost of the Company's multiple line excess reinsurance program effective June 1, 2010 through May 31, 2011 is $3,500,000 of which the Company's cost is 50%, or $1,750,000, 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 $475,000.

Excess Catastrophe

Effective June 1, 2010 through May 31, 2011, under excess catastrophe contracts, UPCIC obtained catastrophe coverage of $660,500,000 in excess of $160,000,000 covering certain loss occurrences including hurricanes. The coverage of $660,500,000 in excess of $160,000,000 has a second full limit available to UPCIC; additional premium is calculated pro rata as to amount and 100% as to time, as applicable.

Effective June 1, 2010 through May 31, 2011, UPCIC purchased reinstatement premium protection which reimburses UPCIC for its cost to reinstate the catastrophe coverage of the first $310,500,000 (part of $660,500,000) in excess of $160,000,000.

Effective June 1, 2010 through May 31, 2011, under an underlying excess catastrophe contract, UPCIC obtained catastrophe coverage of 50% of $105,000,000 in excess of $55,000,000 covering certain loss occurrences including hurricanes. UPCIC entered into this contract with a segregated account that was established by a third-party reinsurer in accordance with Bermuda law. The Company has secured the obligations of the segregated account by contributing the amount of the segregated account’s liability for losses, net of UPCIC’s required premium payments, to a trust account.

Effective June 1, 2010 through May 31, 2011, under an excess catastrophe contract specifically covering risks located in North Carolina and South Carolina, UPCIC obtained catastrophe coverage of 50% of $40,000,000 in excess of $10,000,000 covering certain loss occurrences including hurricanes. The coverage of 50% of $40,000,000 in excess of $10,000,000 has a second full limit available to UPCIC; additional premium is calculated pro rata as to amount and 100% as to time, as applicable. The cost of UPCIC’s excess catastrophe contract specifically covering risks located in North Carolina and South Carolina is $2,025,000.

Effective June 1, 2010 through May 31, 2011, UPCIC also obtained subsequent catastrophe event excess of loss reinsurance to cover certain levels of UPCIC's net retention through three catastrophe events including hurricanes, as follows:

	2ndEvent			3rdEvent
Coverage	$123,700,000 in excess of $36,300,000 each loss occurrence subject to an otherwise recoverable amount of $123,700,000 (placed 50%)			$130,000,000 in excess of $30,000,000 each loss occurrence subject to an otherwise recoverable amount of $260,000,000 (placed 100%)
Deposit premium (100%)	$	22,266,000		$	9,100,000
Minimum premium (100%)	$	17,812,800		$	7,280,000
Premium rate -% of total insured value		0.020088	%		0.00821	%

UPCIC also obtained coverage from the Florida Hurricane Catastrophe Fund (“FHCF”), which is administered by the Florida State Board of Administration (“SBA”). Under the reimbursement agreement, the FHCF would reimburse UPCIC, for each loss occurrence during the contract year, for 90% of the ultimate loss paid by UPCIC in excess of its retention plus 5% of the reimbursed losses to cover loss adjustment expenses, subject to an aggregate contract limit. A covered event means any one storm declared to be a hurricane by the

National Hurricane Center for losses incurred in Florida, both while it is a hurricane and through subsequent downgrades. For the contract year June 1, 2010 to May 31, 2011, UPCIC purchased the traditional FHCF coverage and did not purchase the Temporary Increase in Coverage Limit Option offered to insurers by the FHCF. UPCIC’s initial estimate of its traditional FHCF coverage is 90% of $985,000,000 in excess of $372,000,000. The estimated premium for this coverage is $60,104,422. The final amount of UPCIC’s traditional FHCF coverage for the contract year will be determined by the FHCF based upon UPCIC’s exposures in-force as of June 30, 2010, as reported by UPCIC to the FHCF by September 1, 2010.

Also at June 1, 2010, the FHCF made available, and UPCIC obtained, $10,000,000 of additional catastrophe excess of loss coverage with one free reinstatement of coverage to carriers qualified as Limited Apportionment Companies or companies that participated in the Insurance Capital Build-Up Incentive (“ICBUI”) Program offered by the FHCF, such as UPCIC. This particular layer of coverage at June 1, 2010 is $10,000,000 in excess of $26,300,000. The premium for this coverage is $5,000,000.

On May 28, 2010, the 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 2010 - 2011 contract year is projected to be $25.461 billion over the 12-month period following the estimate. The SBA also referred to its report entitled, “May 2010 Estimated Claims Paying Capacity Report” (“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 billion and its maximum 12-month loss reimbursement capacity is $26 billion. UPCIC elected to purchase the FHCF Mandatory Layer of Coverage for the 2010 - 2011 contract year, which corresponds to FHCF loss reimbursement capacity of $17 billion. By law, the FHCF’s obligation to reimburse insurers is limited to its actual claims-paying capacity. the aggregate 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 multiple line excess and property per risk reinsurance program effective June 1, 2010 through May 31, 2011 is $3,975,000 of which UPCIC's cost is $2,225,000, and the quota share reinsurers cost is the remaining $1,750,000. The cost of UPCIC’s underlying excess catastrophe contract is $42,000,000, subject to a potential return premium of up to $31,458,000. The total cost of UPCIC's private catastrophe reinsurance program effective June 1, 2010 through May 31, 2011 is $134,538,000 of which UPCIC's cost is 50%, or $67,269,000, and the quota share reinsurers cost is the remaining 50%. In addition, UPCIC purchases reinstatement premium protection as described above, the cost of which is $16,210,064. UPCIC’s cost of the subsequent catastrophe event excess of loss reinsurance is $15,683,000. The estimated premium that UPCIC plans to cede to the FHCF for the 2010 hurricane season is $60,104,422 of which UPCIC's cost is 50%, or $30,052,211, 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 offered by theFHCF, 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%. The Company is responsible for losses related to catastrophic events with incurred losses in excess of coverage provided by UPCIC's reinsurance program which could have a material adverse effect on the Company's business, financial condition and results of operations. UPCIC’s private market reinsurance costs are subject to increases or decreases if changes in its earned premiums or the total insured value under its in-force policies as of August 31, 2010, are outside of ranges specified in certain of its reinsurance contracts.

Effective June 1, 2010 through December 31, 2010, 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 $8,250,000.

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. UPCIC estimates based upon its in-force exposures as of June 30, 2010, that it had coverage to approximately the 106-year Probable Maximum Loss (PML), modeled using AIR CLASIC/2 v.11.0, long term, without demand surge and without loss amplification. PML is a general concept applied in the insurance industry for defining high loss scenarios that should be considered when underwriting insurance risk. Catastrophe models produce loss estimates that are qualified in terms of dollars and probabilities. Probability of exceedance or the probability that the actual loss level will exceed a particular threshold is a standard catastrophe model output. For example, the 100-year PML represents a 1.00% Annual Probability of Exceedance (the 106-year PML represents a 0.943% 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.

UPCIC limits the maximum net loss that can arise from large risks or risks in concentrated areas of exposure by reinsuring (ceding) certain levels of risks with other insurers or reinsurers on an automatic basis under reinsurance contracts. The reinsurance arrangements are intended to provide UPCIC with the ability to limit its exposure to losses within its capital resources. Such reinsurance includes quota share, excess of loss and catastrophe forms of reinsurance. UPCIC submits the reinsurance program for regulatory review to the 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:

	Six Months Ended June 30, 2010									Six Months Ended June 30, 2009

	Premiums			Premiums			Loss and Loss			Premiums			Premiums			Loss and Loss
	Written			Earned			Adjustment			Written			Earned			Adjustment
							Expenses									Expenses
Direct	$	368,119,332		$	290,754,177		$	97,025,344		$	301,984,289		$	262,398,307		$	90,929,142
Ceded		(248,872,199	)		(216,079,827	)		(48,538,739	)		(224,366,164	)		(187,263,917	)		(46,002,319	)

Net	$	119,247,133		$	74,674,350		$	48,486,605		$	77,618,125		$	75,134,390		$	44,926,823

	Three Months Ended June 30, 2010									Three Months Ended June 30, 2009

	Premiums			Premiums			Loss and Loss			Premiums			Premiums			Loss and Loss
	Written			Earned			Adjustment			Written			Earned			Adjustment
							Expenses									Expenses
Direct	$	208,019,687		$	150,600,999		$	50,345,476		$	156,772,144		$	134,106,112		$	49,604,750
Ceded		(121,304,233	)		(109,240,212	)		(25,510,583	)		(128,638,307	)		(96,729,374	)		(25,098,591	)

Net	$	86,715,454		$	41,360,787		$	24,834,893		$	28,133,837		$	37,376,738		$	24,506,159

Other Amounts:

Prepaid reinsurance premiums and reinsurance recoverables as of June 30, 2010 and December 31, 2009 were as follows:

	As of June 30,			As of December 31,
	2010			2009

Prepaid reinsurance premiums	$	233,086,613		$	200,294,241

Reinsurance recoverable on unpaid losses and LAE	$	63,451,074		$	62,900,913
Reinsurance recoverable on paid losses		(215,564	)		28,915,520
Reinsurance recoverables	$	63,235,510		$	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 June 30,			As of December 31,
	2010			2009
Reinsurance payable, net of ceding commissions
due from reinsurers	$	124,157,228		$	105,536,847
Inuring premiums receivable		(37,342,171	)		(32,432,252	)

Reinsurance payable, net	$	86,815,057		$	73,104,595

5. Investments

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

	For the Six Months Ended June 30,
	2010			2009
Cash and cash equivalents	$	51,330		$	231,859
Fixed maturities		545,938			700,984
Equity securities		19,863			187,116
Total investment income		617,131			1,119,959
Less investment expenses		(306,560	)		(321,477	)

Net investment income	$	310,571		$	798,482

As of June 30, 2010 and December 31, 2009, the Company’s investments consisted of cash and cash equivalents, and investments with carrying values of $400,369,542 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 $262,444,768 and $192,924,291 as of June 30, 2010 and December 31, 2009, respectively, held at the following financial institutions:

	As of June 30, 2010
Financial Institution	Cash		Money Market Funds		Total		%

U. S. Bank IT&C (1)	$	-	$	71,458,546	$	71,458,546		27.2	%
Evergreen Investment Management
Company, L.L.C.		-		2,909		2,909		0.0	%
SunTrust Bank		731,637		-		731,637		0.3	%
SunTrust Bank Institutional
Asset Services		-		157,883,410		157,883,410		60.2	%
Wachovia Bank, N.A.		257,478				257,478		0.1	%
Bank of New York Trust Fund		-		11,340,087		11,340,087		4.3	%
Deutsche Bank Alex Brown		20,335,762		-		20,335,762		7.7	%
All Other Banking Institutions		434,939		-		434,939		0.2	%
	$	21,759,816	$	240,684,952	$	262,444,768		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)	$	-	$	71,977,371	$	71,977,371		37.3	%
Evergreen Investment Management		-		26,909		26,909		0.0	%
Company, L.L.C.
SunTrust Bank		1,063,785		-		1,063,785		0.5	%
SunTrust Bank Institutional
Asset Services		-		102,257,833		102,257,833		53.0	%
Wachovia Bank, N.A.		489,051		-		489,051		0.3	%
Bank of New York Trust Fund		-		16,515,181		16,515,181		8.6	%
All Other Banking Institutions		594,161		-		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.

The following table shows the realized gains and losses for fixed maturities and equity securities, net of OTTI of investments, for the six month and three-month periods ended June 30, 2010. There were $9,090,220 and $4,919,795 of realized gains and $3,345,875 and $462,488 of realized losses for the six month and three-month periods ended June 30, 2010, respectively.

	For the Six Months Ended					For the Three Months Ended
	June 30, 2010					June 30, 2010
	Realized Gains (Losses)			Fair Value at Sale		Realized Gains (Losses)			Fair Value at Sale
Fixed maturities, available for sale	$	1,896,101		$	91,064,319	$	1,835,359		$	85,102,515
Equity securities		7,194,119			69,127,155		3,084,436			32,640,707
Total Realized Gains	$	9,090,220		$	160,191,474	$	4,919,795		$	117,743,222

Fixed maturities, available for sale	$	(283,994	)	$	25,173,393	$	(84,414	)	$	5,813,149
Equity securities		(3,009,881	)		9,963,804		(378,074	)		4,114,560
Other Investments		(52,000	)		-
Total Realized Losses	$	(3,345,875	)	$	35,137,197	$	(462,488	)	$	9,927,709

Net realized gains on investments/Total Fair Value at Sale	$	5,744,345		$	195,328,671	$	4,457,307		$	127,670,931

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 June 30, 2010 and December 31, 2009 follows. The company’s foreign obligations consist of government bonds of Norway and Switzerland.

	June 30, 2010
	Amortized Cost / Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Fixed maturities - available for sale:
US government and agency obligations	$	49,536,007	$	582,830	$	(7,022	)	$	50,111,815
Foreign obligations		10,961,595		5,767		(631,467	)		10,335,895
Total fixed maturities - available for sale	$	60,497,602	$	588,597	$	(638,489	)	$	60,447,710

Equity securities:
Commodities
Common Stock	$	78,066,419	$	3,413,169	$	(4,002,524	)	$	77,477,064
Total equity securities	$	78,066,419	$	3,413,169	$	(4,002,524	)	$	77,477,064

	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

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 June 30, 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