UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2011March 31, 2012

or

 

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period fromto

Commission File Number 001-33251

 

 

UNIVERSAL INSURANCE HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware 65-0231984

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

1110 W. Commercial Blvd., Fort Lauderdale, Florida 33309

(Address of principal executive offices)

(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  x    No  ¨

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

 

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 39,992,76940,171,028 shares of common stock, par value $0.01 per share, outstanding on NovemberMay 2, 2011.2012.

 

 

 


UNIVERSAL INSURANCE HOLDINGS, INC.

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

 

     Page
No.
 
PART I—FINANCIAL INFORMATION

Item 1.

 Financial Statements:  
 Condensed Consolidated Balance Sheets as of September 30, 2011March 31, 2012 and December 31, 20102011 (unaudited)   4  
 Condensed Consolidated Statements of Income for the three and nine-monththree-month periods ended September 30,March 31, 2012 and 2011 and 2010 (unaudited)   5  
 Condensed Consolidated Statements of Cash Flows for the nine-monththree-month periods ended September 30,March 31, 2012 and 2011 and 2010 (unaudited)   6  
 Notes to Condensed Consolidated Financial Statements (unaudited)   7  

Item 2.

 Management’s Discussion and Analysis of Financial Condition and Results of Operations   2724  

Item 3.

 Quantitative and Qualitative Disclosure about Market Risk   4336  

Item 4.

 Controls and Procedures   4538  
PART II – II—OTHER INFORMATION  

Item 1.

 Legal Proceedings   4638  

Item 1A.

 Risk Factors   4639  
Item 5.Other Information46

Item 6.

 Exhibits   4639  

Signatures

    4841  

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 ofUniversal Insurance Holdings, Inc. (the “Company”) and its Subsidiaries as of September 30, 2011March 31, 2012 and the related condensed consolidated statements of income for the three and nine-monththree-month periods ended September 30,March 31, 2012 and 2011 and 2010 and cash flows for the nine-monththree-month periods ended September 30, 2011March 31, 2012 and 2010.2011. 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

November 8, 2011May 9, 2012

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETSCONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

(in thousands, except per share data)

 

  As of 
  As of
September 30,
2011
 As of
December 31,
2010
   March 31,
2012
 December 31,
2011
 

ASSETS:

      

Cash and cash equivalents

  $328,838   $147,585    $325,968   $229,685  

Investment securities, at fair value

   153,476    224,532  

Restricted cash and cash equivalents

   48,178    78,312  

Fixed maturities, at fair value

   3,800    3,801  

Equity securities, at fair value

   96,996    95,345  

Prepaid reinsurance premiums

   251,342    221,086     276,365    243,095  

Reinsurance recoverables

   77,545    79,552     77,049    85,706  

Reinsurance receivable, net

   49,816    37,607     15,794    55,205  

Premiums receivable, net

   50,580    43,622     45,628    45,828  

Receivable from securities

   5,585    17,556  

Receivable from securities sold

   4,117    9,737  

Other receivables

   2,910    2,864     2,207    2,732  

Property and equipment, net

   6,597    5,407     8,441    7,116  

Deferred policy acquisition costs, net

   13,013    9,446     11,798    12,996  

Income taxes recoverable

   1,070    —    

Deferred income taxes

   24,120    13,448     17,409    22,991  

Other assets

   3,126    1,132     1,836    1,477  
  

 

  

 

   

 

  

 

 

Total assets

  $966,948   $803,837    $936,656   $894,026  
  

 

  

 

 
  

 

  

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

      

LIABILITIES:

      

Unpaid losses and loss adjustment expenses

  $162,954   $158,929    $172,300   $187,215  

Unearned premiums

   375,779    328,334     371,041    359,842  

Advance premium

   21,639    19,840     31,101    19,390  

Accounts payable

   4,287    3,767     5,064    4,314  

Bank overdraft

   34,914    23,030     28,690    25,485  

Payable for securities

   17,667    —    

Reinsurance payable, net

   128,804    75,553  

Payable for securities purchased

   8,017    1,067  

Reinsurance payable

   114,477    87,497  

Income taxes payable

   16,378    8,282     551    12,740  

Dividends payable to shareholders

   3,199    —       4,012    —    

Other accrued expenses

   22,322    23,150     23,506    24,780  

Long-term debt

   22,059    23,162     21,324    21,691  
  

 

  

 

   

 

  

 

 

Total liabilities

   810,002    664,047     780,083    744,021  
  

 

  

 

   

 

  

 

 

Commitments and Contingencies (Note 12)

   

Commitments and Contingencies (Note 11)

   

STOCKHOLDERS’ EQUITY:

      

Cumulative convertible preferred stock, $.01 par value

   1    1     1    1  

Authorized shares - 1,000

   

Issued shares - 108

   

Outstanding shares - 108

   

Authorized shares—1,000

   

Issued shares—108

   

Outstanding shares—108

   

Minimum liquidation preference, $2.66 per share

      

Common stock, $.01 par value

   410    404     411    411  

Authorized shares - 55,000

   

Issued shares - 41,010 and 40,407

   

Outstanding shares - 39,993 and 39,388

   

Treasury shares, at cost - 1,018 and 1,019

   (3,102  (3,109

Authorized shares—55,000

   

Issued shares—41,135 and 41,100

   

Outstanding shares—40,117 and 40,082

   

Treasury shares, at cost—1,018

   (3,101  (3,101

Additional paid-in capital

   35,549    33,675     37,497    36,536  

Retained earnings

   124,088    108,819     121,765    116,158  
  

 

  

 

   

 

  

 

 

Total stockholders’ equity

   156,946    139,790     156,573    150,005  
  

 

  

 

   

 

  

 

 

Total liabilities and stockholders’ equity

  $966,948   $803,837    $936,656   $894,026  
  

 

  

 

   

 

  

 

 

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 INCOMECONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited)

(in thousands, except per share data)

 

0000000000000000000000000000
   For the Three
Months Ended September 30,
  For the Nine
Months Ended September 30,
 
   2011  2010  2011  2010 

PREMIUMS EARNED AND OTHER REVENUES

     

Direct premiums written

  $171,370   $152,662   $558,024   $520,782  

Ceded premiums written

   (123,984  (108,539  (393,673  (357,411
  

 

 

  

 

 

  

 

 

  

 

 

 

Net premiums written

   47,386    44,123    164,351    163,371  

Decrease (increase) in net unearned premium

   2,248    4,708    (17,189  (39,865
  

 

 

  

 

 

  

 

 

  

 

 

 

Premiums earned, net

   49,634    48,831    147,162    123,506  

Net investment income

   122    66    358    377  

Net realized gains on investments

   5,884    6,149    12,496    11,893  

Net unrealized (losses) gains on investments

   (15,985  6,281    (23,037  6,281  

Net foreign currency (losses) gains on investments

   (455  (8  (384  801  

Commission revenue

   5,192    4,423    14,313    13,469  

Policy fees

   3,535    3,525    12,110    12,000  

Other revenue

   1,486    1,468    4,400    3,489  
  

 

 

  

 

 

  

 

 

  

 

 

 

Total premiums earned and other revenues

   49,413    70,735    167,418    171,816  
  

 

 

  

 

 

  

 

 

  

 

 

 

OPERATING COSTS AND EXPENSES

     

Losses and loss adjustment expenses

   29,343    29,370    81,380    77,857  

General and administrative expenses

   18,827    20,053    48,598    43,631  
  

 

 

  

 

 

  

 

 

  

 

 

 

Total operating costs and expenses

   48,170    49,423    129,978    121,488  
  

 

 

  

 

 

  

 

 

  

 

 

 

INCOME BEFORE INCOME TAXES

   1,243    21,312    37,440    50,328  

Income taxes, current

   7,331    7,359    25,690    19,016  

Income taxes, deferred

   (7,063  876    (10,672  524  
  

 

 

  

 

 

  

 

 

  

 

 

 

Income taxes, net

   268    8,235    15,018    19,540  
  

 

 

  

 

 

  

 

 

  

 

 

 

NET INCOME

  $975   $13,077   $22,422   $30,788  
  

 

 

  

 

 

  

 

 

  

 

 

 

Basic earnings per common share

  $0.02   $0.33   $0.57   $0.78  
  

 

 

  

 

 

  

 

 

  

 

 

 

Weighted average of common shares outstanding - Basic

   39,190    39,167    39,177    39,076  
  

 

 

  

 

 

  

 

 

  

 

 

 

Fully diluted earnings per common share

  $0.02   $0.32   $0.55   $0.76  
  

 

 

  

 

 

  

 

 

  

 

 

 

Weighted average of common shares outstanding - Diluted

   40,330    40,276    40,536    40,386  
  

 

 

  

 

 

  

 

 

  

 

 

 

Cash dividend declared per common share

  $0.08   $—     $0.18   $0.22  
  

 

 

  

 

 

  

 

 

  

 

 

 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
00000000000000000000000000000000
   For the Three
Months Ended September 30,
   For the Nine
Months Ended September 30,
 
   2011   2010   2011   2010 

Comprehensive Income:

        

Net income

  $       975    $     13,077    $   22,422    $  30,788  

Change in net unrealized gains (losses) on investments, net of tax

   —       409     —       (558
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive Income

  $975    $13,486    $22,422    $30,230  
  

 

 

   

 

 

   

 

 

   

 

 

 
   Three Months Ended March 31, 
   2012  2011 

PREMIUMS EARNED AND OTHER REVENUES

   

Direct premiums written

  $190,003   $173,175  

Ceded premiums written

   (163,434  (123,891
  

 

 

  

 

 

 

Net premiums written

   26,569    49,284  

Decrease (increase) in net unearned premium

   22,071    (1,280
  

 

 

  

 

 

 

Premiums earned, net

   48,640    48,004  

Net investment (expense) income

   (36  257  

Net realized (losses) gains on investments

   (7,449  3,652  

Net unrealized gains on investments

   9,187    2,588  

Net foreign currency gains on investments

   23    71  

Commission revenue

   4,541    4,180  

Policy fees

   3,901    4,173  

Other revenue

   1,440    1,408  
  

 

 

  

 

 

 

Total premiums earned and other revenues

   60,247    64,333  
  

 

 

  

 

 

 

OPERATING COSTS AND EXPENSES

   

Losses and loss adjustment expenses

   26,174    26,185  

General and administrative expenses

   17,844    15,072  
  

 

 

  

 

 

 

Total operating costs and expenses

   44,018    41,257  
  

 

 

  

 

 

 

INCOME BEFORE INCOME TAXES

   16,229    23,076  

Income taxes, current

   774    8,737  

Income taxes, deferred

   5,582    441  
  

 

 

  

 

 

 

Income taxes, net

   6,356    9,178  
  

 

 

  

 

 

 

NET INCOME AND COMPREHENSIVE INCOME

  $9,873   $13,898  
  

 

 

  

 

 

 

Basic earnings per common share

  $0.24   $0.35  
  

 

 

  

 

 

 

Weighted average of common shares outstanding—Basic

   39,388    39,388  
  

 

 

  

 

 

 

Fully diluted earnings per common share

  $0.24   $0.34  
  

 

 

  

 

 

 

Weighted average of common shares outstanding—Diluted

   40,544    40,838  
  

 

 

  

 

 

 

Cash dividend declared per common share

  $0.10   $0.10  
  

 

 

  

 

 

 

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 FLOWSCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)(unaudited)

(in thousands)

 

  Nine Months Ended
September 30,
   Three Months Ended March 31, 
  2011 2010   2012 2011 

Cash flows from operating activities:

      

Net Income

  $22,422   $30,788    $9,873   $13,898  

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

      

Bad debt expense

   622    1,666  

Bad debt (recovery) expense

   (80  164  

Depreciation

   379    732     199    182  

Amortization of cost of stock options

   957    1,766  

Amortization of non-vested shares

   931    690  

Net realized gains on investments

   (12,496  (11,893

Net unrealized losses (gains) on investments

   23,037    (6,281

Net foreign currency losses (gains) on investments

   384    (835

Amortization of stock-based compensation

   1,012    398  

Net realized losses (gains) on investments

   7,449    (3,652

Net unrealized (gains) losses on investments

   (9,187  (2,588

Net foreign currency (gains) on investments

   (23  (71

Amortization of premium / accretion of discount, net

   185    405     3    157  

Deferred income taxes

   (10,672  885     5,582    442  

Excess tax (benefits) shortfall from stock-based compensation

   142    —    

Other

   (21  (21   —      838  

Net change in assets and liabilities relating to operating activities:

      

Restricted cash and cash equivalents

   30,134    (10,291

Prepaid reinsurance premiums

   (30,256  (28,069   (33,270  (7,309

Reinsurance recoverables

   2,007    24,480     8,657    426  

Reinsurance receivable, net

   (12,209  (9,608   39,411    5,375  

Premiums receivable, net

   (7,578  (12,819   303    43  

Accrued investment income

   580    —       40    —    

Other receivables

   (629  2,035     463    (228

Income taxes recoverable

   —      3,212     (1,070  —    

Deferred policy acquisition costs, net

   (3,567  (3,388   1,198    (694

Proceeds from sale of trading securities

   661,809    395,288     119,686    119,582  

Purchases of trading securities

   (572,790  (348,111   (107,313  (48,350

Other assets

   (1,428  (150   (55  (1,234

Unpaid losses and loss adjustment expenses

   4,025    9,660     (14,915  (679

Unearned premiums

   47,445    67,934     11,199    8,588  

Accounts payable

   519    323     750    1,504  

Reinsurance payable, net

   53,251    4,436     26,980    30,158  

Income taxes payable

   8,096    3,130     (12,331  2,612  

Other accrued expenses

   (828  1,732     (1,274  319  

Advance premium

   1,799    3,879     11,711    10,218  
  

 

  

 

   

 

  

 

 

Net cash provided by operating activities

   175,974    131,866     95,274    119,808  
  

 

  

 

   

 

  

 

 

Cash flows from investing activities:

      

Proceeds from sale of property, plant and equipment

   63    33     18    —    

Purchases of property, plant and equipment

   (1,611  (1,589   (1,542  (399

Purchases of fixed maturities, available for sale

   —      (129,141

Proceeds from sales of fixed maturities, available for sale

   —      116,238  

Purchases of equity securities, available for sale

   —      (80,730

Proceeds from sales of equity securities, available for sale

   —      70,681  
  

 

  

 

   

 

  

 

 

Net cash used in investing activities

   (1,548  (24,508   (1,524  (399
  

 

  

 

   

 

  

 

 

Cash flows from financing activities:

      

Bank overdraft

   11,884    4,482     3,205    3,833  

Preferred stock dividend

   (15  (15   (254  (5

Common stock dividend

   (3,939  (8,617

Issuance of common stock

   —      7     91    —    

Purchase of treasury shares

   —      (3,724

Excess tax benefits from stock-based compensation

   —      3,660  

Excess tax benefits (shortfall) from stock-based compensation

   (142  —    

Repayment of debt

   (1,103  (1,103   (367  —    
  

 

  

 

   

 

  

 

 

Net cash provided by (used in) financing activities

   6,827    (5,310

Net cash provided by financing activities

   2,533    3,828  
  

 

  

 

 
  

 

  

 

 

Net increase in cash and cash equivalents

   181,253    102,048     96,283    123,237  

Cash and cash equivalents at beginning of period

   147,585    192,924     229,685    133,645  
  

 

  

 

   

 

  

 

 

Cash and cash equivalents at end of period

  $328,838   $294,972    $325,968   $256,882  
  

 

  

 

   

 

  

 

 

Supplemental cash flow disclosure

      

Dividends accrued

  $3,199   $—      $4,012   $—    

Interest

  $744   $711    $105   $—    

Income taxes

  $13,513   $7,923    $14,170   $6,050  

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

(unaudited)

1. Nature of Operations and Basis of Presentation

1.Nature of Operations and Basis of Presentation

Nature of Operations

Universal Insurance Holdings, Inc. (“UIH”) is a Delaware corporation originally incorporated as Universal Heights, Inc. in November 1990. UIH, andwith its wholly-owned subsidiaries (the “Company”) is a vertically integrated insurance company performing all aspects of insurance underwriting, distribution and claims. Through its wholly-owned subsidiaries, including Universal Property & Casualty Insurance Company (“UPCIC”) and American Platinum Property and Casualty Insurance Company (“APPCIC”), collectively referred to as the (“Insurance Entities”), the Company is principally engaged in the property and casualty insurance business offered primarily through a network of independent agents. Risk from catastrophic losses is managed through the use of reinsurance agreements. The Company’s primary product is homeowners’ insurance currently offered in fourfive states, including Florida where awhich comprises the vast majority of the Company’s policies are in force.in-force policies. SeeNote 5, Insurance Operations, for more information regarding the Company’s insurance operations.

The Company generates revenues primarily from the collection of premiums and the investment of available funds in excess of those premiums.retained for claims-paying obligations and insurance operations. Other significant sources of revenue include commissions collected from reinsurers and policy fees.

Basis of Presentation

The Company has prepared the accompanying unaudited Condensed Consolidated Financial Statements (“Financial Statements”) in accordance with the rules and regulations of the United States Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by United States Generally Accepted Accounting Principles (“GAAP”) for complete financial statements. Therefore, the Financial Statements should be read in conjunction with the audited Consolidated Financial Statements contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010,2011, filed with the SEC on March 31, 2011.26, 2012. The condensed consolidated balance sheet at December 31, 2010,2011, was derived from audited financial statements, but does not include all disclosures required by GAAP. In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation have been included in the Financial Statements. The results for interim periods do not necessarily indicate the results that may be expected for any other interim period or for the full year.

The Financial Statements include the accounts of the CompanyUIH and its wholly owned subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation.

Management must make estimates and assumptions that affect amounts reported in the Company’s Financial Statements and in disclosures of contingent assets and liabilities. Actual results could differ from those estimates.

To conform to the current period presentation, certain amounts in the prior periods’ consolidated financial statements and notes have been reclassified. Such reclassifications were of an immaterial amount and had no effect on net income or stockholders’ equity. The Company reclassified $37.6 millionhas adjusted its Condensed Consolidated Statement of Cash Flows for the three months ended March 31, 2011 to reflect the effect of a reclassification made to its reinsurance payable, netCondensed Consolidated Balance Sheet as of DecemberMarch 31, 2010,2011 related to reinsurance receivable, netpayables. This reclassification was made upon discovery that the Company was offsetting receivables and payables with separatenon-affiliated reinsurers. This correction represents a change in the presentation only of the Company’s Condensed Consolidated Balance Sheet as of December 31, 2010 and Condensed Consolidated Statement of Cash Flows for the Nine Months ended September 30, 2010, and had no impact on earnings, equity or cash flows from operating, investing and financing activities. The following line items were adjusted (in thousands):

Condensed Consolidated Statement of Cash Flows:  Three Months Ended March 31, 2011 
   As Reported   Reclassification  Adjusted 

Net change in assets and liabilities relating to operating activities:

     

Reinsurance receivable, net

  $—      $5,375   $5,375  

Reinsurance payable, net

  $35,533    $(5,375 $30,158  

Condensed Consolidated Balance Sheet as of December 31, 2010

   As Reported   Reclassification   Adjusted 

Receivable from reinsurers, net

  $—      $37,607    $37,607  

Total assets

  $766,230    $37,607    $803,837  

Payable to reinsurers, net

  $37,946    $37,607    $75,553  

Total liabilities

  $626,440    $37,607    $664,047  

An adjustment has been made to the Company’s Condensed Consolidated Statement of Cash Flows for the Nine Months

Ended September 30, 2010three months ended March 31, 2011 to reflect the effect of a reclassification made to the Company’s Condensed Balance Sheet as of March 31, 2011 related to restricted cash and cash equivalents. The Company reclassified amounts out of cash and cash equivalents that were restricted in terms of their use and withdrawal and has presented those amounts of restricted cash and cash equivalents as a separate line item on the face of the Condensed Consolidated Balance Sheets. The following line items were adjusted (in thousands):

 

Net change in assets and liabilities relating to operating activities:  As Reported  Reclassification  Adjusted 

Reinsurance receivable, net

  $—     $(9,608 $(9,608

Reinsurance payable, net

  $(5,172 $9,608   $4,436  
Condensed Consolidated Statements of Cash Flows:  Three Months Ended March 31, 2011 
   As Reported   Reclassification  Adjusted 

Net change in assets and liabilities relating to operating activities:

     

Restricted cash and cash equivalents

  $—      $(10,291 $(10,291

Net cash flows provided by (used in) operating activities

  $130,099    $(10,291 $119,808  

Net increase in cash and cash equivalents

  $133,528    $(10,291 $123,237  

Cash and cash equivalents at beginning of period

  $147,585    $(13,940 $133,645  

Cash and cash equivalents at end of period

  $281,113    $(24,231 $256,882  

2. Significant Accounting Policies

2.Significant Accounting Policies

The Company reported Significant Accounting Policies in its Annual Report on Form 10-K for the year ended December 31, 2010.2011. The following are new or revised disclosures or disclosures required on a quarterly basis.

Concentrations of Credit Risk.The Company is exposed to concentrations of credit risk, consisting principally of cash and cash equivalents, restricted cash and cash equivalents, debt securities, premiums receivable, reinsurance receivable and reinsurance recoverables.

Concentrations of credit risk with respect to cash on deposit are limited by the Company’s policy of investing excess cash with custodial institutions who invest primarily in money market accounts backed by the United States Government and United States Government agency securities with major national banks. These accounts are held by the Institutional Trust & Custody division of U.S. Bank and the Trust Department of SunTrust Bank and Bank of New York Trust Fund.Bank.

The Company maintains depository relationships with SunTrust Bank and Wells Fargo Bank N.A. It is the Company’s policy not to have a balance of more than $250 thousand for any of its affiliates at either institution on any given day to minimize exposure to a bank failure. Cash balances in excess of $250 thousand are transferred daily into custodial accounts with SunTrust Bank where cash is immediately invested into shares of Money Market Funds.

Cash

The following table presents the amount of cash and cash equivalents consistand restricted cash and cash equivalents as of checking, repurchase and money market accounts with carrying values as followsthe periods presented (in thousands):

   As of March 31, 2012 
   Cash and cash equivalents  Restricted cash and cash equivalents 

Institution

  Cash   Money
Market Funds
   Total   % by
institution
  Funds
held in
Trust (1)
   State
Deposits (2)
   Total   % by
institution
 

U. S. Bank IT&C

  $—      $40,476    $40,476     12.4 $—      $800    $800     1.7

SunTrust Bank

   1,130     —       1,130     0.4  —       —       —       0.0

SunTrust Bank Institutional Asset Services

   —       279,229     279,229     85.7  —       —       —       0.0

Wells Fargo Bank N.A.

   1,396     3     1,399     0.4  —       —       —       0.0

Bank of New York Mellon Trust Co. (1)

   —       —       —       0.0  50     —       50     0.1

Florida Department of Financial Services

   —       —       —       0.0  —       47,293     47,293     98.1

All Other Banking Institutions/States

   2,813     921     3,734     1.1  —       35     35     0.1
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $5,339    $320,629    $325,968     100.0 $50    $48,128    $48,178     100.0
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

   

 

 

   

 

 

   

 

 

 
  As of September 30, 2011 

Institution

  Cash   Money Market
Funds
   State Deposits   Total   % 

U. S. Bank IT&C

  $—      $41,275    $—      $41,275     12.6

SunTrust Bank

   580     —       —       580     0.2

SunTrust Bank Institutional Asset Services

   —       219,525     —       219,525     66.8

Wells Fargo Bank N.A.

   772     —       —       772��    0.2

Bank of New York Trust Fund (1)

   —       62,873     —       62,873     19.1

All Other Banking Institutions

   1,210     3     2,600     3,813     1.2
  

 

   

 

   

 

   

 

   

 

 
  $2,562    $323,676    $2,600    $328,838     100.0
  

 

   

 

   

 

   

 

   

 

 
  As of December 31, 2011 
  As of December 31, 2010   Cash and cash equivalents Restricted cash and cash equivalents 

Institution

  Cash   Money Market
Funds
   State Deposits   Total   %   Cash   Money
Market Funds
   Total   % by
institution
 Funds
held in
Trust (1)
   State
Deposits (2)
   Total   % by
institution
 

U. S. Bank IT&C

  $—      $41,454    $—      $41,454     28.1  $—      $40,474    $40,474     17.6 $—      $800    $800     1.0

SunTrust Bank

   1,241     —       —       1,241     0.8   1,629     —       1,629     0.7  —       —       —       0.0

SunTrust Bank Institutional Asset Services

   —       89,724     —       89,724     60.8   —       182,701     182,701     79.5  —       —       —       0.0

Wells Fargo Bank N.A.

   780     —       —       780     0.5   1,244     14     1,258     0.5  —       —       —       0.0

Bank of New York Trust Fund (1)

   —       11,340     —       11,340     7.7

Bank of New York Mellon Trust Co. (1)

   —       —       —       0.0  30,220     —       30,220     38.6

Florida Department of Financial Services

          —       47,292     47,292     60.4

All Other Banking Institutions

   443     3     2,600     3,046     2.1   1,739     1,884     3,623     1.6  —       —       —       0.0
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

  

 

   

 

   

 

   

 

 

Total

  $4,612    $225,073    $229,685     100.0 $30,220    $48,092    $78,312     100.0
  $2,464    $142,521    $2,600    $147,585     100.0  

 

   

 

   

 

   

 

  

 

   

 

   

 

   

 

 
  

 

   

 

   

 

   

 

   

 

 

 

(1)Amounts held in trust include collateral contributed by the CompanyUIH in connection with reinsurance contracts entered into between a segregated account T25 owned and maintained by the CompanyUIH and UPCIC. See Note 4, Reinsurance, for information about this arrangement.
(2)State deposits represent amounts held with regulatory agencies in the various states in which our Insurance Entities do business. Applicable laws and regulations govern not only the amount, but also the type of securities that are eligible for deposit. State deposits also include amounts that UPCIC has voluntarily placed on deposit in connection with the T25 arrangement.

See Note 4—Reinsurance for information about this arrangement.

All debt securities included in cash and cash equivalents and restricted cash and cash equivalents as of September 30, 2011,March 31, 2012, and December 31, 2010,2011, are direct obligations of the United States Treasury or money-market accounts that invest in direct obligations of the United States Treasury.

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

In order to reduce credit risk for amounts due from reinsurers, UPCIC seeksthe Insurance Entities seek to do business with financially sound reinsurance companies and regularly evaluate the financial strength of all reinsurers used. Everest Reinsurance Company, the reinsurer to which UPCIC cedes the largest volume of premium,Insurance Entities cede the most risk, 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. UPCIC’s reinsurance portfolio contained

The following table presents the following authorizedunsecured amounts due from the Company’s reinsurers that had reinsurance receivables, unsecured recoverables for paid and unpaid losses, including incurred but not reported (“IBNR”) reserves, loss adjustment expenses and unearned premiums whose aggregate balance exceededexceeds 3% of UPCIC’s statutory surplusthe Company’s stockholders’ equity (in thousands):

   As of 

Reinsurer

  March 31,
2012
   December 31,
2011
 

Everest Reinsurance Company

  $250,985    $264,997  

Florida Hurricane Catastrophe Fund

   10,756     30,422  
  

 

 

   

 

 

 

Total (1)

  $261,741    $295,419  
  

 

 

   

 

 

 

   As of September 30,   As of December 31, 

Reinsurer

  2011   2010 

Everest Reinsurance Company

  $308,384    $265,549  

Florida Hurricane Catastrophe Fund

   —       32,849  
  

 

 

   

 

 

 

Total

  $308,384    $298,398  
  

 

 

   

 

 

 

(1)Amounts represent prepaid reinsurance premiums, reinsurance receivables, and recoverables for paid and unpaid losses, including incurred but not reported ("IBNR") reserves, and loss adjustment expenses.

Recently AdoptedIssued Accounting Pronouncements

In January 2010,December 2011, the Financial Accounting Standards Board (“FASB”) updated its guidance to the Balance Sheet Topic 210 of the FASB “) issued new accountingAccounting Standards Codification (“ASC”). This updated guidance which expandsrequires entities that have financial instruments and derivative instruments that are offset, to disclose information about offsetting and related arrangements to enable users of financial statements to understand the effect of those arrangements on an entity’s financial position. This guidance is to be applied for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. Disclosure is required retrospectively for all comparative periods presented. The additional disclosures required by the updated guidance will not have an impact on the Company’s operating results, cash flows, or financial position.

In June 2011, the FASB updated its guidance related to the Comprehensive Income Topic 220 of the FASB ASC. This updated guidance increases the prominence of items reported in other comprehensive income by eliminating the option of presenting components of other comprehensive income as part of the statement of changes in stockholders’ equity. The guidance requires that total comprehensive income (including both the net income components and other comprehensive income components) be reported in either a single continuous statement of comprehensive income, or two separate but consecutive statements (the approach currently used in the Company’s financial statements). This guidance is to be applied retrospectively to fiscal years (and interim periods within those years) beginning after December 15, 2011. The Company adopted this guidance effective January 1, 2012. This guidance did not have an impact on the presentation of the Company’s financial statements and notes herein, as the Company did not have any amounts of other comprehensive income during the periods presented.

In May 2011, the FASB updated its guidance related to the Fair Value Measurement, Topic 820 of the ASC, to achieve common fair value measurement and disclosure requirements relatingwith International Financial Reporting Standards. The amendments change the wording used to describe many of the requirements in United States generally accepted accounting principles, to clarify the intent of application of existing fair value measurement and disclosure requirements, and to change particular principles or requirements for measuring and disclosing fair value measurements. The guidance adds requirements for disclosing amounts ofamendments are to be applied prospectively to interim 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.annual reporting periods beginning after December 15, 2011. The Company adopted the provisions of the newthis guidance as of March 31, 2010, except for disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements, which were adopted as ofeffective January 1, 2011. Disclosures are2012. The adoption of this guidance resulted in additional disclosure but did not required for earlier periods presented for comparative purposes. The new guidance affects disclosures only; therefore, the adoption had no impact on the Company’s results of operations, cash flows or financial position.

In September 2010, the FASB issued guidance related to accounting for costs associated with acquiring or renewing insurance contracts. This guidance defines allowable deferred acquisition costs as costs incurred by insurance entities for the successful acquisition of new and renewal contracts. Such costs result directly from and are essential to the contract transaction(s) and would not have been incurred by the insurance entity had the contract(s) not occurred. This guidance is effective for periods beginning after December 15, 2011, with early adoption permitted. The Company adopted this guidance prospectively effective January 1, 2012. Under the new guidance, the Company’s net deferred policy acquisition costs were reduced from $13.0 million to $11.4 million, a difference of 13%. The resulting $1.6 million difference was charged directly to earnings during the three months ended March 31, 2012. This charge represents a charge-off of capitalized costs existing at December 31, 2011, which would have been amortized to earnings within a twelve-month period under the old guidance.

3.Investments

3. Investments

The following table providespresents the Company’s investment holdings by type of instrument as of the periods presented (in thousands):

  As of September 30, 2011   As of December 31, 2010   As of March 31, 2012   As of December 31, 2011 
  Cost or
Amortized
Cost
   Fair Value   Carrying
Value
   Cost or
Amortized
Cost
   Fair Value   Carrying
Value
   Cost or
Amortized
Cost
   Fair Value   Carrying
Value
   Cost or
Amortized
Cost
   Fair Value   Carrying
Value
 

Cash equivalents(1) (2)

  $326,276    $326,276    $326,276    $145,121    $145,121    $145,121  

Cash equivalents (1)

  $325,968    $325,968    $325,968    $229,685    $229,685    $229,685  

Restricted cash and cash equivalents (1)

   48,178     48,178     48,178     78,312     78,312     78,312  

Trading portfolio:

                        

Debt securities:

                        

U.S. government securities obligations and agencies(2)

   3,182     3,711     3,711     138,086     130,116     130,116     3,294     3,800     3,800     3,179     3,801     3,801  

Foreign government bonds

   54,353     54,352     54,352     —       —       —    

Equity securities:

                        

Common stock:

                        

Metals and mining

   42,344     30,829     30,829     22,638     25,752     25,752     38,211     34,460     34,460     50,121     38,816     38,816  

Energy

   7,364     7,203     7,203     6,077     4,999     4,999  

Other

   20,749     16,173     16,173     344     362     362     2,235     2,145     2,145     8,044     6,945     6,945  

Exchange-traded and mutual funds:

                        

Metals and mining

   26,534     23,295     23,295     32,736     42,209     42,209     15,197     15,174     15,174     28,311     25,997     25,997  

Agriculture

   17,699     15,411     15,411     10,961     14,877     14,877     20,609     19,811     19,811     17,781     16,878     16,878  

Energy

   9,206     8,333     8,333     5,798     5,559     5,559  

Indices

   1,483     1,372     1,372     11,047     4,613     4,613     21,373     18,203     18,203     2,006     1,710     1,710  

Other

   —       —       —       1,029     1,044     1,044  

Derivatives: (3)

                        

Non-hedging instruments

   768     1,545     1,545     419     182     182     147     60     60     357     123     123  

Other investments (3) (4)

   413     366     366     —       —       —       517     385     385     517     371     371  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total trading portfolio investments

   176,731     155,387     155,387     223,058     224,714     224,714     108,947     101,241     101,241     116,393     99,640     99,640  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total investments

  $503,007    $481,663    $481,663    $368,179    $369,835    $369,835    $483,093    $475,387    $475,387    $424,390    $407,637    $407,637  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

 

(1)Cash equivalents include short-term debt securities consisting of direct obligations of the U.S. Treasury or money-market accounts that invest in direct obligations of the U.S. Treasury.
(2)The Company is required by various state laws and regulations to maintain certain securities on deposit in depositary accounts with the states in which we do business. As of September 30, 2011March 31, 2012 and December 31, 2010,2011, securities having fair values of $3.7$3.8 million and $3.4 million, respectively were on deposit. These laws and regulations govern not only the amount, but also the type of security that is eligible for deposit.
(3)Derivatives and other investments are in included in other assetsOther Assets in the consolidated balance sheets.Condensed Consolidated Balance Sheets.
(4)Other investments represent physical metals held by the Company.

The Company has made an assessment of its invested assets for fair value measurement as further described in Note 1312 – Fair Value Measurements.

The following table providespresents investment income comprised primarily of interest and dividends (in thousands):

 

  Three Months Ended
September 30,
 Nine Months Ended
September 30,
   Three Months Ended
March 31,
 
  2011 2010 2011 2010   2012 2011 

Cash and equivalents

  $203   $58   $253   $109  

Cash and cash equivalents (1)

  $179   $14  

Debt securities

   13    164    481    710     13    401  

Equity securities

   76    17    136    37     56    26  
  

 

  

 

  

 

  

 

   

 

  

 

 

Total investment income

   292    239    870    856     248    441  

Less: Investment expenses

   (170  (173  (512  (479

Less investment expenses

   (284  (184
  

 

  

 

  

 

  

 

   

 

  

 

 

Net investment income

  $122   $66   $358   $377  

Net investment (expense) income

  $(36 $257  
  

 

  

 

  

 

  

 

   

 

  

 

 

(1)Includes interest earned on restricted cash and cash equivalents.

Trading Portfolio

The following table providespresents the effect of trading activities on the Company’s results of operations by type of instrument and by line item in the condensed consolidated statements of income (in thousands):

 

   Three Months Ended  Nine Months Ended 
   September 30,  September 30, 
   2011  2010  2011  2010 

Realized gains(losses) on investments

     

Debt securities

  $—     $2,521   $(3,616 $2,521  

Equity securities

   5,669    3,726    16,535    3,726  

Derivatives (non-hedging instruments)

   215    (98  (423  (98
  

 

 

  

 

 

  

 

 

  

 

 

 

Total realized gains on trading portfolio

   5,884    6,149    12,496    6,149  

Unrealized gains (losses) on investments

     

Debt securities

   112    423    8,372    423  

Equity securities

   (17,504  6,497    (32,398  6,497  

Derivatives (non-hedging instruments)

   1,454    17    1,036    17  

Other

   (47  —      (47  —    
  

 

 

  

 

 

  

 

 

  

 

 

 

Total unrealized gains (losses) on trading portfolio

   (15,985  6,937    (23,037  6,937  
  

 

 

  

 

 

  

 

 

  

 

 

 

Net (losses) gains recognized on trading securities

  $(10,101 $13,086   $(10,541 $13,086  
  

 

 

  

 

 

  

 

 

  

 

 

 

The preceding table represents alternative quantitative disclosures permitted for derivatives that are not used as hedging instruments and are included in a trading portfolio.

Securities Available-for-sale

The following table provides information related available-for-sale securities (in thousands):

   Three Months
Ended
   Nine Months Ended 
   September 30,   September 30, 
   2011   2010   2011   2010 

Sales proceeds (fair value)

   n/a     n/a     n/a    $195,329  

Gross realized gains

   n/a     n/a     n/a    $9,090  

Gross realized losses

   n/a     n/a     n/a    $(938

Other than temporary losses

   n/a     n/a     n/a    $(2,408

During the three-month period ended September 30, 2010, the Company evaluated the trading activity in its investment portfolio, its investing strategy, and its overall investment program. As a result of this evaluation, the Company reclassified its available-for-sale portfolio as a trading portfolio effective July 1, 2010. Net unrealized losses of $656 thousand were reflected as a transfer as of July 1, 2010, and recognized in earnings and included under the caption “Unrealized Gains on Investments” in the Consolidated Statement of Income. The net unrealized loss of $656 thousand was comprised of $1.2 million in unrealized losses, offset by $573 thousand of unrealized gains.

   Three Months Ended March 31, 
   2012  2011 

Realized gains (losses) on investments:

   

Debt securities

  $—     $(4,140

Equity securities

   (7,593  8,185  

Derivatives (non-hedging instruments) (1)

   144    (393
  

 

 

  

 

 

 

Total realized (losses) gains on trading portfolio

   (7,449  3,652  

Unrealized gains (losses) on investments:

   

Debt securities

   37    5,519  

Equity securities

   8,989    (3,195

Derivatives (non-hedging instruments) (1)

   147    264  

Other

   14    —    
  

 

 

  

 

 

 

Total unrealized gains on trading portfolio

   9,187    2,588  
  

 

 

  

 

 

 

Net gains recognized on trading securities

  $1,738   $6,240  
  

 

 

  

 

 

 

 

4.(1)ReinsuranceThis table represents the alternative quantitative disclosures permitted for derivatives that are not used as hedging instruments and are included in the trading portfolio.

4. Reinsurance

UPCIC seeks to reduce its risk of loss by reinsuring certain levels of risk in various areas of exposure with other insurance enterprises or reinsurers, generally, as of the beginning of the hurricane season on June 1 of each year. UPCIC’s reinsurance program consists of excess of loss, quota share and catastrophe reinsurance, subject to the terms and conditions of the applicable agreements. UPCIC is responsible for insured losses related to catastrophes and other events in excess of coverage provided by its reinsurance program. UPCIC also remains responsible for the settlement of insured losses notwithstanding the failure of any of its reinsurers to make payments otherwise due to UPCIC.

UPCIC’s in-force policyholder coverage for windstorm exposures as of September 30, 2011,March 31, 2012 was approximately $129.2$127.5 billion.

Amounts recoverable from reinsurers are estimated in a manner consistent with the reinsurance contracts. Reinsurance premiums, losses and loss adjustment expenses (“LAE”) are accounted for on a basis consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. ReinsuranceDeferred ceding commissions received are deferred and netted against policy acquisition costs and amortized over the effective period of the related insurance policies.

The Company’s reinsurance arrangements had the following effect on certain items in the Condensed Consolidated Statements of Income (in thousands):

 

   Three Months Ended September 30, 2011  Three Months Ended September 30, 2010 
   Premiums
Written
  Premiums
Earned
  Loss and Loss
Adjustment
Expenses
  Premiums
Written
  Premiums
Earned
  Loss and Loss
Adjustment
Expenses
 

Direct

  $171,370   $175,858   $59,789   $152,662   $162,093   $59,512  

Ceded

   (123,984  (126,224  (30,446  (108,539  (113,262  (30,142
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net

  $47,386   $49,634   $29,343   $44,123   $48,831   $29,370  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
   Nine Months Ended September 30, 2011  Nine Months Ended September 30, 2010 
   Premiums
Written
  Premiums
Earned
  Loss and Loss
Adjustment
Expenses
  Premiums
Written
  Premiums
Earned
  Loss and Loss
Adjustment
Expenses
 

Direct

  $558,024   $510,579   $166,280   $520,782   $452,848   $156,537  

Ceded

   (393,673  (363,417  (84,900  (357,411  (329,342  (78,680
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net

  $164,351   $147,162   $81,380   $163,371   $123,506   $77,857  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

   Three Months Ended March 31, 2012 
   Premiums
Written
  Premiums
Earned
  Loss and Loss
Adjustment
Expenses
 

Direct

  $190,003   $178,804   $52,607  

Ceded

   (163,434  (130,164  (26,433
  

 

 

  

 

 

  

 

 

 

Net

  $26,569   $48,640   $26,174  
  

 

 

  

 

 

  

 

 

 
   Three Months Ended March 31, 2011 
   Premiums
Written
  Premiums
Earned
  Loss and Loss
Adjustment
Expenses
 

Direct

  $173,175   $164,587   $53,131  

Ceded

   (123,891  (116,583  (26,946
  

 

 

  

 

 

  

 

 

 

Net

  $49,284   $48,004   $26,185  
  

 

 

  

 

 

  

 

 

 

The following prepaid reinsurance premiums and reinsurance recoverables are reflected in the Condensed Consolidated Balance Sheets (in thousands):

 

  As of
September 30,
2011
   As of
December 31,
2010
   As of
March 31, 2012
 As of
December 31, 2011
 

Prepaid reinsurance premiums

  $251,342    $221,086    $276,365   $243,095  
  

 

   

 

   

 

  

 

 

Reinsurance recoverable on unpaid losses and LAE

  $76,659    $79,114    $79,285   $88,002  

Reinsurance recoverable on paid losses

   886     438     (2,236  (2,296
  

 

   

 

   

 

  

 

 

Reinsurance recoverables

  $77,545    $79,552    $77,049   $85,706  
  

 

   

 

   

 

  

 

 

Termination of Agreements With Segregated Account T25

The Company ownsEffective January 1, 2012, the agreement between the Insurance Entities and maintains a segregated account,UIH’s Segregated Account T25 - Universal Insurance Holdings of White Rock Insurance (SAC) Ltd. (“T25”) established by awas replaced at identical limits and retentions as the prior agreement with an unaffiliated third-party reinsurer in accordance with Bermuda law. T25 enters into underlyingas an open market purchase. Effective January 1, 2012 through May 31, 2012, under an excess catastrophe contracts with UPCIC forcontract, the purposeInsurance Entities obtained catastrophe coverage of assuming the risk$140.2 million in excess of certain policies issued by UPCIC,$44.8 million covering certain loss occurrences including hurricanes. The Company secures the obligationstotal cost of T25 to UPCIC under these contracts by contributing the amount of T25’s liability for losses, net of UPCIC’s required premium payments, to a trust account as collateral. The collateral will be used to pay any claims that may arise inthis reinsurance coverage is $4.4 million. In the event of the occurrence of covered events. Transactions relateda non-hurricane loss subject to this arrangement are eliminated in consolidation, however, andcontract, the amount of collateral is held in trust forInsurance Entities will pay to the benefit of UPCIC until the occurrence of a covered event, expiration or terminationreinsurer 20.0% of the agreement between T25 and UPCIC.

On May 31, 2011, T25 and UPCIC mutually agreed to a Commutation and Settlement Agreement relatedultimate net loss ceded to the underlying Property Catastrophe Excessreinsurer arising out of Loss Reinsurance Contract that was effective January 1, 2011. A replacement contract was entered into between the parties on June 1, 2011, as part of UPCIC’s reinsurance program in effect for the period June 1, 2011, through May 31, 2012. In conjunction with entering into the replacement contract, the Company contributed additional funds to T25 due to the increased reinsurance coverage and collateral requirements. The amount of collateral in the trust account at September 30, 2011, was $63.0 million.such non-hurricane loss.

5. Insurance Operations

5.Insurance Operations

The Company’s primary product is homeowners’ insurance currently offered by APPIC in one state (Florida) and by UPCIC in fourfive states, including Florida, which represented 98% of the Insurance Entities’ policies-in-force as of September 30, 2011,March 31, 2012 and December 31, 2010. As2011. Approximately 98% of September 30, 2011the Insurance Entities’ policies-in-force as of March 31, 2012 and December 31, 2010,2011 included coverage for wind. As of March 31, 2012 and December 31, 2011, 30% and 32%, respectively, of the Insurance Entities’ policies-in-force arewith wind coverage were for insured properties located in Miami-Dade, Broward and Palm Beach counties.

Deferred Policy Acquisition Costs

The Company defers commissions and state premium taxes on policies written, called Deferred Policy Acquisition Costs (“DPAC”), net of corresponding amounts of ceded reinsurance commissions, called Deferred Reinsurance Ceding Commissions (“DRCC”). Net DPAC is amortized over the effective period of the related insurance policies. The following table providespresents the beginning and ending balances and the changes in deferred policy acquisition costs (“DPAC”),DPAC, net of deferred ceding commission (“DCC”),DRCC, for the periods presented (in thousands):

   For the Three Months Ended September 30,  For the Nine Months Ended September 30, 
   2011  2010  2011  2010 

DPAC, beginning of period

  $59,129   $58,151   $50,128   $43,971  

Capitalized costs during the period

   30,759    27,742    87,551    78,703  

Amortization of DPAC during the period (1)

   (30,332  (30,112  (78,123  (66,893
  

 

 

  

 

 

  

 

 

  

 

 

 

DPAC, end of period

  $59,556   $55,781   $59,556   $55,781  
  

 

 

  

 

 

  

 

 

  

 

 

 

DCC, beginning of period

  $(47,103 $(44,109 $(40,682 $(34,506

Ceding commissions written during the period

   (21,220  (18,912  (69,109  (64,554

Earned Ceding Commissions during the period

   21,780    20,093    63,248    56,132  
  

 

 

  

 

 

  

 

 

  

 

 

 

DCC, end of period

  $(46,543 $(42,928 $(46,543 $(42,928
  

 

 

  

 

 

  

 

 

  

 

 

 

DPAC (DCC), net, beginning of period

  $12,026   $14,042   $9,446   $9,465  

Capitalized costs, net during the period

   9,539    8,830    18,442    14,149  

Amortization of DPAC (DCC), net during the period (1)

   (8,552  (10,019  (14,875  (10,761
  

 

 

  

 

 

  

 

 

  

 

 

 

DPAC (DCC), net, end of period

  $13,013   $12,853   $13,013   $12,853  
  

 

 

  

 

 

  

 

 

  

 

 

 
   Three Months Ended March 31, 
   2012  2011 

DPAC, beginning of year (1)

  $50,200   $50,128  

Capitalized costs

   26,144    26,285  

Amortization of DPAC

   (24,472  (24,553
  

 

 

  

 

 

 

DPAC, end of period

  $51,872   $51,860  
  

 

 

  

 

 

 

DRCC, beginning of year (1)

  $38,845   $40,682  

Ceding commissions written

   20,506    21,431  

Earned ceding commissions

   (19,277  (20,392
  

 

 

  

 

 

 

DRCC, end of period

  $40,074   $41,721  
  

 

 

  

 

 

 

DPAC (DRCC), net, beginning of year (1)

  $11,355   $9,446  

Capitalized costs, net

   5,638    4,854  

Amortization of DPAC (DRCC), net

   (5,195  (4,161
  

 

 

  

 

 

 

DPAC (DRCC), net, end of period

  $11,798   $10,139  
  

 

 

  

 

 

 

 

(1)Includes amortization of agent commissions of $22.8 million and $23.0 millionThe beginning balances for the three months ended September 30, 2011 and 2010 and $59.5 million and $53.5 million forMarch 31, 2012 have been adjusted in connection with the nine months ended September 30, 2011 and 2010, respectively.adoption of the FASB's updated guidance related to deferred acquisition costs as discussed below.

As discussed in Note 2 – Significant Accounting Policies, the Company prospectively adopted new accounting guidance effective January 1, 2012 related to accounting for costs associated with acquiring or renewing insurance contracts. This guidance resulted in a reduction of our net deferred policy acquisition costs as of December 31, 2011 by 13%, and a corresponding charge of $1.6 million, before taxes of $617 thousand, against earnings during the first quarter of 2012. This charge represents an acceleration of capitalized costs existing at December 31, 2011, which would have been amortized to earnings within a twelve-month period under the old guidance. Approximately $9 million of net costs would have been deferred during the three months ended March 31, 2012 under the old guidance compared to the $5.6 million under the new guidance. Future expenses will be higher with the adoption of this guidance, as the amounts being deferred have decreased, partially offset by less amortization. The effect of this change in future periods on income and per share amounts is not determinable as the historical methodology will have been discontinued after adoption.

Liability for Unpaid Losses and Loss Adjustment Expenses

Set forth in the following table is the change in liability for unpaid losses and LAE for the periods presented (in thousands):

   For the Three Months Ended September 30,   For the Nine Months Ended September 30, 
   2011   2010   2011   2010 

Balance at beginning of period

  $155,375    $128,903    $158,929    $127,198  

Less reinsurance recoverable

   76,307     63,451     79,114     62,901  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net balance at beginning of period

  $79,068    $65,452    $79,815    $64,297  
  

 

 

   

 

 

   

 

 

   

 

 

 

Incurred related to:

        

Current year

  $24,975    $29,063    $76,897    $77,905  

Prior years

   4,368     307     4,483     (48
  

 

 

   

 

 

   

 

 

   

 

 

 

Total incurred

  $29,343    $29,370    $81,380    $77,857  
  

 

 

   

 

 

   

 

 

   

 

 

 

Paid related to:

        

Current year

  $15,244    $17,091    $30,119    $34,614  

Prior years

   9,587     8,095     47,496     37,903  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total paid

  $24,831    $25,186    $77,615    $72,517  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net balance at end of period

   83,580     69,636     83,580     69,636  

Plus reinsurance recoverable

   79,374     67,221     79,374     67,221  
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

  $162,954    $136,857    $162,954    $136,857  
  

 

 

   

 

 

   

 

 

   

 

 

 

As a result of changes in estimates of insured events in prior years, the provision of losses and LAE, net of related reinsurance recoverables increased principally as a result of actual loss development on prior year non-catastrophe losses. The Company has created a proprietary claims analysis tool (P2P) to analyze and calculate reserves. P2P is a custom built application by UPCIC that aggregates, analyzes and forecasts reserves based on historical data that spans more than a decade. It identifies historical claims data using the same “like kind and quality” variables that exist in present claims and sets forth appropriate, more accurate reserves on current claims. P2P is reviewed by UPCIC management on a weekly basis in reviewing the topography of existing and incoming claims. P2P will be analyzed at each quarter’s end and adjustments to reserves are made at an aggregate level when appropriate.

   Three Months Ended
March 31,
 
   2012  2011 

Balance at beginning of period

  $187,215   $158,929  

Less reinsurance recoverable

   88,002    79,114  
  

 

 

  

 

 

 

Net balance at beginning of period

   99,213    79,815  
  

 

 

  

 

 

 

Incurred related to:

   

Current year

   26,350    26,335  

Prior years

   (176  (150
  

 

 

  

 

 

 

Total incurred

   26,174    26,185  
  

 

 

  

 

 

 

Paid related to:

   

Current year

   953    2,059  

Prior years

   31,419    24,302  
  

 

 

  

 

 

 

Total paid

   32,372    26,361  
  

 

 

  

 

 

 

Net balance at end of period

   93,015    79,639  

Plus reinsurance recoverables

   79,285    78,611  
  

 

 

  

 

 

 

Balance at end of period

  $172,300   $158,250  
  

 

 

  

 

 

 

Regulatory Requirements

The Company’s regulated subsidiaries, UPCIC and American Platinum Property and Casualty Insurance Company (“APPCIC”),Entities are subject to regulations and standards of the Florida Office of Insurance Regulation (“OIR”). TheseUPCIC is also subject to the laws of other states in which it operates. The OIR standards require the subsidiariesInsurance Entities to maintain specified levels of statutory capital and restrict the timing and amount of dividends and other distributions that may be paid to the parent company. Except in the case of extraordinary dividends, these standards generally permit dividendsthe Insurance Entities to be paidpay dividends from statutory unassigned surplus of the regulated subsidiary andsurplus. The dividends are limited based on the regulated subsidiary’sInsurance Entities’ level of statutory net income and statutory capital and surplus. These dividends are referred to as “ordinary dividends” and generally can be paid without prior regulatory approval. If the dividend, together with other dividends paid within the preceding twelve months, exceeds a specified statutory limit or is paid from sources other than earned surplus, the entire dividend is generally considered an “extraordinary dividend” and must receive prior regulatory approval.

In 2011, basedBased on the 20102011 statutory net income and statutory capital and surplus levels, UPCIC and APPCIC do not have the maximum amount ofcapacity to pay ordinary dividends which could be paid is $2.5 million from UPCIC and $1.2 million from APPCIC.during 2012. For the ninethree months ended September 30, 2011,March 31, 2012, no dividends were paid from UPCIC or APPCIC to theirthe parent company.

The Florida Insurance Code requires companies to maintain capitalization equivalent to the greater of ten percent of the insurer’s total liabilities or $5.0 million. Ten percentThe following table presents the amount of UPCIC’s total liabilities were $42.9 million and $32.9 million at September 30, 2011, and December 31, 2010, respectively. Ten percent of APPCIC’s total liabilities were $64 thousand and $83 thousand at September 30, 2011 and December 31, 2010, respectively. UPCIC’s statutory capital and surplus, was $95.6 million and $115.9 million at September 30, 2011,an amount representing ten percent of total liabilities for both UPCIC and December 31, 2010, respectively. APPCIC’s statutory capital and surplus was $9.4 million and $11.3 million at September 30, 2011, and December 31, 2010, respectively. APPCIC as of the periods presented (in thousands):

   As of
March 31,
2012
   As of
December 31,
2011
 

Ten percent of total liabilities

    

UPCIC

  $39,039    $37,063  

APPCIC

  $141    $97  

At such dates, both UPCIC and APPCIC met the Florida capitalization requirement. UPCIC and APPCIC are also required to adhere to prescribed premium-to-capital surplus ratioratios and have met those requirements at such dates.

Through Universal Insurance Holdings Company of Florida, UPCIC’s parent company, UIH made capital contributions of $5.0 million and $12.0 million to UPCIC in June 2011, and September 2011, respectively.

6.

6. Share-Based Compensation

Stock Options

The Company recognized stock-based compensation expense as follows (in thousands):

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2011   2010   2011   2010 

Compensation expense:

        

Stock options

  $501    $314    $957    $1,767  

Non-vested shares

   468     234     931     690  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $969    $548    $1,888    $2,457  
  

 

 

   

 

 

   

 

 

   

 

 

 

Deferred tax benefits:

        

Stock options

  $193    $121    $369    $682  

Non-vested shares

   —       90     —       266  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $193    $211    $369    $948  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total unrecognized compensation expense related to stock options was $2.1 million at September 30, 2011, to be recognized over a weighted-average period of approximately 1.6 years. Total unrecognized compensation expense related to non-vested shares of Company common stock was $1.4 million at September 30, 2011, to be recognized over a weighted-average period of approximately 1 year.

The following table providespresents certain information related to stock options and non-vested shares (in thousands, except per share data):

   Three Months Ended March 31, 2012 
    Stock Options   Non-vested Shares 
   Number of
Shares
  Weighted
Average
Exercise
Price
   Aggregate
Intrinsic
Value
   Weighted
Average
Remaining
Term
   Number of
Shares
  Weighted
Average
Grant Date
Fair Value
 

Outstanding as of December 31, 2011

   6,720   $4.78         801   $5.67  

Granted

   —      —           —      —    

Forfeited

   —      —           —      —    

Exercised (1)

   (35  2.60         —      —    

Vested

   —      —           (299  5.69  

Expired

   —      —           —      —    
  

 

 

  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

Outstanding as of March 31, 2012 (2)

   6,685   $4.79    $1,264     2.6     502   $5.66  
  

 

 

  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

Exercisable as of March 31, 2012

   5,613   $4.81    $1,264     1.9     
  

 

 

  

 

 

   

 

 

   

 

 

    

(1)Unless otherwise specified, such as in the case of the exercise of stock options, the per share prices were determined using the closing price of the Company’s Common Stock as quoted on the NYSE Amex Equities. Shares issued upon exercise of options represent original issuances in private transactions pursuant to Section 4(2) of the Securities Act of 1933, as amended.
(2)All shares outstanding as of March 31, 2012 are expected to vest.

   Three Months Ended September 30, 2011 
   Stock Options   Non-vested Shares 
   Number of
Shares
   Weighted
Average
Exercise
Price
   Aggregate
Intrinsic
Value
   Weighted
Average
Remaining
Term
   Number of
Shares
  Weighted
Average
Grant Date
Fair Value
 

Outstanding as of June 30, 2011

   6,880    $4.68         801   $5.67  

Granted

   —       —           —      —    

Forfeited

   —       —           —      —    

Exercised

   —       —           —      —    

Vested

   —       —           —      —    

Expired

   —       —           —      —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

Outstanding as of September 30, 2011

   6,880    $4.68    $1,797     3.0     801   $5.67  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

Exercisable as of September 30, 2011

   5,285    $4.66    $1,797     2.0     
  

 

 

   

 

 

   

 

 

   

 

 

    
   Nine Months Ended September 30, 2011 
   Stock Options   Non-vested Shares 
   Number of
Shares
   Weighted
Average
Exercise
Price
   Aggregate
Intrinsic
Value
   Weighted
Average
Remaining
Term
   Number of
Shares
  Weighted
Average
Grant Date
Fair Value
 

Outstanding as of December 31, 2010

   5,385    $4.68         300   $5.84  

Granted

   1,495     4.70         600    5.61  

Forfeited

   —       —           —      —    

Exercised

   —       —           —      —    

Vested

   —       —           (99  5.84  

Expired

   —       —           —      —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

Outstanding as of September 30, 2011

   6,880    $4.68    $1,797     3.0     801   $5.67  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

Exercisable as of September 30, 2011

   5,285    $4.66    $1,797     2.0     
  

 

 

   

 

 

   

 

 

   

 

 

    

On June 23, 2011, the Company granted options to purchase an aggregate of 1,495 thousand shares of common stock toThe following table presents certain information regarding the Company’s directors (225 thousand shares), executive officers (675 thousand shares) and management (595 thousand shares). Options granted to directors vest in full onstock-based compensation for the earlierperiods presented (in thousands):

   Three Months Ended March 31, 
   2012  2011 

Compensation expense:

   

Stock options

  $337   $254  

Restricted stock

   675    144  
  

 

 

  

 

 

 

Total

  $1,012   $398  
  

 

 

  

 

 

 

Deferred tax benefits:

   

Stock options

  $130   $98  

Restricted stock

   204    —    
  

 

 

  

 

 

 

Total

  $334   $98  
  

 

 

  

 

 

 

Realized tax benefits:

   

Stock options

  $14   $—    

Restricted stock

   291    —    
  

 

 

  

 

 

 

Total

  $305   $—    
  

 

 

  

 

 

 

Excess tax benefits(shortfall):

   

Stock options

  $—     $—    

Restricted stock

   (142  —    
  

 

 

  

 

 

 

Total

  $(142 $—    
  

 

 

  

 

 

 

Weighted avg grant date fair value for grants:

   

Stock options

  $—     $—    

Restricted stock

   —      —    
  

 

 

  

 

 

 

Total

  $—     $—    
  

 

 

  

 

 

 

Intrinsic value of options exercised

  $35   $—    

Fair value of restricted stock vested

  $1,164   $540  

Cash received for strike price and tax withholdings

  $518   $199  

The following table presents the amount of (i) the first anniversaryunrecognized compensation expense as of the most recent balance sheet date of grant, and (ii) the first annual meeting of the Company’s shareholders, following the date of grant, atweighted average period over which the shareholders elect or reelect any directors to the Board. Options granted to executive officersthose expenses will be recorded for both stock options and management vest as follows: (i) one third on the six (6) month anniversary of the date of grant, (ii) one third on the one (1) year anniversary of the date of grant, and (iii) one third on the two (2) year anniversary of the date of grant. The options have an exercise price of $4.70 per share and expire on June 23, 2016 for directors and June 23, 2018 for executive officers and management.restricted stock (dollars in thousands):

Effective May 11, 2011, the Company issued 600 thousand shares of performance-based restricted common stock at a price of $5.61 per share to its Senior Vice President and Chief Operating Officer. Shares of 200 thousand vest on each of the first, second and third anniversary of the grant date which is March 28, 2011.

   As of March 31, 2012 
   Stock
Options
   Restricted
Stock
 

Unrecognized expense

  $1,273    $2,513  

Weighted average remaining years

   1.18     1.41  

7. Stockholders’ Equity

7.Stockholders’ Equity

Dividends

On January 6, 2011,February 23, 2012, the Company declared a dividend of $0.10 per share on its outstanding common stockstock. The dividend was paid on April 7, 2011,6, 2012 to the Company’s shareholders of record at the close of business on March 11, 2011.28, 2012.

On August 15, 2011, the Company declared a dividend of $0.08 per share on its outstanding common stock paid on October 6, 2011, to the Company’s shareholders of record at the close of business on September 16, 2011.

8. Related Party Transactions

8.Related Party Transactions

Downes and Associates, a multi-line insurance adjustment corporation based in Deerfield Beach, Florida performs certain claims adjusting work for UPCIC. Downes and Associates is owned by Dennis Downes, who is the father of Sean P. Downes, Senior Vice President and Chief Operating Officer of the Company.

The following table presents payments made by the Company expensed claims adjusting feesto Downes and Associates for the periods presented (in thousands):

   Three Months Ended 
   March 31, 
   2012   2011 

Claims adjusting fees

  $130    $260  

There were no amounts due to Downes and Associates as follows (in thousands):of March 31, 2012 and December 31, 2011.

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2011   2010   2011   2010 

Claims adjusting fees

  $91    $120    $521    $360  

9. Income Taxes

Deferred income taxes represent the temporary differences between the GAAP and tax basis of the Company’s assets and liabilities. The tax effects of temporary differences are as follows for the periods presented (in thousands):

   As of March 31,  As of December 31, 
   2012  2011 

Deferred income tax assets:

   

Unearned premiums

  $7,305   $9,007  

Advance premiums

   2,345    1,451  

Unpaid losses

   2,977    3,139  

Stock option expense

   4,142    4,026  

Accrued wages

   993    958  

Allowance for uncollectible receivables

   236    276  

Additional tax basis of securities

   995    2,407  

Restricted stock grant

   86    315  

Unrealized losses on investments

   2,881    6,425  
  

 

 

  

 

 

 

Total deferred income tax assets

   21,960    28,004  
  

 

 

  

 

 

 

Deferred income tax liabilities:

   

Deferred policy acquisition costs, net

   (4,551  (5,013
  

 

 

  

 

 

 

Total deferred income tax liabilities

   (4,551  (5,013
  

 

 

  

 

 

 

Net deferred income tax asset

  $17,409   $22,991  
  

 

 

  

 

 

 

   As of September 30,  As of December 31, 
   2011  2010 

Deferred income tax assets:

   

Unearned premiums

  $9,600   $8,274  

Advanced premiums

   1,620    1,460  

Unpaid losses

   2,379    2,194  

Regulatory assessments

   —      182  

Executive compensation

   1,211    1,312  

Stock option expense

   3,836    3,467  

Accrued wages

   906    357  

Allowance for uncollectible receivables

   60    43  

Additional tax basis of securities

   1,106    172  

Recognition of OTTI

   —      307  

Market value losses on trading securities

   8,422    —    
  

 

 

  

 

 

 

Total deferred income tax assets

   29,140    17,768  
  

 

 

  

 

 

 

Deferred income tax liabilities:

   

Deferred policy acquisition costs, net

   (5,020  (3,644

Market value gains on trading securities

   —      (676
  

 

 

  

 

 

 

Total deferred income tax liabilities

   (5,020  (4,320
  

 

 

  

 

 

 

Net deferred income tax asset

  $24,120   $13,448  
  

 

 

  

 

 

 
A valuation allowance is deemed unnecessary as of March 31, 2012 and December 31, 2011, because management believes it is probable that the Company will generate taxable income sufficient to realize the tax benefits associated with the net deferred income tax asset shown above in the near future.

Tax years that remain open for purposes of examination of the Company’s income tax liability due to taxby taxing authorities include the years ended December 31, 2010, 2009 and 2008. The Company’s 2009 consolidated federal income tax return is currently under examination by the Internal Revenue Service.

The following table reconciles the statutory federal income tax rate to the Company’s effective tax rate:rate for the periods presented:

 

  Three Months Ended
September 30,
 Nine Months Ended
September 30,
   Three Months Ended
March 31,
 
  2011 2010 2011 2010   2012 2011 

Statutory federal income tax rate

   35.0  35.0  35.0  35.0   35.0  35.0

Increases resulting from:

        

Disallowed meals & entertainment

   1.3  0.1  0.1  0.3   0.3  0.1

Disallowed compensation

   25.4  0.4  2.0  0.5   0.3  0.6

True-up to prior year tax returns

   -43.2  —      -1.3  —    

State income tax, net of federal tax benefit (1)

   3.6  3.6  3.6  3.6   3.6  3.6

Other, net

   -0.5  -0.5  0.6  -0.6   0.0  0.5
  

 

  

 

  

 

  

 

   

 

  

 

 

Effective tax rate

   21.6  38.6  40.0  38.8   39.2  39.8
  

 

  

 

  

 

  

 

   

 

  

 

 

 

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

10. Earnings Per Share

10.Earnings Per Share

Basic earnings per share (“EPS”) is based on the weighted average number of shares outstanding for the period, excluding any dilutive common share equivalents. Diluted EPS reflects the potential dilution that could occur if securities to issue common stock were exercised.exercised or restricted stock vests.

The following tables reconciletable reconciles the numerator (i.e., income) and denominator (i.e., shares) of the basic and diluted earnings per share computations for net income for the three and nine-month periods ended September 30, 2011, and 2010presented (in thousands, except per share data):

 

  Three Months Ended
September 30,
 Nine Months Ended
September 30,
   Three Months Ended
March 31,
 
  2011 2010 2011 2010   2012 2011 

Numerator for EPS:

        

Net income

  $975   $13,077   $22,422   $30,788    $9,873   $13,898  

Less: Preferred stock dividends

   (5  (5  (15  (15   (254  (5
  

 

  

 

  

 

  

 

   

 

  

 

 

Income available to common stockholders

  $970   $13,072   $22,407   $30,773    $9,619   $13,893  

Denominator for EPS:

        

Weighted average common shares outstanding

   39,190    39,167    39,177    39,076     39,388    39,388  

Plus: Assumed conversion of stock-based compensation

   651    949    871    1,150  

Assumed conversion of preferred stock

   489    160    489    160  

Plus: Assumed conversion of stock-based compensation (1)

   668    962  

Assumed conversion of preferred stock (2)

   488    488  
  

 

  

 

  

 

  

 

   

 

  

 

 

Weighted average diluted common shares outstanding

   40,330    40,276    40,536    40,386     40,544    40,838  

Basic earnings per common share

  $0.02   $0.33   $0.57   $0.78    $0.24   $0.35  

Diluted earnings per common share

  $0.02   $0.32   $0.55   $0.76    $0.24   $0.34  

 

11.(1)Other Comprehensive IncomeRepresents the dilutive effect of unvested restricted stock and unexercised stock options.

The components of other comprehensive income on a pre-tax and after-tax basis are as follows (in thousands):

   For the Three Months
Ended September 30, 2011
   

For the Three Months

Ended September 30, 2010

 
   Pretax   Tax   After-tax   Pretax  Tax  After-tax 

Net unrealized gains on available-for-sale investments arising during the periods

  $—      $—      $—      $—     $—     $—    

Less: realized gains on investments

   —       —       —       —      —      —    

Less: reclassification of unrealized losses relating to the reclassification of investment portfolio to trading from available-for-sale

   —       —       —       (656  253    (403

Less: realized foreign currency gains on investments

   —       —       —       —      —      —    

Less: other

   —       —       —       (9  3    (6
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

Change in net unrealized gains on available-for-sale investments

   —       —       —       (665  257    (408
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

Other comprehensive (loss) income

  $—      $—      $—      $(665 $257   $(408
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 
   

For the Nine Months

Ended September 30, 2011

   

For the Nine Months

Ended September 30, 2010

 
   Pretax   Tax   After-tax   Pretax  Tax  After-tax 

Net unrealized gains on available-for-sale investments arising during the periods

  $—      $—      $—      $4,979   $(1,921 $3,058  

Less: realized gains on investments

   —       —       —       5,744    (2,216  3,528  

Less: reclassification of unrealized losses relating to the reclassification of investment portfolio to trading from available-for-sale

   —       —       —       (656  253    (403

Less: realized foreign currency gains on investments

   —       —       —       809    (312  497  

Less: other

   —       —       —       (9  3    (6
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

Change in net unrealized gains on available-for-sale investments

   —       —       —       (909  351    (558
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

Other comprehensive (loss) income

  $—      $—      $—      $(909 $351   $(558
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

There were no amounts of other comprehensive income for the three and nine month periods ended September 30, 2011.

 

12.(2)Commitments and ContingenciesThe assumed conversion of preferred stock for the three months ended March 31, 2011 has been corrected to reflect the conversion factor of 1 to 5 for Series M Preferred Stock. A conversion factor of 1 to 1. 25 was incorrectly used to calculate the assumed conversion of Series M Preferred Stock as presented in the Company's Form 10-Q for the three months ended March 31, 2011. This error resulted in an understatement of the assumed conversion of preferred stock for purposes of calculating the average diluted shares outstanding resulting in an overstatement of diluted earnings per share of an amount less than $0.01.

11. Commitments and Contingencies

Employment Agreements

The Company has employment agreements with certain employees which are in effect as of September 30, 2011.March 31, 2012. The agreements provide for minimum salaries, which may be subject to annual percentage increases, and non-equity incentive compensation for certain executives based on pre-tax, or net income levels attained by the Company. The agreements also provide for payments contingent upon the occurrence of certain events.

The following table providespresents the amount of commitments and estimated contingent payments the Company is obligated to pay in the form of salaries and non-equity incentive compensation under thesethe agreements with named executive officers (in thousands):

   As of September 30, 2011 
   Salaries   Non-equity
incentive
compensation
 

Commitments

  $15,282    $11,836  

Contingent payments upon certain events:

    

Termination

  $6,291    $5,302  

Change in control

  $14,316    $9,354  

Death

  $8,046    $8,003  

Disability

  $4,938    $2,582  

Operating Leases

The Company has leases for certain computer equipment, software and office space. The Company reported in its Annual Report on Form 10-K for the year ended December 31, 2010, a schedule of future minimum rental payments required under the non-cancelable operating leases.

   As of March 31, 2012 
   Salaries   Non-equity
incentive
compensation
   Equity
compensation
 

Commitments

  $8,221    $4,397     —    

Contingent payments upon certain events:

      

Termination

  $4,449    $2,823     —    

Change in control

  $13,634    $5,016    $319  

Death

  $6,249    $3,571     —    

Disability

  $4,036    $2,277     —    

Litigation

Certain lawsuits have been filed against the Company. These lawsuits involve matters that are routine litigation incidental to the claims aspect of the Company’s business for which estimated losses are included in Unpaid Losses and Loss Adjustment Expenses in the Company’s Condensed Consolidated Financial Statements. In the opinion of management, these lawsuits are not material individually or in the aggregate to the Company’s financial position or results of operations. Accruals made or assessments of materiality of disclosure related to probable or possible losses do not consider any anticipated insurance proceeds.

12. Fair Value Measurements

13.Fair Value Measurements

GAAP defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. GAAP describes three approaches to measuring the fair value of assets and liabilities: the market approach, the income approach and the cost approach. Each approach includes multiple valuation techniques. GAAP does not prescribe which valuation technique should be used when measuring fair value, but does establish a fair value hierarchy that prioritizes the inputs used in applying the various techniques. Inputs broadly refer to the assumptions that market participants use to make pricing decisions, including assumptions about risk. Level 1inputs are given the highest priority in the hierarchy while Level 3 inputs are given the lowest priority. Assets and liabilities carried at fair value are classified in one of the following three categories based on the nature of the inputs to the valuation technique used:

 

Level 1 — 1—Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities in active markets as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.

 

Level 2 — 2—Observable market-based inputs or unobservable inputs that are corroborated by market data.

 

Level 3 — 3—Unobservable inputs that are not corroborated by market data. These inputs reflect management’s best estimate of fair value using its own assumptions about the assumptions a market participant would use in pricing the asset or liability.

Summary of significant valuation techniques for assets measured at fair value on a recurring basis

Level 1

Cash and cash equivalents: CompriseCash equivalents comprise actively traded money market funds that have daily quoted net asset values for identical assets that the Company can access. The carrying value of cash and cash equivalents approximates fair value due to its liquid nature.

U.S. government obligations and agencies:Comprise U.S. Treasury Bills or Notes. Valuation is based on unadjusted quoted prices for identical assets in active markets that the Company can access.

Foreign government bonds:Comprise actively traded fixed-rate bonds of foreign governments rated AAA. Valuation is based on unadjusted quoted prices for identical assets in active markets that the Company can access.

Common stock:Comprise actively traded, exchange-listed U.S. and international equity securities. Valuation is based on unadjusted quoted prices for identical assets in active markets that the Company can access.

Exchange tradedExchange-traded and mutual funds:Comprise actively traded funds. Valuation is based on daily quoted net asset values for identical assets in active markets that the Company can access.

Other investments:Currently comprise physical metal positions held by the Company.Valuation is based on unadjusted quoted prices for identical assets in active markets that the Company can access.

Level 2

U.S. government obligations and agencies:Comprise U.S. Treasury Bills or Notes or U.S. Treasury Inflation Protected Securities (TIPS). The primary inputs to the valuation include quoted prices for identical assets in inactive markets or similar assets in active or inactive markets, contractual cash flows, benchmark yields and credit spreads.

Derivatives: The primary inputs to the valuation include quoted prices or quoted net asset values for identical or similar assets in markets that are not active or highly active.

As required by GAAP, assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect their placement within the fair value hierarchy levels.

The following tables set forth by level within the fair value hierarchy the Company’s assets that were accounted for at fair value on a recurring basis as of September 30, 2011 and December 31, 2010the periods presented (in thousands):

   Fair Value Measurements
As of March 31, 2012
 
   Level 1   Level 2   Level 3   Total 

Cash and cash equivalents

  $325,968    $—      $—      $325,968  

Restricted cash and cash equivalents

   48,178     —       —       48,178  

Trading portfolio:

        

Debt securities:

        

U.S. government securities obligations and agencies

   —       3,800     —       3,800  

Equity securities:

        

Common stock:

        

Metals and mining

   34,460     —       —       34,460  

Energy

   7,203     —       —       7,203  

Other

   2,145     —       —       2,145  

Exchange-traded and mutual funds:

        

Metals and mining

   15,174     —       —       15,174  

Agriculture

   19,811     —       —       19,811  

Indices

   18,203     —       —       18,203  

Derivatives (non-hedging)

   —       60     —       60  

Other investments

   385     —       —       385  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total trading portfolio investments

   97,381     3,860     —       101,241  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investments

  $471,527    $3,860    $—      $475,387  
  

 

 

   

 

 

   

 

 

   

 

 

 
  Fair Value Measurements
As of September 30, 2011
   Fair Value Measurements
As of December 31, 2011
 
  Level 1   Level 2   Level 3   Total   Level 1   Level 2   Level 3   Total 

Cash equivalents

  $326,276    $—      $—      $326,276  

Cash and cash equivalents

  $229,685    $—      $—      $229,685  

Restricted cash and cash equivalents

   78,312     —       —       78,312  

Trading portfolio:

                

Debt securities:

                

U.S. government securities obligations and agencies

   175     3,536     —       3,711     174     3,627     —       3,801  

Foreign government bonds

   54,352     —       —       54,352  

Equity securities:

                

Common stock:

                

Metals and mining

   30,829     —       —       30,829     38,816     —       —       38,816  

Energy

   4,999     —       —       4,999  

Other

   16,173     —       —       16,173     6,927     18     —       6,945  

Exchange-traded and mutual funds:

                

Metals and mining

   23,295     —       —       23,295     25,997     —       —       25,997  

Agriculture

   15,411     —       —       15,411     16,878     —       —       16,878  

Energy

   8,333     —       —       8,333  

Indices

   1,372     —       —       1,372     1,710     —       —       1,710  

Derivatives:

        

Non-hedging instruments

   —       1,545     —       1,545  

Derivatives (non-hedging)

   —       123     —       123  

Other investments

   366     —       —       366     371     —       —       371  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total trading portfolio investments

   150,306     5,081     —       155,387     95,872     3,768     —       99,640  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total investments

  $476,582    $5,081    $—      $481,663    $403,869    $3,768    $—      $407,637  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 
  Fair Value Measurements
As of December 31, 2010
 
  Level 1   Level 2   Level 3   Total 

Cash equivalents

  $145,121    $—      $—      $145,121  

Trading portfolio:

        

Debt securities:

        

U.S. government securities obligations and agencies

   179     129,937     —       130,116  

Equity securities:

        

Common stock:

        

Metals and mining

   25,752     —       —       25,752  

Other

   362     —       —       362  

Exchange-traded and mutual funds:

        

Metals and mining

   42,209     —       —       42,209  

Agriculture

   14,877     —       —       14,877  

Energy

   5,559     —       —       5,559  

Indices

   4,613     —       —       4,613  

Other

   1,044     —       —       1,044  

Derivatives:

        

Non-hedging instruments

   —       182     —       182  
  

 

   

 

   

 

   

 

 

Total trading portfolio investments

   94,595     130,119     —       224,714  
  

 

   

 

   

 

   

 

 

Total investments

  $239,716    $130,119    $—      $369,835  
  

 

   

 

   

 

   

 

 

The Company utilizes third-party independent pricing services that provide a price quote for each debt security, equity security and derivatives. Management reviews the methodology used by the pricing services. If management believes that the price used by the pricing service does not reflect an orderly transaction between participants, management will use an alternative valuation methodology. There were no adjustments made by the Company to the prices obtained from the independent pricing source for any debt securities, equity securities or derivatives included in the tables above.

The Company did not have any transfers between Level 1 and Level 2 for the nine-monththree-month periods ended September 30,March 31, 2012 and 2011 and 2010.

The following table summarizes the carrying value net unrealized gains (losses) and estimated fair values of the Company’s financial instruments that are not carried at fair value (in thousands):

 

  As of September 30, 2011
Fair Value Measurements
 
  Carrying
value
   Net unrealized
Gains/(Losses)
 Estimated Fair
Value
 

Assets:

     

Cash

  $2,562    $—     $2,562  
  

 

   

 

  

 

 
  $2,562    $—     $2,562    As of March 31, 2012 
  

 

   

 

  

 

   Carrying value   (Level 3)
Estimated Fair
Value
 

Liabilities:

         

Long-term debt

  $22,059    $(4,481 $17,578    $21,324    $18,602  
  

 

   

 

  

 

 
  $22,059    $(4,481 $17,578    As of December 31, 2011 
  

 

   

 

  

 

   Carrying value   (Level 3)
Estimated Fair
Value
 
  As of December 31, 2010
Fair Value Measurements
 
  Carrying
value
   Net unrealized
Gains/(Losses)
 Estimated Fair
Value
 

Assets:

     

Cash

  $2,464    $—     $2,464  
  

 

   

 

  

 

 
  $2,464    $—     $2,464  
  

 

   

 

  

 

 

Liabilities:

         

Long-term debt

  $23,162    $(4,063 $19,099    $21,691    $18,775  
  

 

   

 

  

 

 
  $23,162    $(4,063 $19,099  
  

 

   

 

  

 

 

The carrying value of cash approximates fair value due to its liquid nature.Level 3

Long-term debt:The carrying value of long-term debt was determined by management from the expected cash flows discounted using the interest rate quoted by the issuer of the note, the State Board of Administration of Florida (“SBA”) which is below prevailing rates quoted by private lending institutions. However, as the Company’s use of funds from the surplus note is limited by the terms of the agreement, the Company has determined the interest rate quoted by the SBA to be appropriate for purposes of establishing the fair value of the note.

13. Subsequent Events

14.Subsequent Events

The Company performed an evaluation of subsequent events through the date the Financial Statements were issued and determined there were no recognized or unrecognized subsequent events that would require an adjustment or additional disclosure in the Financial Statements as of September 30, 2011March 31, 2012, except the following.

In consultation withOn April 23, 2012, the OIR, UPCIC has offered to segregate fromCompany declared a dividend of $0.08 per share on its general operating funds an amount equivalent to its anticipated future reinsurance premiums under the arrangement with T25 and UPCIC described in Note 4 “Reinsurance.” On October 28, 2011, UPCIC remitted $45.5 million as a deposit with the Florida Department of Financial Services. Accordingoutstanding common stock, payable on July 9, 2012, to the termsCompany’s shareholders of record at the reinsurance contract, UPCIC will pay approximately halfclose of the deposited amount to T25business on or about January 1, 2012 and the remaining amount on or about April 1,June 26, 2012. Alternatively, UPCIC anticipates that it will propose to commute the existing contract in December 2011. The commutation would result in the entire deposit being returned to UPCIC in December or being used to support a replacement contract.

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

Unless the context otherwise requires, all references to “we,” “us,” “our,” and “Company” refer to Universal Insurance Holdings, Inc. and its subsidiaries. You should read the following discussion together with our unaudited condensed consolidated financial statements and the related notes thereto included in Part I, Item 1 “Financial1”Financial Statements.” Operating results for any one quarter are not necessarily indicative of results to be expected for any other quarter or for the year.

Forward-Looking Statements

In addition to historical information, the following discussion may contain “forward-looking statements” within the meaning of the Private Securities Reform Litigation Act of 1995. The words “expect,” “estimate,” “anticipate,” “believe,” “intend,” “project,” “plan” and similar expressions and variations thereof-,thereof, speak only as of the date the statement was made and are intended to identify forward-looking statements. Forward-looking statements are based on various factors and assumptions that include known and unknown risks and uncertainties. Such statements may include, but not be limited to, projections of revenues, income or loss, expenses, plans, as well as assumptions relating to the foregoing.

Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. Future results could differ materially from those in the following discussion and those described in forward-looking statements as a result of the risks set forth below.

Risk Factors Summary

We operate in a rapidly changing environment that involves a number of uncertainties, some of which are beyond our control. Certain statements made in this report that reflect management’s expectations regarding future events are forward-looking in nature and, accordingly are subject to risks and uncertainties. These forward-looking statements are only current expectations about future events. Actual results could differ materially from those set forth in or implied by any forward-looking statement. Factors that could cause or contribute to such differences include, but are not limited to, risk factors set forth in filings with the Securities and Exchange Commission, including our annual and quarterly reports. The following is a summary of uncertainties which were disclosed in greater detail in “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2011:

Risks Relating to the Property-Casualty business

As a property and casualty insurer, we may face significant losses from catastrophes and severe weather events

Unanticipated increases in the section below entitled “Cautionary Note Regarding Forward-Looking Statements.”severity or frequency of claims may adversely affect our profitability and financial condition

Actual claims incurred may exceed current reserves established for claims and may adversely affect our operating results and financial condition

Predicting claim expense relating to environmental liabilities is inherently uncertain and may have a material adverse effect on our operating results and financial condition

The failure of the risk mitigation strategies we utilize could have a material adverse effect on our financial condition or results of operations

Reinsurance may be unavailable at current levels and prices, which may limit our ability to write new business

Regulation limiting rate increases and requiring us to participate in loss sharing may decrease our profitability

The potential benefits of implementing our profitability model may not be fully realized

Our financial condition and operating results and the financial condition and operating results of the Insurance Entities may be adversely affected by the cyclical nature of the property and casualty business

Continued weakness in the Florida real estate market could adversely affect our loss results

Risks Relating to Investments

We have periodically experienced, and may experience further reductions in returns or losses on our investments especially during periods of heightened volatility, which could have a material adverse effect on our results of operations or financial condition

We are subject to market risk which may adversely impact investment income

Concentration of our investment portfolios in any particular segment of the economy may have adverse effects on our operating results and financial condition

Our overall financial performance is significantly dependent on the returns on our investment portfolio, which may have a material adverse effect on our results of operations or cause such results to be volatile

Risks Relating to the Insurance Industry and Other Factors

Our future results are dependent in part on our ability to successfully operate in an insurance industry that is highly competitive

Difficult conditions in the economy generally could adversely affect our business and operating results

There can be no assurance that actions of the U.S. federal government, Federal Reserve and other governmental and regulatory bodies for the purpose of stabilizing the financial markets and stimulating the economy will achieve the intended effect

We are subject to extensive regulation and potential further restrictive regulation may increase our operating costs and limit our growth

Reinsurance subjects us to the credit risk of our reinsurers and may not be adequate to protect us against losses arising from ceded risks, which could have a material adverse effect on our operating results and financial condition

The continued threat of terrorism and ongoing military actions may adversely affect the level of claim losses we incur and the value of our investment portfolio

A downgrade in our Financial Stability Rating® may have an adverse effect on our competitive position, the marketability of our product offerings, and our liquidity, operating results and financial condition

Adverse capital and credit market conditions may significantly affect our ability to meet liquidity needs or our ability to obtain credit on acceptable terms

Changing climate conditions may adversely affect our financial condition, profitability or cash flows

Loss of key executives could affect our operations

Overview

Universal Insurance Holdings, Inc. (“UIH”) is a vertically integrated insurance holding company performing all aspects of insurance underwriting, distribution and claims. Through our wholly-owned subsidiaries, including Universal Property & Casualty Insurance Company (“UPCIC”) and American Platinum Property and Casualty Insurance Company (“APPCIC”), collectively referred to as the (“Insurance Entities”), we are principally engaged in the property and casualty insurance business offered primarily through a network of independent agents. Our primary product is homeowners’ insurance currently offered in fourfive states, including the State of Florida, which represented 98% of the 595 thousand policies-in-force as of September 30, 2011, and 98% of the 584 thousand policies-in-force as of March 31, 2012, and 98% of the 593 thousand policies-in-force as of December 31, 2010.2011. As for the geographic distribution of business within Florida as of September 30, 2011,March 31, 2012, and December 31, 2010,2011, 30% and 32%, respectively, of the policies-in-force are in Miami-Dade, Broward and Palm Beach Counties. Risk from catastrophic losses is managed through the use of reinsurance agreements.

We generate revenues primarily from the collection of premiums and the investment of funds in excess of those premiums.retained for claims-paying obligations and insurance operations. Other significant sources of revenue include commissions collected from reinsurers and policy fees.

20112012 Developments

On October 28, 2011,January 11, 2012, we announced that UPCIC remitted $45.5 million as a deposit with the Florida Department of Financial Services. In consultation with the Florida Office of Insurance Regulation (“OIR”), UPCIC has offered to segregate from its general operating funds an amount equivalent to its anticipated future reinsurance premiums under the arrangement with T25 and UPCIC, as described below under2011-2012 Reinsurance Program. See Liquidity and Capital resourcesreceived OIR approval for further discussion regarding this arrangement.

UPCIC filed a premium rate changeincreases for its homeowners and Dwelling Fire insuranceprograms within Florida. The premium rate increases will average approximately 14.9% statewide for its homeowners program with the OIR on September 23, 2011. The rate increase, which will result in an average rate increase of approximatelyand 8.8% statewide is still pending approval by OIR. Also included infor its dwelling fire program. The effective dates for both of the filing was a proposal to remove sinkhole coverage from the base policy. The sinkhole coveragepremium rate increases are January 9, 2012 for new business and form changes filedFebruary 28, 2012 for Dwelling Fire are similar in nature to those filed for Homeowners described below. An effective date of December 22, 2011 was requested in the filing.renewal business.

UPCIC filedmade a premium rate change for its Homeowners insurance program with the OIR on September 21, 2011. The rate increase, which will result in an average rate increase of approximately 14.8% statewide, is still pending approval by OIR. UPCIC also filed to remove Sinkhole from the standard HO3 & HO8 policy and offer the coverage via endorsement for an additional surcharge, and a mandatory 10% deductible, to those policyholders that meet the proposed eligibility standards. An effective date of December 21, 2011 was requested for new and renewal business, although notification requirements for the sinkhole coverage change will dictate the effective date for renewal business depending on the date of approval. A forms filing was made immediately after the rate filing to segregate the sinkhole coverage and to include updated policy language as a result of the property insurance bill which became law in May 2011 (Senate Bill 408). The OIR approved the forms filing with effective dates of April 1, 2012 for new business and May 21, 2012 for renewals. With the approval of this forms filing, sinkhole coverage will be removed from certain base homeowners policies and the coverage will be offered via endorsement for an additional surcharge, and a mandatory 10% deductible, to those policyholders that meet the proposed eligibility standards. Revised inspection and eligibility requirements will not be imposed upon existing policyholders who elect to continue sinkhole coverage at their policy renewal. Form changes for sinkhole coverage on dwelling fire policies, which are similar in nature to those filed for homeowners policies, were approved by the OIR with effective dates of May 1, 2012 for new business and June 8, 2012 for renewal business. Coverage for catastrophic ground cover collapse will remain a covered peril under all standard policy forms.

On August 17, 2011, we announced that the Georgia department of insurance approved the homeowners’ rates and forms of its wholly-owned subsidiary, UPCIC. UPCIC expects to begin to write homeowners’ insurance in Georgia in the near future.

On August 15, 2011,February 22, 2012, we declared a cash dividend of $0.08 per share on our outstanding common stock, payable on October 6, 2011, to shareholders of record at the close of business on September 16, 2011.

During the second quarter, UPCIC completed its 2011-2012 reinsurance program effective June 1, 2011. See2011-2012 Reinsurance Programbelow for a description of that program.

During the second quarter, American Platinum Property and Casualty Insurance Company (“APPCIC,”) received approval of its rate filing from the OIR. APPCIC intends to write homeowners’ multi-peril and inland marine insurance on Florida homes valued in excess of $1 million, which are limits and coverages currently not targeted by UPCIC.

On January 6, 2011, we declared a cash dividend of $0.10 per share on our outstanding common stock payable on April 7, 2011,6, 2012, to shareholders of record at the close of business on March 11, 2011.28, 2012.

On April 17, 2012, Demotech, Inc. affirmed UPCIC’s Financial Stability Rating® of A. A Financial Stability Rating® of A is the third highest of six possible rating levels. According to Demotech, Inc., A ratings are assigned to insurers that have “…exceptional ability to maintain liquidity of invested assets, quality reinsurance, acceptable financial leverage and realistic pricing while simultaneously establishing loss and loss adjustment expense reserves at reasonable levels.” The rating of UPCIC filedis subject to at least annual review by, and may be revised upward or downward or revoked at the sole discretion of Demotech, Inc.

On April 23, 2012, we declared a premium rate changedividend of $0.08 per share on our outstanding common stock payable on July 9, 2012, to shareholders of record at the close of business on June 26, 2012. We expect to declare additional quarterly dividends in the same amount to shareholders of record in the third and fourth quarters of 2012. Declaration and payment of future dividends is subject to the discretion of UIH’s board of directors and will be dependent on future earnings, cash flows, financial requirements and other factors.

Impact of new accounting pronouncement

We prospectively adopted new accounting guidance related to accounting for its Homeowners’costs associated with acquiring or renewing insurance programs withcontracts effective January 1, 2012. The overall impact under the Florida Officenew guidance, which was adopted on January 1, 2012, was a reduction in earnings of Insurance Regulation (“OIR”) on November 5, 2010.$2.7 million ($1.7 million after tax or $0.04 per diluted share). The rate increase,$2.7 million pre-tax reduction in earnings during the three months ended March 31, 2012, includes an acceleration of capitalized costs existing as of December 31, 2011, which willwould have been amortized to earnings within a twelve-month period, and the immediate recognition of costs which otherwise would have been deferred, partially offset by a lesser amount of amortization expense due to the reduction in capitalized costs. The new guidance does not result in an average rate increaseincremental charges to earnings, but rather affects the timing of approximately 14.9 percent statewide, was approved by the OIR on February 3, 2011. The effective dates forrecognition of those charges in the rate increase are February 7, 2011 for new business and March 28, 2011 for renewal business. We expect the approved premium rate increases to have a positive effect on premiums written and earned in future months as new and renewal policies are written at the higher rates.income statement.

2011-2012 Reinsurance Program

In the normal course of business, we limit the maximum net loss that can arise from large risks, risks in concentrated areas of exposure and catastrophes, such as hurricanes or other similar loss occurrences, by reinsuring certain levels of risk in various areas of exposure with other insurers or reinsurers under our reinsurance agreements. Our intention is to limit our exposure and the Insurance Entities’ exposure thereby protecting stockholders’ equity and the Insurance Entities’ capital and surplus, even in the event of catastrophic occurrences, through reinsurance agreements. Without these reinsurance agreements, the Insurance Entities would be more substantially exposed to catastrophic losses with a greater likelihood that those losses could exceed their statutory capital and surplus. Any such catastrophic event, or multiple catastrophes, could have a material adverse effect on the Insurance Entities’ solvency and our results of operations, financial condition and liquidity.

Quota Share

Effective June 1, 2011 through May 31, 2012, UPCIC entered into a quota share reinsurance contract with Everest Re. Everest Re has the following ratings from each of the rating agencies: A+ from A.M. Best

Company, A+ from Standard and Poor’s Rating Services and Aa3 from Moody’s Investors Service, Inc. Under the quota share contract, UPCIC cedes 50% of its gross written premiums, losses and loss adjustment expenses (“LAE”)LAE for policies with coverage for wind risk with a ceding commission equal to 25% of ceded gross written premiums. In addition, the quota share contract has a limitation for any one occurrence not to exceed $34.8 million (of which UPCIC’s net liability on the first $34.8 million of losses in a first event scenario is $17.4 million, in a second event scenario is $17.4 million and in a third event scenario is $30 million) and a limitation from losses arising out of events that are assigned a catastrophe serial number by the Property Claims Services (“PCS”) office not to exceed $69.6 million. The contract requires UPCIC to reassume 100% of the attritional loss and LAE activity from 30% to 37.5% of gross written premium and has a limitation for LAE not to exceed 30% of indemnity losses paid during the contract period. Further, the contract requires UPCIC to purchase and maintain certain inuring reinsurance agreements. The contract limits the amount of premium which can be deducted forreinsurance premiums inuring reinsuranceto the contract to $288 million excluding reinstatement premiums, orand limits the total reinsurance premiums inuring to the contract to $326 million including any reinstatement premiums if any.and all ancillary payments under the inuring reinsurance agreements.

Excess Per Risk

Effective June 1, 2011 through May 31, 2012, UPCIC entered into a multiple line excess per risk contract with various reinsurers. Under the multiple line excess per risk contract, UPCIC obtained coverage of $1.4 million in excess of $600 thousand ultimate net loss for each risk and each property loss, and $1 million in excess of $300 thousand for each casualty loss. A $7 million aggregate limit applies to the term of the contract.

Effective June 1, 2011 through May 31, 2012, UPCIC entered into a property per risk excess contract covering ex-wind only policies. Under the property per risk excess contract, UPCIC obtained coverage of $400 thousand in excess of $200 thousand for each property loss. A $2 million aggregate limit applies to the term of the contract.

The total cost of our multiple line excess reinsurance program effective June 1, 2011 through May 31, 2012 is $4 million of which our cost is 50%, or $2 million and the quota share reinsurers’ cost is the remaining 50%. The total cost of our property per risk reinsurance program effective June 1, 2011 through May 31, 2012 is $575 thousand.

Effective October 1, 2011 through May 31, 2012, APPCIC entered into a multiple line excess per risk contract with various reinsurers. Under the multiple line excess per risk contract, APPCIC obtained coverage of $8.4 million in excess of $600 thousand ultimate net loss for each risk and each property loss, and $1 million in excess of $300 thousand for each casualty loss. A $21 million aggregate limit applies to the term of the contract.

The total cost of the APPCIC multiple line excess reinsurance program effective October 1, 2011 through May 31, 2012 is a minimum premium of $31,475, of which our cost is 50% or $15,737 and the quota share reinsurers’ cost is the remaining 50%, which is equated as follows: $25,000 minimum premium on 87.5% of the contract, $75,000 minimum premium on 10% of the contract and $84,000 minimum premium on 2.5% of the contract. The final premium will be determined based upon APPCIC’s volume of business during the contract term and a predetermined pricing algorithm.

Excess Catastrophe

Effective June 1, 2011 through May 31, 2012, under excess catastrophe contracts, UPCIC obtained catastrophe coverage of $541.3 million in excess of $185 million covering certain loss occurrences including hurricanes. The coverage of $541.3 million in excess of $185 million has a second full limit available to UPCIC. Additional premium is calculated pro rata as to amount and 100% as to time, as applicable.

Effective June 1, 2011 through May 31, 2012, UPCIC purchased reinstatement premium protection which reimburses UPCIC for its cost to reinstate the catastrophe coverage of the first $399.3 million (part of $541.3 million) in excess of $185 million.

Effective June 1, 2011 through May 31, 2012, under an excess catastrophe contract specifically covering risks located in Georgia, North Carolina and South Carolina, UPCIC obtained catastrophe coverage of 50% of $24.8 million in excess of $10 million and 100% of $20 million in excess of $34.8 million covering certain loss occurrences including hurricanes. Both coverages have a second full limit available to UPCIC. Additional premium is calculated pro rata as to amount and 100% as to time, as applicable.

The cost of UPCIC’s excess catastrophe contracts specifically covering risks in Georgia, North Carolina and South Carolina is $3.9 million.

Effective June 1, 2011 through May 31, 2012, UPCIC also obtained subsequent catastrophe event excess of loss reinsurance to cover certain levels of UPCIC’s net retention through three catastrophe events including hurricanes, as follows:

 

  

2nd Event

  3rd Event
  2nd Event 3rd Event 
Coverage   
 
 
 
 
 
$140.2 million in excess of
$44.8 million each loss
occurrence subject to an
otherwise recoverable
amount of $140.2 million
(placed 100%)
  
  
  
  
  
  
  
 
 
 
 
 
$155.0 million in excess of
$30.0 million each loss
occurrence subject to an
otherwise recoverable
amount of $310.0 million
(placed 100%)
  
  
  
  
  
  
  

$140.2 million in excess of

$44.8 million each loss occurrence

subject to an otherwise

recoverable amount of $140.2 million

(placed 100%)

  $155.0 million in excess of

$30.0 million each loss occurrence

subject to an otherwise

recoverable amount of $310.0 million

(placed 100%)

Deposit premium (100%)

  $27.8 million   $11.9 million    $27.8 million  $11.9 million

Minimum premium (100%)

  $22.2 million   $9.5 million    $22.2 million  $9.5 million

Premium rate -% of total insured value

   0.021863  0.009400  0.021863 %  0.009400 %

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

subsequent downgrades. For the contract year June 1, 2011 to May 31, 2012, UPCIC purchased the traditional FHCF coverage and did not purchase the Temporary Increase in Coverage Limit Option offered to insurers by the FHCF. UPCIC’s estimate of its traditional FHCF coverage is based upon UPCIC’s exposure in-force as of June 30, 2011, as reported by UPCIC to the FHCF on September 1, 2011 and is 90% of $1.172$1.221 billion in excess of $457$461.4 million. The estimated premium for this coverage is $73.3$74 million.

Also at June 1, 2011, the FHCF made available, and UPCIC obtained, $10.0 million of additional catastrophe excess of loss coverage with one free reinstatement of coverage to carriers qualified as Limited Apportionment Companies or companies that participated in the Insurance Capital Build-Up Incentive (“ICBUI”) Program offered by the FHCF, such as UPCIC. This particular layer of coverage at June 1, 2011 is $10.0 million in excess of $34.8 million. The premium for this coverage is $5.0 million.

On October 28, 2011, 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 2011—2011 – 2012 contract year is projected to be $15.17 billion over the 12-month period following the estimate. The SBA also referred to

its report entitled, “October 18, 2011 Estimated Claims Paying Capacity Report” (“(��Report”) as providing greater detail regarding the FHCF’s loss reimbursement capacity. The Report estimated that the FHCF’s loss reimbursement capacity range is $12.17 billion to $18.17 billion. UPCIC elected to purchase the FHCF Mandatory Layer of Coverage for the 2011—2011 – 2012 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. Fortunately, no hurricanes made landfall in Florida during the 2011-2012 contract year and no reimbursement payments for the 2011-2012 contract year were required from the FHCF to participating companies. Accordingly, the effect of the change in the FHCF’s reimbursement capacity estimate as compared to prior estimates had no effect on our financial position, results of operations and liquidity. In the 2012 Florida legislative session, the FHCF advocated a statutory change that would have reduced the amount of reimbursement capacity made available to the insurance industry in future years. However, the proposal did not pass.

The total cost of UPCIC’s multiple line excess and property per risk reinsurance program effective June 1, 2011 through May 31, 2012 is $4.575 million, of which UPCIC’s cost is $2.575 million, and the quota share reinsurer’s cost is the remaining $2.0 million. The total costs of APPCIC’s multiple line excess is at a minimum $31,475, of which APPCIC’s cost is at a minimum $15,737 and the quota share reinsurer’s cost is the remaining 50%. The total cost of UPCIC’s underlying excess catastrophe contract with T25 (see below) is $111.4 million, subject to a potential return premium of $83.4 million, which is eliminated in consolidation. The total cost of UPCIC’s private catastrophe reinsurance program effective June 1, 2011 through May 31, 2012 is $135.8 million, of which UPCIC’s cost is 50%, or $67.9 million, and the quota share reinsurer’s cost is the remaining 50%. In addition, UPCIC purchases reinstatement premium protection as described above, the cost of which is $22.4 million. UPCIC’s cost of the subsequent catastrophe event excess of loss reinsurance is $19.8 million. The estimated premium that UPCIC plans to cede to the FHCF for the 2011 hurricane season is $73.3 million of which UPCIC’s cost is 50%, or $36.7 million, and the quota share reinsurer’s cost is the remaining 50%. UPCIC is also participating in the additional coverage option for Limited Apportionment Companies or companies that participated in the Insurance Capital Build-Up Incentive Program offered by the FHCF, the premium for which is $5.0 million, of which UPCIC’s cost is 50%, or $2.5 million, and the quota share reinsurer’s cost is the remaining 50%.

UPCIC is responsible for losses related to catastrophic events with incurred losses in excess of coverage provided by UPCIC’s reinsurance program and for losses that otherwise are not covered by the reinsurance program, which could have a material adverse effect on UPCIC’s and our business, financial condition and results of operations.program.

UPCIC estimates, based upon its in-force exposures as of September 30,December 31, 2011, it had coverage to approximately the 123-year137-year Probable Maximum Loss (PML), modeled using AIR CLASIC/2 v.11.0, long term, without demand surge. Recently, AIR updated its catastrophe model and outlook of risk with the release of its new version, AIR CLASIC/2 v12.04. UPCIC estimates, based on its in-force exposures as of September 30,December 31, 2011, that it had coverage to approximately the 89-year94-year PML, modeled using AIR CLASIC/2 v.12.04, long term, without demand surge. Additionally, from time to time, UPCIC uses estimates from other catastrophe modeling vendors to estimate its PML. UPCIC estimates based upon its in-force exposures as of June 1,September 30, 2011, that it had coverage to approximately the 126-year131-year PML, modeled using RMS’s new release of its RiskLink model, v11, long term, without loss amplification. PML is a general concept applied in the insurance industry for defining high loss scenarios that should be considered when underwriting insurance risk. Both “loss

amplification” and “demand surge” refer to the potential impact of secondary contributors to insured losses arising from catastrophic events. Examples of loss amplification or demand surge include increases in the cost of labor or materials, incremental losses associated with time elapsing between the initial date of loss and the date of repair, claim inflation, and potential coverage ambiguities due to concurrent causes of loss. Catastrophe models produce loss estimates that are qualifiedquantified 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 123-year, 89-year137-year, 94-year and 126-year131-year PML represents a 0.81%0.80%, 1.12%1.06% and 0.79%0.76% Annual Probability of Exceedance, respectively, for AIR v11.0, AIR v12.04 and RMS v11). It is estimated that the 100-year PML is likely to be equaled or exceeded in one year out of 100 on average, or 1 percent of the time. It is the 99th percentile of the annual loss distribution.

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

In the event of catastrophic losses in the future, there could be a material adverse impact on our Financial Statements. With the implementation of our 2011-2012 reinsurance program at June 1, 2011, we retained a maximum, pre-tax net liability of $157.6 million as of December 31, 2011 for the first catastrophic event up to $1.781 billion of losses. Refer to the preceding table for information with respect to subsequent catastrophic events coverage. If catastrophic losses result in a net operating loss for the 2011 tax year, we can carry back the net operating loss to the 2010 and 2009 tax years and recover all, or a portion of, income taxes paid in those years.

In addition to coverage obtained by UPCIC underSeparately from the Insurance Entities’ reinsurance programs, the ultimate parent of UPCIC obtained $60.0UIH protected its own interests against diminution in value due to catastrophe events by purchasing $60 million ofin coverage via a catastrophe risk-linked transaction contract, effective June 1, 2011 through December 31, 2011,2011. The contract provided for a recovery by UIH in the event of the exhaustion of UPCIC’s catastrophe coverage is exhausted.coverage. The total cost to UIH of the risk-linked transaction contract is $8.7 million.

We continually evaluate strategies to more effectively manage our exposure to catastrophe losses, including the maintenance of catastrophic reinsurance coverage. The Company is currently in the process of renegotiating its 2012-2013 reinsurance program. Based on current discussions, the Company does not expect that the terms of the 2012-2013 reinsurance program will differ materially from the 2011-2012 reinsurance program, but there can be no assurance that the Company will be able to obtain reinsurance at the same levels, terms or price as the 2011-2012 program.

Termination of Agreements with Segregated Account T25

UIH ownsEffective January 1, 2012, the agreement between the Insurance Entities and maintains a segregated account,UIH’s Segregated Account T25—T25 – Universal Insurance Holdings of White Rock Insurance (SAC) Ltd. (“T25”) established by awas replaced at identical limits and retentions as the prior agreement with an unaffiliated third-party reinsurer in accordance with Bermuda law. T25 enters into underlyingas an open market purchase. Effective January 1, 2012 through May 31, 2012, under an excess catastrophe contracts with UPCIC forcontract, the purposeInsurance Entities obtained catastrophe coverage of assuming the risk$140.2 million in excess of certain policies issued by UPCIC,$44.8 million covering certain loss occurrences including hurricanes. UIH securesThe total cost of this reinsurance coverage is $4.4 million. In the obligationsevent of T25a non-hurricane loss subject to this contract, the Insurance Entities will pay to the reinsurer 20.0% of the ultimate net loss ceded to the reinsurer arising out of such non-hurricane loss.

Wind Mitigation Discounts

The insurance premiums charged by the Insurance Entities are subject to various statutory and regulatory requirements. Among these, the Insurance Entities must offer wind mitigation discounts in accordance with a program mandated by the Florida Legislature and implemented by the OIR. The level of wind mitigation discounts mandated by the Florida Legislature to be effective June 1, 2007 for new business and August 1, 2007 for renewal business have had a significant negative effect on our premium.

The following table reflects the effect of wind mitigation credits received by our policy holders (in thousands):

   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 $6,285    $487,866     1.3

12/31/2007

   11.8 $31,952    $500,136     6.0

3/31/2008

   16.9 $52,398    $501,523     9.5

6/30/2008

   21.3 $74,186    $508,412     12.7

9/30/2008

   27.3 $97,802    $515,560     16.0

12/31/2008

   31.1 $123,525    $514,011     19.4

3/31/2009

   36.3 $158,230    $530,030     23.0

6/30/2009

   40.4 $188,053    $544,646     25.7

9/30/2009

   43.0 $210,292    $554,379     27.5

12/31/2009

   45.2 $219,974    $556,557     28.3

3/31/2010

   47.8 $235,718    $569,870     29.3

6/30/2010

   50.9 $281,386    $620,277     31.2

9/30/2010

   52.4 $291,306    $634,285     31.5

12/31/2010

   54.2 $309,858    $648,408     32.3

3/31/2011

   55.8 $325,511    $660,303     33.0

6/30/2011

   56.4 $322,640    $673,951     32.4

9/30/2011

   57.1 $324,313    $691,031     31.9

12/31/2011

   57.7 $325,315    $703,459     31.6

3/31/2012

   57.9 $323,286    $718,164     31.0

Insurers like UPCIC under these contracts by contributingfully experience the impact of rate or discount changes more than 12 months after implementation because insurance policies renew throughout the year. Although UPCIC may seek to offset the impact of wind mitigation credits through subsequent rate increase filings with the OIR, there is no assurance that the OIR and UPCIC will agree on the amount of T25’s liability for losses, net ofrate change that is needed. In addition, any adjustments to UPCIC’s required premium payments,rates similarly take more than 12 months to a trust account as collateral. The collateral will be used to pay any claims that may arise in the event of the occurrence of covered events. Transactions related to this arrangement are eliminated in consolidation; however, the amount of collateral is held in trust for the benefit of UPCIC until the occurrence of a covered event, expiration or termination of the agreement between T25 and UPCIC.fully integrated into its business.

UPCIC and T25 mutually agreed to a Commutation and Settlement Agreement on May 31, 2011, related to the underlying Property Catastrophe Excess of Loss Reinsurance Contract that was effective January 1, 2011. A replacement contract was entered into between the parties on June 1, 2011 as part of UPCIC’s reinsurance program in effect for the period June 1, 2011, through May 31, 2012. In conjunction with entering into the replacement contract, UIH contributed additional funds to T25 due to the increased reinsurance coverage and collateral requirements. The amount of collateral in the trust account at September 30, 2011 was $63.0 million.

Results of Operations - Operations—Three Months Ended September 30, 2011,March 31, 2012, Compared to Three Months Ended September 30, 2010March 31, 2011

The following table summarizes changes in each component of our Statement of Income for the three months ended September 30, 2011,March 31, 2012, compared to the same period in 20102011 (in thousands):

  Three Months Ended September 30, Change   Three Months Ended March 31, Change 
  2011 2010 $ %   2012 2011 $ % 

PREMIUMS EARNED AND OTHER REVENUES

          

Direct premiums written

  $171,370   $152,662   $18,708    12.3  $190,003   $173,175   $16,828    9.7

Ceded premiums written

   (123,984  (108,539  (15,445  14.2   (163,434  (123,891  (39,543  31.9
  

 

  

 

  

 

    

 

  

 

  

 

  

Net premiums written

   47,386    44,123    3,263    7.4   26,569    49,284    (22,715  -46.1

Decrease in net unearned premium

   2,248    4,708    (2,460  NM  

Decrease (increase) in net unearned premium

   22,071    (1,280  23,351    NM  
  

 

  

 

  

 

    

 

  

 

  

 

  

Premiums earned, net

   49,634    48,831    803    1.6   48,640    48,004    636    1.3

Net investment income

   122    66    56    84.8

Net realized gains on investments

   5,884    6,149    (265  -4.3

Net unrealized (losses) gains on investments

   (15,985  6,281    (22,266  NM  

Net foreign currency losses on investments

   (455  (8  (447  NM  

Net investment (expense) income

   (36  257    (293  NM  

Net realized (losses) gains on investments

   (7,449  3,652    (11,101  NM  

Net unrealized gains on investments

   9,187    2,588    6,599    255.0

Net foreign currency gains on investments

   23    71    (48  -67.6

Commission revenue

   5,192    4,423    769    17.4   4,541    4,180    361    8.6

Policy fees

   3,535    3,525    10    0.3   3,901    4,173    (272  -6.5

Other revenue

   1,486    1,468    18    1.2   1,440    1,408    32    2.3
  

 

  

 

  

 

    

 

  

 

  

 

  

Total premiums earned and other revenues

   49,413    70,735    (21,322  -30.1   60,247    64,333    (4,086  -6.4
  

 

  

 

  

 

    

 

  

 

  

 

  

OPERATING COSTS AND EXPENSES

          

Losses and loss adjustment expenses

   29,343    29,370    (27  -0.1   26,174    26,185    (11  0.0

General and administrative expenses

   18,827    20,053    (1,226  -6.1   17,844    15,072    2,772    18.4
  

 

  

 

  

 

    

 

  

 

  

 

  

Total operating costs and expenses

   48,170    49,423    (1,253  -2.5   44,018    41,257    2,761    6.7
  

 

  

 

  

 

    

 

  

 

  

 

  

INCOME BEFORE INCOME TAXES

   1,243    21,312    (20,069  -94.2   16,229    23,076    (6,847  -29.7

Income taxes, current

   7,331    7,359    (28  -0.4   774    8,737    (7,963  -91.1

Income taxes, deferred

   (7,063  876    (7,939  NM     5,582    441    5,141    1165.8
  

 

  

 

  

 

    

 

  

 

  

 

  

Income taxes, net

   268    8,235    (7,967  -96.7   6,356    9,178    (2,822  -30.7
  

 

  

 

  

 

    

 

  

 

  

 

  

NET INCOME

  $975   $13,077   $(12,102  -92.5  $9,873   $13,898   $(4,025  -29.0
  

 

  

 

  

 

    

 

  

 

  

 

  

Net income decreased by $12.1$4 million, or 92.5%29%, primarily as a result of unrealized tradingrealized losses in our investment portfolio. These losses reflect a particularly steep declineportfolio compared to realized gains during the three months ended March 31, 2011 and an increase in the equity marketsgeneral and administrative expenses due primarily to accelerated amortization of deferred acquisition costs as a whole duringresult of adopting new accounting guidance provided by the quarter ended September 2011.FASB. These factors were partially offset by an increase in unrealized gains of $6.6 million.

The increase in net earned premiums of $803$636 thousand, or 1.6%1.3%, was due toreflects an increase in the numberdirect earned premium of policies written generated$14.2 million mostly offset by our agent network and thean increase in ceded earned premium of $13.6 million. The increase in direct earned premium is due primarily to rate increases whichthat first became effective in February 2011, as well as those that became effective in the latter partand March of 2009.2011. These rate increases have had a positive effect on premium generated by renewal policies. The benefit from these factors was partially offset by an increasepolicies but have resulted in a moderate reduction in the number of policies-in-force eligible for wind mitigation credits.

policies in force. The following table reflectsbenefit from the effect ofrate increases continued to be partially offset by wind mitigation credits received by UPCIC policyholders (in thousands):within the state of Florida. The increase in ceded earned premium of $13.6 million includes $2.7 million in the 2012 period relating to the aforementioned underlying property catastrophe excess of loss reinsurance contract with an unaffiliated third-party reinsurer.

   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%  $        6,285  $    487,866  1.3%

12/31/2007

  11.8%  $      31,952  $    500,136  6.0%

3/31/2008

  16.9%  $      52,398  $    501,523  9.5%

6/30/2008

  21.3%  $      74,186  $    508,412  12.7%

9/30/2008

  27.3%  $      97,802  $    515,560  16.0%

12/31/2008

  31.1%  $    123,525  $    514,011  19.4%

3/31/2009

  36.3%  $    158,230  $    530,030  23.0%

6/30/2009

  40.4%  $    188,053  $    544,646  25.7%

9/30/2009

  43.0%  $    210,292  $    554,379  27.5%

12/31/2009

  45.2%  $    219,974  $    556,557  28.3%

3/31/2010

  47.8%  $    235,718  $    569,870  29.3%

6/30/2010

  50.9%  $    281,386  $    620,277  31.2%

9/30/2010

  52.4%  $    291,306  $    634,285  31.5%

12/31/2010

  54.2%  $    309,858  $    648,408  32.3%

3/31/2011

  55.8%  $    325,511  $    660,303  33.0%

6/30/2011

  56.4%  $    322,640  $    673,951  32.4%

9/30/2011

  57.1%  $    324,313  $    691,031  31.9%

Net unrealizedinvestment expenses for the three months ended March 31, 2012, compared to net investment income for the same period in the prior year, reflects one time charges for investment accounting services as we convert to a new investment accounting service provider.

Realized losses on investments of $16.0$7.5 million recorded during the three months ended September 30, 2011,March 31, 2012 reflect loss in value primarily in the metals and mining sector.

Net unrealized gains on investments of $9.2 million, recorded during the three months ended March 31, 2012, include both a reclassification of unrealized gains and losses recorded in prior periods to realized gains and losses upon disposition during the current period and a net decreaseincrease in value of investments held in our trading portfolio as of September 30, 2011. These unrealized lossesMarch 31, 2012. The majority of the increase in value was in the trading portfolio during the three months ended September 30, 2011, were partially offset by realized gains of $5.9 million recorded during the same period. The unrealized losses reflect a particularly steep decline in the equity markets as a whole during the quarter ended September 2011. We will continue to record future changes in the market value of our trading portfolio directly to earnings as unrealized gainsmetals and losses on investments. All investment securities held at June 30, 2010, were classified as available-for-sale with net unrealized losses reflected in Accumulated Other Comprehensive Income in the Condensed Consolidated Statement of Financial Condition. During 2010, management evaluated the trading activity of our investment portfolio, investing strategy and overall investment program. As a result of this evaluation, we reclassified the available-for-sale portfolio as a trading portfolio effective July 1, 2010. Since July 1, 2010, changes in the market value of our trading portfolio are recorded directly to revenues as unrealized gains or losses on investments. In previous periods, the changes in unrealized gains and losses on the available-for-sale portfolio were appropriately included in Other Comprehensive Income rather than current period income.mining sector.

Commission revenue is comprised principally of reinsurance commission sharing agreements. The increase in commission revenue of $769$361 thousand is due to an increase in the amount of ceded premiums.

Policy fees are comprised primarily of the managing general agent’s policy fee income from insurance policies. The decrease of $272 thousand reflects a reduction in the number of policies written primarily due to the rate increases that have taken affect, which has caused some attrition.

The net loss and LAE ratios, or net losses and LAE as a percentage of net earned premiums, were 59.1%53.8% and 60.1%54.5% during the three-month periods ended September 30,March 31, 2012 and 2011, and 2010, respectively, and were comprised of the following components (in thousands):

   Three months ended March 31, 2012 
   Direct  Ceded  Net 

Loss and loss adjustment expenses

  $52,607   $26,433   $26,174  

Premiums earned

  $178,804   $130,164   $48,640  

Loss & LAE ratios

   29.4  20.3  53.8
  Three months ended September 30, 2011   Three months ended March 31, 2011 
  Direct Ceded Net   Direct Ceded Net 

Loss and loss adjustment expenses

  $59,789   $30,446   $29,343    $53,131   $26,946   $26,185  

Premiums earned

  $175,858   $126,224   $49,634    $164,587   $116,583   $48,004  

Loss & LAE ratios

   34.0  24.1  59.1   32.3  23.1  54.5
  Three months ended September 30, 2010 
  Direct Ceded Net 

Loss and loss adjustment expenses

  $59,512   $30,142   $29,370  

Premiums earned

  $162,093   $113,262   $48,831  

Loss & LAE ratios

   36.7  26.6  60.1

The reduction in the direct loss and LAE ratio reflects an increase in earned premiums and favorable loss experience in the current year net of adverse development related to prior years.premiums.

General and administrative expenses decreasedincreased by $1.2$2.8 million due primarily to the adoption of new accounting guidance related to deferred acquisition costs. The overall impact under the new guidance, which was adopted on January 1, 2012, was a decreasereduction in performance-based bonus accrualsearnings of $1.9$2.7 million ($1.7 million after tax or $0.04 per diluted share). The $2.7 million pre-tax reduction in earnings during the three months ended March 31, 2012, includes an acceleration of capitalized costs existing as of December 31, 2011, which would have been amortized to earnings within a twelve-month period, and a decrease in bad debt expensethe immediate recognition of $807 thousand. Performance-based bonuses are based on either net income before taxes or net income. These decreases werecosts which otherwise would have been deferred, partially offset by an increasea lesser amount of amortization expense due to the reduction in capitalized costs. The new guidance does not result in incremental charges to earnings, but rather affects the timing of the recognition of those charges in the income statement. There were also increases in stock-based compensation of $422$614 thousand for the three months ended September 30, 2011March 31, 2012 compared to 2010,the same period in 2011, and non-recurring credits in the amount of $975$469 thousand from the recovery of Florida Insurance Guaranty Association (“FIGA”) assessments recorded during the three months ended September 30, 2010. FIGA assessments are ultimately passed down to policyholders. Amounts charged or credited to our earnings represent timing differences between the time assessments are made by FIGA to us, and the collection of those assessments from policyholders.

The decrease in income tax expense was the result of a significant reduction in taxable income due to unrealized losses in the trading portfolio. In addition, we recorded adjustments in connection with the filing of federal and state income tax returns for prior periods reducing the effective tax rate to 21.6% for the three months ended September 30,March 31, 2011.

Results of Operations—Nine Months Ended September 30, 2011 Compared to Nine Months Ended September 30, 2010

The following table summarizes changes in each component of our Statement of Income for the nine months ended September 30, 2011, compared to the same period in 2010 (in thousands):

   Nine Months Ended September 30,  Change 
   2011  2010  $  % 

PREMIUMS EARNED AND OTHER REVENUES

     

Direct premiums written

  $558,024   $520,782   $37,242    7.2

Ceded premiums written

   (393,673  (357,411  (36,262  10.1
  

 

 

  

 

 

  

 

 

  

Net premiums written

   164,351    163,371    980    0.6

Increase in net unearned premium

   (17,189  (39,865  22,676    -56.9
  

 

 

  

 

 

  

 

 

  

Premiums earned, net

   147,162    123,506    23,656    19.2

Net investment income

   358    377    (19  -5.0

Net realized gains on investments

   12,496    11,893    603    5.1

Net unrealized (losses) gains on investments

   (23,037  6,281    (29,318  NM  

Net foreign currency (losses) gains on investments

   (384  801    (1,185  NM  

Commission revenue

   14,313    13,469    844    6.3

Policy fees

   12,110    12,000    110    0.9

Other revenue

   4,400    3,489    911    26.1
  

 

 

  

 

 

  

 

 

  

Total premiums earned and other revenues

   167,418    171,816    (4,398  -2.6
  

 

 

  

 

 

  

 

 

  

OPERATING COSTS AND EXPENSES

     

Losses and loss adjustment expenses

   81,380    77,857    3,523    4.5

General and administrative expenses

   48,598    43,631    4,967    11.4
  

 

 

  

 

 

  

 

 

  

Total operating costs and expenses

   129,978    121,488    8,490    7.0
  

 

 

  

 

 

  

 

 

  

INCOME BEFORE INCOME TAXES

   37,440    50,328    (12,888  -25.6

Income taxes, current

   25,690    19,016    6,674    35.1

Income taxes, deferred

   (10,672  524    (11,196  NM  
  

 

 

  

 

 

  

 

 

  

Income taxes, net

   15,018    19,540    (4,522  -23.1
  

 

 

  

 

 

  

 

 

  

NET INCOME

  $22,422   $30,788   $(8,366  -27.2
  

 

 

  

 

 

  

 

 

  

Net income decreased by $8.4 million, or 27.2%, primarily as a result of unrealized trading losses in our investment portfolio. These losses reflect a particularly steep decline in the equity markets as a whole during the quarter ended September 2011.

The increase in net earned premiums of $23.7 million, or 19.2%, was due to an increase in the number of policies written generated by our agent network and the rate increases which became effective in the second quarter of 2011, as well as those that became effective in the latter part of 2009. These rate increases have had a positive effect on premiums generated by renewal policies. This benefit was partially offset by an increase in the number of policies-in-force eligible for and receiving wind mitigation credits. See “Results of Operations – Three Months Ended September 30, 2011 Compared to Three Months Ended September 30, 2010” for a table reflecting the effect of wind mitigation credits received by UPCIC policyholders.

Net unrealized losses on investments of $23.0 million recorded during the nine months ended September 30, 2011, reflect the net decrease in value of investments held in our trading portfolio as of September 30, 2011. These unrealized losses in the trading portfolio during the three months ended September 30, 2011, were partially offset by realized gains of $12.5 million recorded during the same period. The unrealized losses reflect a particularly steep decline in the equity markets as a whole during the quarter ended September 2011. We will continue to record future changes in the market value of investments held in our trading portfolio directly to earnings as unrealized gains and losses on investments. All investment securities held at June 30, 2010, were classified as available-for-sale with net unrealized losses reflected in Accumulated Other Comprehensive Income in the Condensed Consolidated Statement of Financial Condition. As discussed in the Results of Operations for the Three Months Ended September 30, 2011, compared to 2010, management evaluated the trading activity of our investment portfolio, investing strategy, and overall investment program during 2010. As a result of this evaluation, we reclassified the available-for-sale portfolio as a trading portfolio effective July 1, 2010. Since July 1, 2010, changes in the market value of our trading portfolio are recorded directly to revenues as unrealized gains or losses on investments. In previous periods, the changes in unrealized gains and losses on the available-for-sale portfolio were appropriately included in Other Comprehensive Income rather than current period income.

During the nine months ended September 30, 2010, we recorded $2.4 million of other than temporary losses for certain securities that were available-for-sale. Effective July 1, 2010, we transferred all securities classified as available-for-sale to the trading portfolio and recognized all unrealized gains and losses in earnings thereafter.

Foreign currency losses and gains reflect changes in exchange rates for investments denominated in currencies other than U.S dollars.

The increase in other revenues of $911 thousand is due primarily to a higher volume of policyholders participating in our installment payment plan program offered by UPCIC.

The increase in net losses and LAE of $3.5 million, or 4.5%, was primarily related to the servicing of additional policies due to the growth in policy count on a year-over-year basis.

The net loss and LAE ratios, or net losses and LAE as a percentage of net earned premiums, were 55.3% and 63.0% during the nine-month periods ended September 30, 2011, and 2010, respectively, and were comprised of the following components (in thousands):

   Nine months ended September 30, 2011 
   Direct  Ceded  Net 

Loss and loss adjustment expenses

  $166,280   $84,900   $81,380  

Premiums earned

  $510,579   $363,417   $147,162  

Loss & LAE ratios

   32.6  23.4  55.3
   Nine months ended September 30, 2010 
   Direct  Ceded  Net 

Loss and loss adjustment expenses

  $156,537   $78,680   $77,857  

Premiums earned

  $452,848   $329,342   $123,506  

Loss & LAE ratios

   34.6  23.9  63.0

The improvement in the direct loss and LAE ratio for the nine-month period ended September 30, 2011, compared to the same period in the prior year, was the result of an increase in earned premiums and favorable loss experience in the current year net of adverse development related to prior years.

General and administrative expenses increased by $5.0 million due primarily to an increase in the amortization of deferred acquisition costs of $4.1 million. The increase in amortization of deferred acquisition costs is primarily in response to an increase in commissions paid on direct premium and the associated premium taxes thereon, partially offset by an increase in ceding commissions. Commissions and premium taxes are directly related to the volume of direct premium. Direct written premium has increased in response to an increase in the number of policies-in-force and the increase in average premium per policy. Other factors giving rise to the increase in general and administrative expenses include non-recurring credits in the amount of $2.3 million from the recovery of FIGA assessments recorded during the nine months ended September 30, 2010, an increase in legal fees of $678 thousand

related to corporate matters, and an increase in insurance expense of $364 thousand. FIGA assessments are ultimately passed down to policyholders. Amounts charged or credited to our earnings represent timing differences between the time assessments are made by FIGA to us, and the collection of those assessments from policyholders. These increases were partially offset by a decrease of $1.5 million in performance-based bonus accruals a decrease in bad debt expense of $1.0 million,$418 thousand and a decrease of $242 thousand in stock-based compensation of $569 thousand.legal fees related to corporate matters. Performance-based bonuses are based on either net income before taxes or net income.

The decrease in income tax expense was the result of a significant reduction in taxable income due primarily to unrealizedthe realized losses in the trading portfolio.portfolio and an increase general and administrative expenses.

Analysis of Financial Condition - Condition—As of September 30, 2011,March 31, 2012 Compared to December 31, 20102011

We believe that premiums will be sufficient to meet our working capital requirements for at least the next twelve months.

Our policy is to invest amounts considered to be in excess of current working capital requirements. We reduced our aggregate investment securities to $153.5 million as of September 30, 2011, from $224.5 million as of December 31, 2010, in response to market conditions. We have a receivable of $5.6$4.1 million at September 30, 2011,March 31, 2012 for securities sold that had not yet settled compared to $17.6$9.7 million at December 31, 2010,2011, and a payable for securities purchased that had not yet settled of $17.7$8.0 million as of September 30,March 31, 2012 compared to $1.1 million at December 31, 2011.

The following table summarizes, by type, the carrying values of investments (in thousands):

 

  As of
September 30,
   As of
December 31,
 

Type of Investment

  2011   2010   As of March 31, 2012   As of December 31, 2011 

Cash and cash equivalents

  $328,838    $147,585    $325,968    $229,685  

Restricted cash and cash equivalents

   48,178     78,312  

Debt securities

   58,063     130,116     3,800     3,801  

Equity securities

   95,413     94,416     96,996     95,345  

Non-hedge derivatives

   1,545     182     60     123  

Other investments

   366     —       385     371  
  

 

   

 

   

 

   

 

 

Total Investments

  $484,225    $372,299    $475,387    $407,637  
  

 

   

 

   

 

   

 

 

Prepaid reinsurance premiums represent ceded unearned premiums related to our catastrophe and quota share reinsurance programs. The increase of $30.3$33.3 million to $251.3$276.4 million during the ninethree months ended September 30, 2011,March 31, 2012, was primarily due to an increase in premiums for catastrophe reinsurance coverage, as previously described in Recent Developments, 2011-2012 Reinsurance Program, and an increase in quota share reinsurance premiums commensurate with the increase in direct written premium. Premiums for catastrophe reinsurance coverage are earned over the respective contract periods which are generally effective from June 1, 2011, through May 31, 2012.

Reinsurance recoverables represent amounts due from reinsurers for ceded loss and LAE. The decrease in reinsurance recoverables of $8.7 million to $77 million reflects favorable loss experience in the current period and the timing of settlements with reinsurers.

Reinsurance receivable, net, represents inuring premiums receivable, net of ceded premiums payable with our quota share reinsurer. The increasedecrease of $12.2$39.4 million to $49.8$15.8 million during the ninethree months ended September 30, 2011,March 31, 2012 was due to greater ceded premiums on our catastrophe reinsurance program and timing of the settlement with the quota share reinsurer. In prior periods, we netted this receivable against reinsurance payables. See Note 1 “Nature of Operations and Basis of Presentation” for more information about this reclassification in theBasis of Presentation section.

Premiums receivable represent amounts due from policyholders. The increase in Property and Equipment of $7.0$1.3 million to $50.6$8.4 million duringreflects the nine months ended September 30, 2011cost of building a new office building which was due toplaced into service at the growth in direct written premiums and an increase in the numberend of policyholders participating in the installment payment plan program offered by UPCIC.March 2012.

See Note 5, “Insurance Operations”Insurance Operations. in our Notes to Condensed Consolidated Financial Statements for a roll-forward in the balance of our deferred policy acquisition costs.

The increasedecrease in net deferred income taxestax asset of $10.7$5.6 million during the ninethree months ended September 30, 2011March 31, 2012 is due primarily to a decrease in the amount of unrealized losses in the trading portfolio.

See Note 5, “Insurance Operations”Insurance Operations, in our Notes to Condensed Consolidated Financial Statements for a roll-forward in the balance of our unpaid losses and loss adjustment expenses.LAE.

Unearned premiums represent the portion of written premiums that will be earned pro rata in the future. The increase of $47.4$11.2 million to $375.8$371 million during the ninethree months ended September 30, 2011March 31, 2012 was due to growth in, and timing of, direct written premiums.

Advance premium represents premium payments made by policy holders ahead of a policy’s effective date. The increase of $11.7 million to $31.1 million reflects a trend for an increase in the volume of policies with advance payments in March, relative to December.

Reinsurance payable, net, represents our liability to reinsurers for ceded written premiums, net of ceding commissions receivable. The increase of $53.3$27 million to $128.8$114.5 million during the ninethree months ended September 30, 2011March 31, 2012 was primarily due to the timing of settlements with reinsurers and amounts not yet due to reinsurers for catastrophe reinsurance coverage, as previously described above in Recent Developments,2011-2012 Reinsurance Program. In prior periods, we netted reinsurance receivable, net against reinsurance payables. See Note 1 “Nature of Operations and Basis of Presentation” for more information about this reclassification in theBasis of PresentationProgram section..

Liquidity and Capital Resources

Liquidity

Liquidity is a measure of a company’s ability to generate sufficient cash flows to meet its short and long-term obligations. Funds generated from operations have generally been sufficient to meet our liquidity requirements and we expect that in the future funds from operations will continue to meet such requirements.

The balance of cash and cash equivalents as of September 30, 2011,March 31, 2012 was $328.8$326 million compared to $147.6$229.7 million at December 31, 2010.2011. See our Condensed Consolidated Statements of Cash Flows for a reconciliation of the balance of cash and cash equivalent between September 30, 2011March 31, 2012 and December 31, 2010.2011. Most of this amount is available to pay claims in the event of a catastrophic event pending reimbursement amounts recoverable under reinsurance agreements. The source of liquidity for possible claim payments consists of the collection of net premiums after deductions for expenses, reinsurance recoverables and short-term loans.

As a means by which T25 can secure its potential obligation under its reinsurance contractThe balance of restricted cash and cash equivalents as of March 31, 2012 was $48.2 million. Restricted cash as of March 31, 2012 is mostly comprised of cash equivalents on deposit with UPCIC, UIH holds collateral in a trust account for the benefit of UPCIC until the occurrence of a covered event or the expiration or termination of the agreement between T25 and UPCIC. The amount of collateralregulatory agencies in the trust account at September 30, 2011 was $63.0 million and is placed with a major U.S. financial institution as provided by the Floridavarious states in which our Insurance Code. These funds are segregated from the general operating funds of UIH. See Note 4 “Reinsurance” in our Notes to Condensed Consolidated Financial Statements for information about the arrangement between T25 and UPCIC.

In consultation with the OIR, UPCIC has offered to segregate from its general operating funds an amount equivalent to its anticipated future reinsurance premiums under the arrangement with T25 and UPCIC.

On October 28, 2011, UPCIC remitted $45.5 million as a deposit with the Florida Department of Financial Services. According to the terms of the reinsurance contract, UPCIC will pay approximately half of the deposited amount to T25 on or about January 1, 2012 and the remaining amount on or about April 1, 2012. Alternatively, UPCIC anticipates that it will propose to commute the existing contract in December 2011. The commutation would result in the entire deposit being returned to UPCIC in December or being used to support a replacement contract.Entities do business.

The Company’s liquidity requirements primarily include potential payments of catastrophe losses, the payment of dividends to shareholders, and interest and principal payments on debt obligations. The declaration and payment of future dividends to shareholders will be at the discretion of our Board of Directors and will depend upon many factors, including our operating results, financial condition, capital requirements and any regulatory constraints.

Our insurance operations provide liquidity in that premiums are generally received months or even years before losses are paid under the policies sold. Historically, cash receipts from operations, consisting of insurance premiums, commissions, policy fees and investment income, have provided more than sufficient funds to pay loss claims and operating expenses. We maintain substantial investments in highly liquid, marketable securities. Liquidity can also be generated by funds received upon the sale of marketable securities in our investment portfolio.

Effective July 1, 2010, we elected to classify our securities investment portfolio as trading. Accordingly, purchases and sales of investment securities are included in cash flows from operations beginning July 1, 2010. We generated $176.0$95.3 million in cash from operations during the ninethree months ended September 30, 2011,March 31, 2012, compared to $ 131.9119.8 million of cash generated by operating activities for the ninethree months ended September 30, 2010.March 31, 2011. The generation of cash during the ninethree months ended September 30, 2011March 31, 2012 reflects proceeds from sales of investment securities, net of purchases, of $89.0 million.$12.4 million, compared to $71.2 million during the three months ended March 31, 2011.

UPCIC isThe Insurance Entities are responsible for losses related to catastrophic events with incurred losses in excess of coverage provided by UPCIC’sthe Insurance Entities’ reinsurance programs and for losses that otherwise are not covered by the reinsurance programs, which could have a material adverse effect on either UPCIC’sthe Insurance Entities’ or our business, financial condition, results of operations and liquidity (see Note 42011-2012 Reinsurance Program above for a discussion of the 2011-2012 reinsurance program and Note 3 to our Consolidated Financial Statements in Part II, Item 8 of Form 10-K for the Year Ended December 31, 2010 for a discussion of the 2008-2009, 2009-2010 and 2010-2011 reinsurance programs)program).

Funds generated from operations have generally been sufficient to meet liquidity requirements and we expect that in the future funds from operations will continue to meet such requirements. There can be no assurances, however, that this will be the case.

Capital Resources

Capital resources provide protection for policyholders, furnish the financial strength to support the business of underwriting insurance risks and facilitate continued business growth. At September 30, 2011,March 31, 2012, we had total capital of $179.0$177.9 million, comprised of stockholders’ equity of $156.9$156.6 million and total debt of $22.1$21.3 million. Our debt-to-total-capital ratio and debt-to-equity ratio were 12.3%12% and 14.1%13.6%, respectively, at September 30,March 31, 2012. At December 31, 2011, we had total capital of $171.7 million, comprised of stockholders’ equity of $150 million and total debt of $21.7 million. Our debt-to-total-capital ratio and debt-to-equity ratio were 12.6% and 14.5%, respectively, at December 31, 2011.

At September 30, 2011,March 31, 2012, UPCIC was in compliance with all of the covenants under its surplus note and its total adjusted capital was in excess of regulatory requirements.

Cash Dividends

On January 6, 2011,February 22, 2012, we declared a dividend of $0.10 per share on our outstanding common stock to be paid on April 7, 2011,6, 2012, to the shareholders of record at the close of business on March 11, 2011. 28, 2012.

On August 8, 2011,April 23, 2012, we declared a dividend of $0.08 per share on our outstanding common stock to be paid on October 6, 2011,July 9, 2012, to the shareholders of record at the close of business on September 16, 2011.June 26, 2012. We expect to declare additional quarterly dividends in the same amount to shareholders of record in the third and fourth quarters of 2012. Declaration and payment of future dividends is subject to the discretion of UIH’s board of directors and will be dependent on future earnings, cash flows, financial requirements and other factors.

Contractual Obligations

There have been no material changes during the period covered by this Quarterly Report on Form 10-Q, outside of the ordinary course of business, to the contractual obligations specified in the table of contractual obligations included in Part 1, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2010.2011.

Critical Accounting Policies and Estimates

There have been no material changes during the period covered by this Quarterly Report on Form 10-Q to Critical Accounting Policies and Estimates previously disclosed in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2010.2011.

Accounting Pronouncements Issued and Not Yet Adopted

In September 2010,December 2011, the Financial Accounting Standards Board (“FASB”) issued guidance related to accounting for costs associated with acquiring or renewing insurance contracts. This guidance defines allowable deferred acquisition costs as costs incurred by insurance entities for the successful acquisition of new and renewal contracts. Such costs result directly from and are essential to the contract transaction(s) and would not have been incurred by the insurance entity had the contract(s) not occurred. This guidance will be effective for periods beginning after December 15, 2011, with early adoption permitted. We plan to prospectively adopt this guidance on January 1, 2012. Although we have not yet completed our evaluation of the impact to our financial statements, this guidance represents a significant departure from current industry practice upon adoption and will result in a reduction in our net deferred policy acquisition costs of as much as 20% to 30%, with a corresponding charge to earnings, and a reduction of deferrals and amortization of policy acquisition costs in future periods. This adjustment represents an acceleration of the amortization of costs that ultimately are charged to earnings.

In June 2011, the FASB updated its guidance related to the Comprehensive IncomeBalance Sheet Topic 220210 of the FASB Accounting Standards Codification (ASC).Codification. The objective of this updated guidance isrequires entities that have financial and derivative instruments that are offset to increasedisclose information about offsetting and related arrangements to enable users of financial statements to understand the prominenceeffect of items reported in other comprehensive income by eliminating the option of presenting components of other comprehensive income as part of the statement of changes in stockholders’ equity. The guidance requires total comprehensive income (including both the net income components and other comprehensive income components) be reported in either a single continuous statement of comprehensive income, or two separate but consecutive statements (the approach currently used in the Company’s consolidatedthose arrangements on an entity’s financial statements).position. This guidance is to be applied retrospectively to fiscal years (andfor annual reporting periods beginning on or after January 1, 2013, and interim periods within those years) beginning after December 15, 2011. Early adoptionannual periods. Disclosure is permitted. Since we already userequired retrospectively for all comparative periods presented. The additional disclosures required by the two-statement approach for reporting comprehensive income, thisupdated guidance will not have an impact on the presentation of our operating results, cash flows or financial statements and notes.

In May 2011, the FASB updated its guidance related to the Fair Value Measurement, Topic 820 of the ASC, to achieve common fair value measurement and disclosure requirements with International Financial Reporting Standards. The amendments change the wording used to describe many of the requirements in United States generally accepted accounting principles, to clarify the intent of application of existing fair value measurement and disclosure requirements, and to change particular principles or requirements for measuring and disclosing fair value measurements. The amendments are to be applied prospectively to interim and annual reporting periods beginning after December 15, 2011. The amendments are to be applied prospectively. The Company is currently evaluating the requirements of the guidance and its impact on the Company’s financial statements.position.

Related Parties

See Note 8, “RelatedRelated Party Transactions”Transactions, in our Notes to Condensed Consolidated Financial Statements for information about related parties.

Cautionary Note Regarding Forward-Looking Statements

We operate in a rapidly changing environment that involves a number of uncertainties, some of which are beyond our control. Certain statements made in this report that reflect management’s expectations regarding future events are forward-looking in nature and, accordingly are subject to risks and uncertainties. These forward-looking statements are only current expectations about future events. Actual results could differ materially from those set forth in or implied by any forward-looking statement. Factors that could cause or contribute to such differences include, but are not limited to, risk factors set forth in filings with the Securities and Exchange Commission, including our annual and quarterly reports. The following is a summary of uncertainties which were disclosed in greater detail in “Factors Affecting Operating Results and Market Price of Stock” in our Annual Report on Form 10-K for the year ended December 31, 2010:

Industry risks relating to fluctuating operating results caused by competition, catastrophe losses, general economic conditions including interest rate changes and market conditions, legislative initiatives, the regulatory environment, the frequency of litigation, the size of judgments, severe weather conditions, climate changes or cycles, the role of federal or state government in the insurance market, judicial or other authoritative interpretations of laws and policies, and the availability and cost of reinsurance.

Our ability to manage our exposure to catastrophic losses.

Risks related to our dependence upon third party developers of models to estimate hurricane losses and the reasonableness of assumptions or scenarios incorporated into the models which may be provided by third parties or management.

Risks related to our dependence upon third parties to perform certain functions including, but not limited to, the purchase of reinsurance and risk management analysis. We also rely on reinsurers to limit the amount of risk retained under our policies and to increase our ability to write additional risks.

Our ability to obtain reinsurance to the same extent and at the same cost as currently in place and minimize the loss of potential profits by ceding premiums to reinsurers.

Credit risk, including certain concentrations with respect to our reinsurers, in light of our primary liability for the full amount of the risk underlying the reinsurance agreements.

Risks related to the ability of the Florida Hurricane Catastrophe Fund (FHCF) to provide reimbursements at levels requested and relied upon by us or as timely as required by our claims payments to policyholders. In addition, the cost of our reinsurance program may increase should we deem it necessary to purchase additional private market reinsurance due to reduced estimates of the FHCF’s claims-paying capacity.

Risks that laws, contracts or requirements relating to the FHCF may not be interpreted in a manner consistent with UPCIC’s understandings or will change in the future.

Our ability to estimate and maintain adequate liabilities to pay claims for losses and loss adjustment expenses.

Adverse regulation or legislation.

Our ability to implement sufficient and timely rate adjustments to provide aggregate premiums commensurate with expected losses.

Risks related to our dependence upon the efforts of key individuals.

Our ability to compete in a highly competitive industry.

Our ability to maintain our financial stability rating provided by Demotech, Inc.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Market risk is the potential for economic losses due to adverse changes in fair value of financial instruments. Our primary market risk exposures are related to our investment portfolio and include interest rates, equity prices and commodity prices. We also have exposure to foreign currency exchange rates for investments denominated in foreign currencies, and to a lesser extent, our debt obligation in the form of a surplus note. The surplus note, as previously described in “Liquidity and Capital Resources,” accrues interest at an adjustable rate based on the 10-year Constant Maturity Treasury rate. Investments held in trading are carried on the balance sheet at fair value. Our investment trading portfolio is comprised primarily of debt and equity securities and also includes non-hedging derivatives and physical positions in precious metals. See Note 5, “Investments”Investments, for a schedule of investment holdings as of September 30, 2011March 31, 2012 and December 31, 2010.2011.

Our investments have been, and may in the future be, subject to significant volatility. Our investment objective is to maximize total rate of return after federal income taxes while maintaining liquidity and minimizing risk. Our investment portfolio is managed by an investment committee consisting of all current directorsstrategy includes maintaining investments to support unpaid losses and loss adjustment expenses for the Insurance Entities in accordance with guidelines established by insurance regulators. In addition to investment securities, we invest in derivative financial instruments to try to increase investment returns and for income-generation purposes. The most commonly used instruments are call and put equity options and written call options on common stock (i.e., covered calls). These derivatives are held in our trading portfolio and do not meet the OIR. The committee reviews management’s investment policies on a regular basis. The current investment policy limits investment in non-investment grade fixed maturity securities (including high-yield bonds), and limits total investments in preferred stock and common stock. We comply with applicable laws and regulations, which further restrict the type, quality and concentration of investments. In general, these laws and regulations permit investments, within specified limits and subject to certain qualifications, in federal, state and municipal obligations, corporate bonds, preferred and common equity securities and real estate mortgages.criteria for hedge accounting.

Interest Rate Risk

Interest rate risk is the sensitivity of a fixed-rate instrument to changes in interest rates. When interest rates rise, the fair value of our fixed-rate instruments decline.investment securities declines.

The following table provides information about our fixed income investments, which are sensitive to changes in interest rates. The table presents cash flows of principal amounts and related weighted average interest rates by expected maturity dates for investments held in trading at September 30, 2011, and December 31, 2010as of the periods presented (in thousands):

 

  As of September 30, 2011   As of March 31, 2012 
  Amortized Cost     Amortized Cost   
  2011 2012 2013   2014   2015   Thereafter Total Fair Value   2012 2013   2014   2015   2016   Thereafter Total Fair Value 

U.S. government securities obligations and agencies

  $—     $172   $—      $—      $—      $3,153   $3,325   $3,711    $136   $—      $—      $—      $—      $3,158   $3,294   $3,800  

Average interest rate

    4.09        1.85  1.97  1.97   4.63  —       —       —       —       1.85  1.97  1.96

Foreign government bonds

  $1,894   $52,459   $—      $—      $—      $—     $54,353   $54,352  

Average interest rate

   6.00  0.79         0.97  0.97
  As of December 31, 2010 
  Amortized Cost   
  2011 2012 2013   2014   2015   Thereafter Total Fair Value 

U.S. government securities obligations and agencies

  $—     $174   $—      $—      $—      $137,792   $137,966   $130,116  

Average interest rate

    2.60        1.30  1.30  1.30

   As of December 31, 2011 
   Amortized Cost    
   2012  2013   2014   2015   2016   Thereafter  Total  Fair Value 

U.S. government securities obligations and agencies

  $171   $—      $—      $—      $—      $3,157   $3,328   $3,801  

Average interest rate

   4.09          1.85  1.97  1.97

United States government and agency securities are rated from AAA to Aaa by Moody’s Investors Service, Inc., and AA+ by Standard and Poor’s Company.

Equity and Commodity Price Risk

Equity and commodity price risk is the potential for loss in fair value of investments in common stock, exchange-traded funds (ETF), and mutual funds from adverse changes in the prices of those instruments.

The following table provides information about the composition of equity securities, non-hedging derivatives and other investments held in the Company’s investment portfolio (in thousands):

 

XXX,XXXXXX,XXXXXX,XXXXXX,XXX
  As of September 30, 2011 As of December 31, 2010   As of March 31, 2012 As of December 31, 2011 
  Fair Value   Percent Fair Value   Percent   Fair Value   Percent Fair Value   Percent 

Equity securities:

              

Common stock:

              

Metals and mining

  $30,829     31.7 $25,752     27.2  $34,460     35.4 $38,816     40.5

Energy

   7,203     7.4   

Other

   16,173     16.6  362     0.4   2,145     2.2  11,944     12.5

Exchange-traded and mutual funds:

              

Metals and mining

   23,295     23.9  42,209     44.6   15,174     15.6  25,997     27.1

Agriculture

   15,411     15.8  14,877     15.7   19,811     20.3  16,878     17.6

Energy

   8,333     8.6  5,559     5.9

Indices

   1,372     1.4  4,613     4.9   18,203     18.7  1,710     1.8

Other

   —       0.0  1,044     1.1

Derivatives:

       

Non-risk management instruments

   1,545     1.6  182     0.2

Other investments (4)

   366     0.4  —       0.0

Derivatives: non-hedging

   60     0.1  123     0.1

Other investments (1)

   385     0.4  371     0.4
  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

 

Total

  $97,324     100.0 $94,598     100.0  $97,441     100.0 $95,839     100.0
  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

 

(1)Other investments represent physical metals that we hold in our trading portfolio.

A hypothetical decrease of 10%20% in the market prices of each of the equity securities, non-hedging derivatives, and other investments held at September 30, 2011,March 31, 2012, and December 31, 2010,2011, would have resulted in decreases of $9.7$19.5 million and $9.6$19.2 million, respectively, in the fair value of the equity securities, non-hedging derivatives and other investment portfolio.

Foreign Currency Exchange Risk

A hypothetical change of 10% in the exchange rates of our foreign denominated investments held at September 30, 2011, would have resulted in a charge or credit to earnings of $5.4 million.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company carried out an evaluation under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 as of the period covered by this report. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that disclosure controls and procedures were effective as of September 30, 2011,March 31, 2012, to ensure that information required to be disclosed by the Company in its reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

Changes in Internal Control Over Financial Reporting

There was no change in the Company’s internal controls over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

The Company is involvedWe are subject to litigation in certain lawsuits. In the opinionnormal course of management, noneour business. As of these lawsuits: (1) involve claims for damages exceeding 10% of the Company’s cash and invested assets, (2) involve matters that areMarch 31, 2012, we were not routine litigation incidental to the claims aspect of its business, (3) involve bankruptcy, receivership or similar proceedings, (4) involve material Federal, state, or local environmental laws; (5) potentially involve more than $100 thousand in sanctions and a governmental authority is a party or (6) are material proceedings to any non-routine litigation which any director, officer, affiliate of the Company, beneficial owner of more than 5% of any class of voting securities of the Company, or security holder is a party adverseexpected by management to the Company or hashave a material interest adverse to the Company.effect on our results of operations, financial condition or liquidity.

Item 1A. Risk Factors

Due to the implementation of our 2011-2012 reinsurance program, we retained a maximum, pre-tax net liability of $157.6 million for the first catastrophic event up to $1.781 billion of losses. Refer to the table in the2011-2012 Reinsurance Programunder2011 Developmentsin Management’s Discussion and Analysis of Financial Condition and Results of Operations for information with respect to subsequent catastrophic events coverage. If catastrophic losses result in a net operating loss for the 2011 tax year, we can carry back the net operating loss to the 2010 and 2009 tax years and recover all, or a portion of, income taxes paid in those years.

In the opinion of management, other than the modification provided below to a risk factor that appeared in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, there have been no other material changes during the period covered by this Quarterly Report on Form 10-Q to the risk factors previously disclosed in Part I, Item 1A, “Risk Factors”, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.2011.

Item 5. Other Information

AtOn April 17, 2012, Demotech, Inc. provided an update to guidance originally published in March 2010. Included in the Company’s 2011 Annual Meetingupdate was a statement that Demotech will no longer provide full credit for the Mandatory Layer of Shareholders held on May 11, 2011, the Company’s shareholders voted on an advisory proposal regardingFHCF reinsurance coverage. As a result of this statement, the frequency of future advisory votes on executive compensation. As reportedCompany has modified the following risk factor that appeared in the Company’s CurrentAnnual Report on Form 8-K, consistent with10-K for the recommendationyear ended December 31, 2011. The modification appears in bold.

A downgrade in our Financial Stability Rating® may have an adverse effect on our competitive position, the marketability of our product offerings, and our liquidity, operating results and financial condition

Financial Stability Ratings® are important factors in establishing the competitive position of insurance companies and generally have an effect on an insurance company’s business. On an ongoing basis, rating agencies review the financial performance and condition of insurers and could downgrade or change the outlook on an insurer’s ratings due to, for example, a change in an insurer’s statutory capital; a change in a rating agency’s determination of the Company’s Boardamount of Directors, shareholders votedrisk-adjusted capital required to maintain a particular rating;a change in favorthe perceived adequacy of conducting future advisory votes on executive compensation once every three years and,an insurer’s reinsurance program; an increase in the perceived risk of an insurer’s investment portfolio; a reduced confidence in management or a host of other considerations that may or may not be under an insurer’s control. The current insurance Financial Stability Rating® of UPCIC is from Demotech, Inc. The assigned rating is A. Because this rating is subject to annual re-evaluationcontinuous review, the retention of this rating cannot be assured. A downgrade in or withdrawal of this rating, or a decision by the Board, the Company will follow this advisory voteDemotech to require UPCIC’s parent company to make a capital infusion into UPCIC to maintain its rating, may adversely affect our liquidity, operating results and conduct future advisory votes on executive compensation every three years.financial condition.

Item 6. Exhibits

 

Exhibit No.

  

Exhibit

3.1Registrant’s Restated Amended and Restated Certificate of Incorporation (1)
3.2Certificate of Designation for Series A Convertible Preferred Stock dated October 11, 1994 (2)
3.3Certificate of Designations, Preferences, and Rights of Series M Convertible Preferred Stock dated August 13, 1997 (3)
3.4Certificate of Amendment of Amended and Restated Certificate of Incorporation dated October 19, 1998 (2)
3.5Certificate of Amendment of Amended and Restated Certificate of Incorporation dated December 18, 2000 (2)

3.6Certificate of Amendment of Certificate of Designations of the Series A Convertible Preferred Stock dated October 29, 2001 (2)
3.7Certificate of Amendment of Amended and Restated Certificate of Incorporation dated December 7, 2005 (4)
3.8Certificate of Amendment of Amended and Restated Certificate of Incorporation dated May 18, 2007 (4)
3.9Amended and Restated Bylaws (5)
31.1  Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2  Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32  Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to Title 18, United States Code, Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS-XBRL

  Instance Document

101.SCH-XBRL

  Taxonomy Extension Schema Document

101.CAL-XBRL

  Taxonomy Extension Calculation Linkbase Document

101.LAB-XBRL

  Taxonomy Extension Label Linkbase Document

101.PRE-XBRL

  Taxonomy Extension Presentation Linkbase Document

In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to the Quarterly Report on Form 10-Q shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be part of any registration statement or other document filed under the Securities Act or Exchange Act, except as shall be expressly set forth by specific reference in such filing.

(1)Incorporated by reference to the Registrant’s Registration Statement on Form S-1 (File No. 33-51546) declared effective on December 14, 1992
(2)Incorporated by reference to the Registrant’s Annual Report on Form 10-KSB for the year ended December 31, 2002
(3)Incorporated by reference to the Registrant’s Annual Report on Form 10-KSB/A for the year ended April 30, 1997
(4)Incorporated by reference to the Registrant’s Quarterly Report on Form 10-QSB for period ended September 30, 2007
(5)Incorporated by reference to the Registrant’s Current Report on Form 8-K dated January 8, 2007

SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 UNIVERSAL INSURANCE HOLDINGS, INC.

Date: November 8, 2011May 9, 2012

 

/s/ Bradley I. Meier

 Bradley I. Meier, President and Chief Executive Officer
Date: November 8, 2011 

Date: May 9, 2012

/s/ George R. De Heer

 

George R. De Heer, Chief Financial Officer

(Principal (Principal Accounting Officer)

 

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