UNIVERSAL INSURANCE HOLDINGS, INC. - Quarter Report: 2014 June (Form 10-Q)

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2014

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

For the transition period from to

Commission File Number 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.

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: 34,781,013 shares of common stock, par value $0.01 per share, outstanding on July 31, 2014.

UNIVERSAL INSURANCE HOLDINGS, INC.

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION


		Page No.
Item 1.	Financial Statements:

	Condensed Consolidated Balance Sheets as of June 30, 2014 and December 31, 2013 (unaudited)		4

	Condensed Consolidated Statements of Income for the three and six-month periods ended June 30, 2014 and 2013 (unaudited)		5

	Condensed Consolidated Statements of Comprehensive Income for the three and six-month periods ended June 30, 2014 and 2013 (unaudited)		5

	Condensed Consolidated Statements of Cash Flows for the six-month periods ended June 30, 2014 and 2013 (unaudited)		6

	Notes to Condensed Consolidated Financial Statements (unaudited)		7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		26

Item 3.	Quantitative and Qualitative Disclosure about Market Risk		42

Item 4.	Controls and Procedures		43

	PART II – OTHER INFORMATION

Item 1.	Legal Proceedings		43

Item 1A.	Risk Factors		43

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		44

Item 6.	Exhibits		45

Signatures			46

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To The Board of Directors and Stockholders of

Universal Insurance Holdings, Inc. and Subsidiaries

Fort Lauderdale, Florida

We have reviewed the accompanying condensed consolidated balance sheet of Universal Insurance Holdings, Inc. and its wholly-owned subsidiaries (the “Company”) as of June 30, 2014 and the related condensed consolidated statements of income and comprehensive income for the three and six-month periods ended June 30, 2014 and 2013 and the related condensed consolidated statements of cash flows for the six-month periods ended June 30, 2014 and 2013. 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/ Plante & Moran, PLLC

Chicago, Illinois

August 6, 2014

PART I — FINANCIAL INFORMATION

Item 1.

Financial Statements

UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

(in thousands, except per share data)


	As of
	June 30,			December 31,
	2014			2013
ASSETS
Cash and cash equivalents	$	201,357		$	117,275
Restricted cash and cash equivalents		2,635			2,600
Fixed maturities, at fair value		323,145			289,418
Equity securities, at fair value		12,420			65,022
Prepaid reinsurance premiums		193,811			241,214
Reinsurance recoverable		77,566			107,847
Reinsurance receivable, net		26,352			203
Premiums receivable, net		55,005			46,461
Other receivables		3,340			2,587
Property and equipment, net		9,815			9,289
Deferred policy acquisition costs, net		28,077			15,899
Income taxes recoverable		2,824			8,152
Deferred income tax asset, net		11,813			12,051
Other assets		2,242			2,072

Total assets	$	950,402		$	920,090

LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Unpaid losses and loss adjustment expenses	$	144,625		$	159,222
Unearned premiums		412,709			383,488
Advance premium		22,671			22,959
Accounts payable		4,809			3,441
Book overdraft		4,312			14,947
Payable for securities purchased		1,026			—
Reinsurance payable, net		120,095			86,232
Income taxes payable		407			2,566
Dividends payable to shareholders		3,503			—
Other liabilities and accrued expenses		27,161			34,386
Long-term debt		30,984			37,240

Total liabilities		772,302			744,481

Commitments and Contingencies (Note 12)

STOCKHOLDERS’ EQUITY:
Cumulative convertible preferred stock, $.01 par value		—			—
Authorized shares - 1,000
Issued shares - 12 and 30
Outstanding shares - 12 and 30
Minimum liquidation preference, $8.49 and $6.98 per share
Common stock, $.01 par value		449			436
Authorized shares - 55,000
Issued shares - 44,935 and 43,641
Outstanding shares - 34,988 and 35,366
Treasury shares, at cost - 9,947 and 8,275		(55,701	)		(35,467	)
Additional paid-in capital		41,539			42,282
Accumulated other comprehensive income (loss), net of taxes		(623	)		(376	)
Retained earnings		192,436			168,734

Total stockholders’ equity		178,100			175,609

Total liabilities and stockholders’ equity	$	950,402		$	920,090

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 INCOME (unaudited)

(in thousands, except per share data)


	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
PREMIUMS EARNED AND OTHER REVENUES
Direct premiums written	$	220,009		$	219,946		$	411,926		$	424,085
Ceded premiums written		(76,483	)		(133,897	)		(198,132	)		(275,214	)

Net premiums written		143,526			86,049			213,794			148,871
Change in net unearned premium		(70,164	)		(19,182	)		(76,625	)		(16,595	)

Premiums earned, net		73,362			66,867			137,169			132,276
Net investment income (expense)		412			137			930			149
Net realized gains (losses) on investments		3,950			(1	)		4,852			(16,038	)
Net change in unrealized gains (losses) on investments		—			23			—			7,897
Commission revenue		3,670			5,271			7,759			10,257
Policy fees		3,899			3,819			7,411			7,505
Other revenue		1,696			1,640			3,173			3,165

Total premiums earned and other revenues		86,989			77,756			161,294			145,211

OPERATING COSTS AND EXPENSES
Losses and loss adjustment expenses		27,679			25,199			54,504			51,682
General and administrative expenses		28,901			22,869			53,264			44,079

Total operating costs and expenses		56,580			48,068			107,768			95,761

INCOME BEFORE INCOME TAXES		30,409			29,688			53,526			49,450
Income taxes, current		13,398			12,351			22,457			16,298
Income taxes, deferred		(115	)		308			394			4,164

Income taxes, net		13,283			12,659			22,851			20,462

NET INCOME	$	17,126		$	17,029		$	30,675		$	28,988

Basic earnings per common share	$	0.50		$	0.47		$	0.91		$	0.76

Weighted average common shares outstanding - Basic		33,968			36,378			33,696			38,138

Fully diluted earnings per common share	$	0.49		$	0.44		$	0.87		$	0.73

Weighted average common shares outstanding - Diluted		35,174			38,314			35,450			39,760

Cash dividend declared per common share	$	0.10		$	0.08		$	0.20		$	0.16

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)


	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
Net income	$	17,126		$	17,029		$	30,675		$	28,988
Other comprehensive income (loss), net of taxes		(359	)		(2,608	)		(247	)		(2,608	)

Comprehensive income (loss)	$	16,767		$	14,421		$	30,428		$	26,380

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

UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(in thousands)


	Six Months Ended June 30,
	2014			2013
Cash flows from operating activities:
Net Income	$	30,675		$	28,988
Adjustments to reconcile net income to net cash provided by operating activities:
Bad debt expense		166			254
Depreciation		551			497
Amortization of share-based compensation		5,210			2,928
Amortization of original issue discount on debt		480			101
Accretion of deferred credit		(480	)		(101	)
Book overdraft increase (decrease)		(10,635	)		(1,068	)
Net realized (gains) losses on investments		(4,852	)		16,038
Net change in unrealized (gains) losses on investments		—			(7,897	)
Amortization of premium/accretion of discount, net		1,007			287
Deferred income taxes		394			4,164
Excess tax (benefits) shortfall from share-based compensation		(6,342	)		(4	)
Other		(5	)		5
Net change in assets and liabilities relating to operating activities:
Restricted cash and cash equivalents		(35	)		30,356
Prepaid reinsurance premiums		47,403			(16,020	)
Reinsurance recoverable		30,281			10,040
Reinsurance receivable, net		(26,149	)		(208	)
Premiums receivable, net		(8,707	)		(6,972	)
Accrued investment income		(30	)		(729	)
Other receivables		(721	)		(1,431	)
Income taxes recoverable		5,328			(6,484	)
Deferred policy acquisition costs, net		(12,178	)		41
Purchase of trading securities		—			(26,009	)
Proceeds from sales of trading securities		—			102,661
Other assets		(170	)		(849	)
Unpaid losses and loss adjustment expenses		(14,597	)		(26,981	)
Unearned premiums		29,221			32,616
Accounts payable		1,368			642
Reinsurance payable, net		33,863			49,440
Income taxes payable		4,183			(502	)
Other liabilities and accrued expenses		(6,745	)		(2,336	)
Advance premium		(288	)		10,649

Net cash provided by (used in) operating activities		98,196			192,116

Cash flows from investing activities:
Proceeds from sale of property and equipment		30			5
Purchase of property and equipment		(1,108	)		(848	)
Purchases of available for sale equity securities		(13,251	)		(51,836	)
Purchases of available for sale fixed maturities		(49,230	)		(292,989	)
Proceeds from sales of available for sale equity securities		68,417			14
Proceeds from sales of available for sale fixed maturities		4,371			—
Maturities of available for sale fixed maturities		12,541			4,531

Net cash provided by (used in) investing activities		21,770			(341,123	)

Cash flows from financing activities:
Preferred stock dividend		(8	)		(10	)
Common stock dividend		(3,464	)		(6,080	)
Purchase of treasury stock		(19,737	)		(28,077	)
Payments related to tax withholding for share-based compensation		(12,282	)		(2,630	)
Excess tax benefits (shortfall) from share-based compensation		6,342			4
Repayment of debt		(6,735	)		(735	)
Proceeds from borrowings		—			20,000

Net cash provided by (used in) financing activities		(35,884	)		(17,528	)

Net increase (decrease) in cash and cash equivalents		84,082			(166,535	)
Cash and cash equivalents at beginning of period		117,275			347,392

Cash and cash equivalents at end of period	$	201,357		$	180,857

Supplemental cash flow and non-cash disclosures:
Interest paid	$	828		$	319
Income taxes paid	$	12,935		$	7,833
Non-cash transfer of investments from trading to available for sale portfolio	$	—		$	4,004

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)

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 and its wholly-owned subsidiaries (collectively, the “Company”) are a vertically integrated insurance holding 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 offered in eight states as of June 30, 2014, including Florida, which comprises the vast majority of the Company’s in-force policies. See “—Note 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 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, 2013, filed with the SEC on March 3, 2014. The condensed consolidated balance sheet at December 31, 2013, 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.

To conform to 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 Financial Statements include the accounts of UIH 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.

Significant Accounting Policies

The Company reported Significant Accounting Policies in its Annual Report on Form 10-K for the year ended December 31, 2013. There are no new or revised disclosures or disclosures required on a quarterly basis.

Recently Issued Accounting Pronouncements

In July 2013, the Financial Accounting Standards Board (“FASB”) issued accounting guidance on the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss or a tax credit carryforward exists. Under this guidance, an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should generally be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward. This guidance is effective for fiscal years and interim periods beginning after December 15, 2013, but earlier adoption is permitted. The Company adopted this guidance effective January 1, 2014. The adoption did not have an impact on the presentation of the Company’s financial statements and notes herein.

In June 2011, the FASB updated its guidance to the Comprehensive Income Topic 220 of the FASB Accounting Standards Codification and in February 2013, the FASB further amended such topic. This February 2013 guidance requires disclosure about amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement of operations or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income, but only if the amount reclassified is required to be reclassified to net income in its entirety in the same reporting period. For amounts that are not required to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures that provide additional detail about those amounts. This guidance is to be applied prospectively to interim and annual reporting periods beginning after December 15, 2012. The Company adopted this guidance effective January 1, 2013. The adoption of this guidance results in additional disclosures but did not impact the Company’s results of operations, cash flows or financial position. The updated guidance provided by the FASB in June 2011 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 (the approach currently used in the Company’s financial statements), or two separate but consecutive 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. The adoption did not have an impact on the presentation of the Company’s financial statements and notes herein, as the Company has presented amounts of other comprehensive income consistent with this updated guidance.

Investments

The Company liquidated its trading portfolio of equity securities and transferred the fixed maturities that were outstanding at December 31, 2012 into its portfolio of securities available for sale effective March 1, 2013. The unrealized gain (loss) associated with the fixed maturities trading portfolio was recognized in earnings up to the date of transfer.

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


	June 30, 2014						December 31, 2013
	Cost or						Cost or
	Amortized				Carrying		Amortized				Carrying
	Cost		Fair Value		Value		Cost		Fair Value		Value
Cash and cash equivalents (1)	$	201,357	$	201,357	$	201,357	$	117,275	$	117,275	$	117,275
Restricted cash and cash equivalents		2,635		2,635		2,635		2,600		2,600		2,600
Fixed maturities:
U.S. government obligations and agencies		116,931		116,422		116,422		105,229		104,215		104,215
Corporate bonds		106,450		106,745		106,745		94,708		94,203		94,203
Mortgage-backed and asset-backed securities		95,054		94,908		94,908		91,502		91,000		91,000
Redeemable preferred stock		4,990		5,070		5,070		—		—		—
Equity securities:
Common stock		652		590		590		8,500		9,295		9,295
Mutual funds		12,502		11,830		11,830		55,113		55,727		55,727

Total investments		336,579		335,565		335,565		355,052		354,440		354,440

Total	$	540,571	$	539,557	$	539,557	$	474,927	$	474,315	$	474,315

(1)	Cash and cash equivalents include short-term debt securities consisting of direct obligations of the U.S. Treasury and/or money-market accounts that invest in or are collateralized by direct obligations of the U.S. Treasury and other U.S. government guaranteed securities.

The Company has made an assessment of its invested assets for fair value measurement as further described in “— Note 13 (Fair Value Measurements)”.

The following table presents the components of net investment income, comprised primarily of interest and dividends, for the periods presented (in thousands):


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2014			2013			2014			2013
Cash and cash equivalents (1)	$	9		$	122		$	21		$	242
Fixed maturities		783			(30	)		1,511			(30	)
Equity securities		152			279			454			367

Total investment income		944			371			1,986			579
Less investment expenses		(532	)		(234	)		(1,056	)		(430	)

Net investment (expense) income	$	412		$	137		$	930		$	149

(1)

Includes interest earned on restricted cash and cash equivalents.

Securities Available for Sale

The following table provides the cost or amortized cost and fair value of securities available for sale as of the dates presented (in thousands):


	June 30, 2014
	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Fixed Maturities:
U.S. government obligations and agencies	$	116,931	$	77	$	(586	)	$	116,422
Corporate bonds		106,450		443		(148	)		106,745
Mortgage-backed and asset-backed securities		95,054		204		(350	)		94,908
Redeemable preferred stock		4,990		82		(2	)		5,070
Equity Securities:
Common stock		652		3		(65	)		590
Mutual funds		12,502		19		(691	)		11,830

Total	$	336,579	$	828	$	(1,842	)	$	335,565


	December 31, 2013
	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Fixed Maturities:
U.S. government obligations and agencies	$	105,229	$	19	$	(1,033	)	$	104,215
Corporate bonds		94,708		265		(770	)		94,203
Mortgage-backed and asset-backed securities		91,502		75		(577	)		91,000
Equity Securities:
Common stock		8,500		916		(121	)		9,295
Mutual funds		55,113		2,266		(1,652	)		55,727

Total	$	355,052	$	3,541	$	(4,153	)	$	354,440

The following table provides the credit quality of fixed maturities as of the dates presented (in thousands):


June 30, 2014
Standard and Poor’s Rating Services	Fair Value		% of Total Fair Value
AAA	$	30,547		9.5	%
AA		191,775		59.3	%
A		49,930		15.5	%
BBB		41,812		12.9	%
BB and Below		1,504		0.5	%
No Rating Available		7,577		2.3	%

Total	$	323,145		100.0	%


December 31, 2013
Standard and Poor’s Rating Services	Fair Value		% of Total Fair Value
AAA	$	82,889		28.6	%
AA		120,976		41.8	%
A		46,689		16.1	%
BBB		38,114		13.2	%
No Rating Available		750		0.3	%

Total	$	289,418		100.0	%

The following table summarizes the cost or amortized cost and fair value of mortgage-backed and asset-backed securities as of the dates presented (in thousands):


	June 30, 2014				December 31, 2013
	Cost or Amortized				Cost or Amortized
	Cost		Fair Value		Cost		Fair Value
Mortgage-backed securities:
Agency	$	57,935	$	57,737	$	64,028	$	63,547
Non-agency		2,184		2,169		—		—
Asset-backed securities:
Auto loan receivables		16,858		16,907		14,816		14,841
Credit card receivables		13,478		13,479		11,478		11,425
Other receivables		4,599		4,616		1,180		1,187

Total	$	95,054	$	94,908	$	91,502	$	91,000

The following table summarizes the fair value and gross unrealized losses on securities available for sale, aggregated by major investment category and length of time that individual securities have been in a continuous unrealized loss position as of the dates presented (in thousands):


	June 30, 2014
	Less Than 12 Months							12 Months or Longer
	Number of Issues		Fair Value		Unrealized Losses			Number of Issues		Fair Value		Unrealized Losses
Fixed maturities:
U.S. government obligations and agencies		2	$	17,604	$	(79	)		4	$	34,152	$	(507	)
Corporate bonds		9		5,954		(28	)		14		17,905		(120	)
Mortgage-backed and asset-backed securities		8		27,200		(106	)		5		19,175		(244	)
Redeemable preferred stock		9		1,080		(2	)		—		—		—
Equity securities:
Common stock		5		228		(23	)		5		282		(42	)
Mutual funds		1		1,159		(76	)		1		10,071		(615	)

Total		34	$	53,225	$	(314	)		29	$	81,585	$	(1,528	)


	December 31, 2013
	Less Than 12 Months							12 Months or Longer
	Number of Issues		Fair Value		Unrealized Losses			Number of Issues		Fair Value		Unrealized Losses
Fixed maturities:
U.S. government obligations and agencies		6	$	71,042	$	(1,033	)		—	$	—	$	—
Corporate bonds		55		65,926		(770	)		—		—		—
Mortgage-backed and asset-backed securities		16		67,110		(577	)		—		—		—
Equity securities:
Common stock		13		3,517		(121	)		—		—		—
Mutual funds		5		19,646		(1,652	)		—		—		—

Total		95	$	227,241	$	(4,153	)		—	$	—	$	—

At June 30, 2014, we held fixed maturity and equity securities that were in an unrealized loss position as presented in the table above. For fixed maturity securities with significant declines in value, we perform quarterly fundamental credit analysis on a security-by-security basis, which includes consideration of credit quality and credit ratings, review of relevant industry analyst reports and other available market data. For fixed maturity and equity securities, the Company considers whether it has the intent and ability to hold the securities for a period of time sufficient to recover its cost basis. Where the Company lacks the intent and ability to hold to recovery, or believes the recovery period is extended, the security’s decline in fair value is considered other than temporary and is recorded in earnings. Based upon management’s intent and ability to hold the securities until recovery and its credit analysis of the individual issuers of the securities, management has no reason to believe the unrealized losses for securities available for sale at June 30, 2014 are other than temporary.

The following table presents the amortized cost and fair value of fixed maturities available for sale by contractual maturity as of the date presented (in thousands):


	June 30, 2014
	Amortized Cost		Fair Value
Due in one year or less	$	52,364	$	52,346
Due after one year through five years		165,335		165,278
Due after five years through ten years		5,094		4,970
Due after ten years		2,636		2,678
Mortgage-backed and asset-backed securities		95,054		94,908
Perpetual maturity securities		2,942		2,965

Total	$	323,425	$	323,145

Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay with or without penalty.

The following table provides certain information related to securities available for sale during the period presented (in thousands):


	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
Sales proceeds (fair value)	$	58,347		$	14		$	72,788		$	14
Gross realized gains	$	4,189		$	—		$	5,188		$	—
Gross realized losses	$	(239	)	$	(1	)	$	(336	)	$	(1	)
Other than temporary losses	$	—		$	—		$	—		$	—

Trading Portfolio

The following table provides the effect of trading activities on the Company’s results of operations for the period presented by type of instrument and by line item in the Condensed Consolidated Statements of Income (in thousands):


	Six Months Ended June 30, 2013
Realized gains (losses) on investments:
Equity securities	$	(15,969	)
Derivatives (non-hedging instruments) (1)		(68	)

Total realized gains (losses) on trading portfolio		(16,037	)
Change in unrealized gains (losses) on investments:
Fixed maturities		13
Equity securities		7,758
Derivatives (non-hedging instruments) (1)		89
Other		14

Total change in unrealized gains (losses) on trading portfolio		7,874

Net gains (losses) recognized on trading portfolio	$	(8,163	)

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

The Company liquidated its trading portfolio in March 2013; therefore, for periods subsequent to March 31, 2013 there was no effect of trading activities on the Company’s results of operations.

Reinsurance

The Company 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. The Company’s reinsurance program consists of excess of loss, quota share and catastrophe reinsurance, subject to the terms and conditions of the applicable agreements. The Company is responsible for insured losses related to catastrophes and other events in excess of coverage provided by its reinsurance program. The Company remains responsible for the settlement of insured losses irrespective of the failure of any of its reinsurers to make payments otherwise due to the Company.

The Company reduced the percentage of premiums ceded by UPCIC to its quota share reinsurers to 30% beginning with the reinsurance program effective June 1, 2014, from 45% under the prior year quota share contracts that were effective June 1, 2013 through May 31, 2014. By ceding 15% less premium to its quota share reinsurers, the Company expects to increase its profitability by retaining more premium. The reduction in cession rate also decreases the amount of losses and loss adjustment expenses (“LAE”) that may be ceded by UPCIC and effectively increases the amount of risk retained by UPCIC and the Company. The reduction of cession rate also reduces the amount of ceding commissions earned from the Company’s quota share reinsurer during the contract term and decreases the amount of deferred ceding commission, as of June 30, 2014, that is a component of net deferred policy acquisition costs.

Amounts recoverable from reinsurers are estimated in a manner consistent with the reinsurance contracts. Reinsurance premiums, losses and 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. Deferred ceding commissions are netted against policy acquisition costs and amortized over the effective period of the related insurance policies.

In order to reduce credit risk for amounts due from reinsurers, the Insurance Entities seek to do business with financially sound reinsurance companies and regularly evaluate the financial strength of all reinsurers used.

The following table presents ratings from rating agencies and the unsecured amounts due from the Company’s reinsurers whose aggregate balance exceeded 3% of the Company’s stockholders’ equity as of the dates presented (in thousands):

Ratings as of June 30, 2014

Due from as of

Reinsurer

AM Best
Company

Standard
and Poor’s
Rating
Services

Moody’s
Investors
Service, Inc.

June 30,
2014

December 31,
2013

Everest Reinsurance Company

A+

59,420

87,789

Florida Hurricane Catastrophe Fund

n/a

—

33,593

Odyssey Reinsurance Company

A-

131,277

142,190

Total (1)

190,697

263,572

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

n/a - No rating applicable, because entity is not rated.

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


	Three Months Ended June 30,
	2014									2013
							Loss and Loss									Loss and Loss
	Premiums			Premiums			Adjustment			Premiums			Premiums			Adjustment
	Written			Earned			Expenses			Written			Earned			Expenses
Direct	$	220,009		$	192,061		$	46,970		$	219,946		$	197,302		$	50,350
Ceded		(76,483	)		(118,699	)		(19,291	)		(133,897	)		(130,435	)		(25,151	)

Net	$	143,526		$	73,362		$	27,679		$	86,049		$	66,867		$	25,199


	Six Months Ended June 30,
	2014									2013
							Loss and Loss									Loss and Loss
	Premiums			Premiums			Adjustment			Premiums			Premiums			Adjustment
	Written			Earned			Expenses			Written			Earned			Expenses
Direct	$	411,926		$	382,705		$	97,692		$	424,085		$	391,470		$	100,946
Ceded		(198,132	)		(245,536	)		(43,188	)		(275,214	)		(259,194	)		(49,264	)

Net	$	213,794		$	137,169		$	54,504		$	148,871		$	132,276		$	51,682

The following prepaid reinsurance premiums and reinsurance recoverable and receivable are reflected in the Condensed Consolidated Balance Sheets as of the dates presented (in thousands):


	June 30, 2014		December 31, 2013
Prepaid reinsurance premiums	$	193,811	$	241,214

Reinsurance recoverable on unpaid losses and LAE	$	58,705	$	68,584
Reinsurance recoverable on paid losses		18,861		39,263
Reinsurance receivable, net		26,352		203

Reinsurance recoverable and receivable	$	103,918	$	108,050

Insurance Operations

Deferred Policy Acquisition Costs, net

The Company defers certain costs in connection with written policies, 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 presents the beginning and ending balances and the changes in DPAC, net of DRCC, for the periods presented (in thousands):


	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
DPAC, beginning of period	$	54,211		$	55,391		$	54,099		$	54,431
Capitalized Costs		29,993			30,241			56,775			58,933
Amortization of DPAC		(26,055	)		(26,599	)		(52,725	)		(54,331	)

DPAC, end of period	$	58,149		$	59,033		$	58,149		$	59,033

DRCC, beginning of period	$	38,318		$	38,014		$	38,200		$	37,149
Ceding Commissions Written		10,439			26,222			32,319			48,534
Earned Ceding Commissions		(18,685	)		(22,444	)		(40,447	)		(43,891	)

DRCC, end of period	$	30,072		$	41,792		$	30,072		$	41,792

DPAC (DRCC), net, beginning of period	$	15,893		$	17,377		$	15,899		$	17,282
Capitalized Costs, net		19,554			4,019			24,456			10,399
Amortization of DPAC (DRCC), net		(7,370	)		(4,155	)		(12,278	)		(10,440	)

DPAC (DRCC), net, end of period	$	28,077		$	17,241		$	28,077		$	17,241

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):


	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
Balance at beginning of period	$	150,557		$	182,528		$	159,222		$	193,241
Less reinsurance recoverable		(64,109	)		(75,680	)		(68,584	)		(81,415	)

Net balance at beginning of period		86,448			106,848			90,638			111,826

Incurred (recovered) related to:
Current year		28,333			26,675			55,188			53,329
Prior years		(654	)		(1,476	)		(684	)		(1,647	)

Total incurred		27,679			25,199			54,504			51,682

Paid related to:
Current year		16,200			16,303			20,067			17,475
Prior years		12,007			17,304			39,155			47,593

Total paid		28,207			33,607			59,222			65,068

Net balance at end of period		85,920			98,440			85,920			98,440
Plus reinsurance recoverable		58,705			67,820			58,705			67,820

Balance at end of period	$	144,625		$	166,260		$	144,625		$	166,260

Regulatory Requirements and Restrictions

The Insurance Entities are subject to regulations and standards of the Florida Office of Insurance Regulation. These standards require the Insurance 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 dividends to be paid from statutory unassigned surplus of the regulated subsidiary and are limited based on the regulated subsidiary’s level of statutory net income and statutory capital and surplus. The maximum dividend that may be paid by UPCIC and APPCIC to their immediate parent company, Universal Insurance Holding Company of Florida (“UIHCF”), without prior regulatory approval is limited to the lesser of statutory net income from operations of the preceding calendar year or 10.0% of statutory unassigned surplus as of the preceding year end. These dividends are referred to as “ordinary dividends.” However, if the dividend, together with other dividends paid within the preceding twelve months, exceeds this 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.

Based on the 2013 statutory net income and statutory capital and surplus levels, UPCIC has the capacity to pay ordinary dividends of $290 thousand during 2014. APPCIC does not have the capacity to pay ordinary dividends during 2014. For the six months ended June 30, 2014, no dividends were paid from UPCIC or APPCIC to UIHCF. Dividends paid to the shareholders of UIH are paid from the earnings of UIH and its non-insurance subsidiaries and not from the capital and surplus of the Insurance Entities.

The Florida Insurance Code requires insurance companies to maintain capitalization equivalent to the greater of ten percent of the insurer’s total liabilities or $5.0 million. The following table presents the amount of capital and surplus calculated in accordance with statutory accounting principles, which differ from GAAP, and an amount representing ten percent of total liabilities for both UPCIC and APPCIC as of the dates presented (in thousands):


	June 30,		December 31,
	2014		2013
Ten percent of total liabilities
UPCIC	$	48,122	$	39,179
APPCIC	$	696	$	625

Statutory capital and surplus
UPCIC	$	167,862	$	161,803
APPCIC	$	13,287	$	13,708

As of the dates in the table above, both UPCIC and APPCIC met the Florida capitalization requirement. UPCIC and APPCIC are also required to adhere to prescribed premium-to-capital surplus ratios and have met those requirements at such dates.

The Insurance Entities are required by various state laws and regulations to maintain certain assets in depository accounts. The following table represents assets held by insurance regulators as of the dates presented (in thousands):


	June 30,		December 31,
	2014		2013
Restricted cash and cash equivalents	$	2,635	$	2,600
Investments	$	3,772	$	3,707

Long-Term Debt

Long-term debt consists of a surplus note entered into by UPCIC with carrying amounts of $18.0 million and $18.8 million as of June 30, 2014 and December 31, 2013, respectively; a term loan with carrying amounts of $13.0 million and $18.5 million as of June 30, 2014 and December 31, 2013, respectively; and any amounts drawn upon an unsecured line of credit.

On March 29, 2013, UIH entered into a revolving loan agreement and related revolving note with Deutsche Bank Trust Company Americas (“Deutsche Bank”), amended as of May 23, 2013 (“DB Loan”). The DB Loan makes available to UIH an unsecured line of credit in an aggregate amount not to exceed $10.0 million. The DB Loan contains financial covenants and as of June 30, 2014, UIH was in compliance with all such covenants. UIH had not drawn any amounts under the unsecured line of credit as of June 30, 2014.

On May 23, 2013, UIH entered into a $20 million unsecured term loan agreement and related term note (“Term Loan”) with RenaissanceRe Ventures Ltd. (“RenRe Ventures”). The Term Loan contains financial covenants and as of June 30, 2014, UIH was in compliance with all such covenants.

The following table provides the principal amount and unamortized original issue discount of the Term Loan as of the dates presented (in thousands):


	June 30, 2014			December 31, 2013
Principal amount	$	14,000		$	20,000
Less: unamortized original issue discount		(1,031	)		(1,510	)

Term Loan, net of unamortized original issue discount	$	12,969		$	18,490

Amortization of the original issue discount is included in interest expense, a component of general and administrative expenses, in the Condensed Consolidated Statements of Income and was $230 thousand and $101 thousand for the three months ended June 30, 2014 and 2013, respectively, and $480 thousand and $101 thousand for the six months ended June 30, 2014 and 2013, respectively.

Should UIH default on either the DB Loan or the Term Loan, it will be prohibited from paying dividends to its shareholders.

Stockholders’ Equity

Common Stock

The following table summarizes the activity relating to shares of the Company’s common stock during the six months ended June 30, 2014 (in thousands):


	Issued Shares			Treasury Shares			Outstanding Shares
Balance, as of December 31, 2013		43,641			(8,275	)		35,366

Conversion of preferred stock		65			—			65
Shares repurchased		—			(1,672	)		(1,672	)
Options exercised		1,725			—			1,725
Restricted stocks grants		950			—			950
Shares acquired through cashless exercise (1)		—			(1,446	)		(1,446	)
Shares cancelled		(1,446	)		1,446			—

Balance, as of June 30, 2014		44,935			(9,947	)		34,988

(1)	All shares acquired represent shares tendered to cover the strike price for options and tax withholdings on the intrinsic value of options exercised or restricted stock vested. These shares have been cancelled by the Company.

During the six months ended June 30, 2014, UIH entered into various repurchase agreements with Bradley I. Meier, the Company’s former Chairman, President and Chief Executive Officer, to repurchase shares of UIH’s common stock owned by Mr. Meier. UIH repurchased an aggregate of 1,225,000 shares from Mr. Meier since January 2014 at a total cost of $14.7 million. As a result of these transactions, Mr. Meier now owns less than 5 percent of UIH’s outstanding common stock and according to the terms of the right of first refusal of each of UIH and RenRe Ventures, UIH and RenRe Ventures no longer have a right of first refusal to purchase shares of UIH common stock owned by Mr. Meier.

During the six months ended June 30, 2014, 8,000 and 9,975 shares of Series M and Series A Preferred Stock, respectively, were converted into 64,938 shares of UIH’s common stock.

During the six months ended June 30, 2014, UIH repurchased an aggregate of 446,271 shares of its common stock at a total cost of $5.5 million in the open market in compliance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended (“Rule 10b-18”).

In June 2014, UIH announced that its Board of Directors authorized a share repurchase program under which UIH may repurchase in the open market in compliance with Rule 10b-18 up to $10 million of its outstanding shares of common stock through August 1, 2015. UIH repurchased 38,424 shares through such repurchase program through June 30, 2014.

Dividends

On January 30, 2014, the Company declared a cash dividend of $0.10 per share on its outstanding common stock paid on March 3, 2014, to the shareholders of record at the close of business on February 19, 2014.

On April 16, 2014, the Company declared a cash dividend of $0.10 per share on its outstanding common stock paid on July 3, 2014, to the shareholders of record at the close of business on June 19, 2014.

Related Party Transactions

Downes and Associates, a multi-line insurance adjustment corporation based in Deerfield Beach, Florida, performed certain claims adjusting work for UPCIC. Downes and Associates is owned by Dennis Downes, who is the father of Sean P. Downes, Chairman, President and Chief Executive Officer of the Company. All amounts paid to Downes and Associates were no greater than amounts that would need to be paid to third parties on an arm’s-length basis for similar services. The Company’s agreement with Downes and Associates was terminated effective November 30, 2013 and on December 1, 2013 Dennis Downes became an employee of the Company.

Scott P. Callahan, a director of the Company, provides the Company with consulting services and advice with respect to the Company’s reinsurance and related matters through SPC Global RE Advisors LLC, an entity affiliated with Mr. Callahan. The Company entered into the consulting agreement with SPC Global RE Advisors LLC effective June 6, 2013.

The following table provides payments made by the Company to related parties for the periods presented (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
Downes and Associates	$	—	$	130	$	—	$	259
SPC Global RE Advisors LLC	$	30	$	—	$	60	$	—

There were no amounts due to SPC Global RE Advisors LLC as of June 30, 2014 and December 31, 2013, respectively. Payments due to Downes and Associates and SPC Global RE Advisors LLC were or are generally made in the month the services are provided.

Income Taxes

During the three months ended June 30, 2014 and 2013, the Company recorded approximately $13.3 million and $12.7 million, respectively, of income taxes, which resulted in effective tax rates of 43.7% and 42.6%, respectively. During the six months ended June 30, 2014 and 2013, the Company recorded approximately $22.9 million and $20.5 million, respectively, of income taxes, which resulted in effective tax rates of 42.7% and 41.4%, respectively. The Company’s effective tax rate differs from the statutory federal income tax rate due to state income taxes and certain nondeductible items.

Tax years that remain open for purposes of examination of the Company’s income tax liability due to taxing authorities, include the years ended December 31, 2012, 2011 and 2010. However, there is currently an IRS examination underway related to the loss carryback of realized losses from securities sold during 2012 applied to the 2009 tax year.

10.

Earnings Per Share

Basic earnings per share (“EPS”) is based on the weighted average number of common shares outstanding for the period, excluding any dilutive common share equivalents. Diluted EPS reflects the potential dilution resulting from exercises of stock options, vesting of restricted stock and conversion of preferred stock.

The following table reconciles the numerator (i.e., income) and denominator (i.e., shares) of the basic and diluted earnings per share computations for the periods presented (in thousands, except per share data):


	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
Numerator for EPS:
Net income	$	17,126		$	17,029		$	30,675		$	28,988
Less: Preferred stock dividends		(3	)		(5	)		(8	)		(10	)

Income available to common stockholders	$	17,123		$	17,024		$	30,667		$	28,978

Denominator for EPS:
Weighted average common shares outstanding		33,968			36,378			33,696			38,138
Plus: Assumed conversion of stock-based compensation (1)		1,171			1,448			1,697			1,134
Plus: Assumed conversion of preferred stock		35			488			57			488

Weighted average diluted common shares outstanding		35,174			38,314			35,450			39,760

Basic earnings per common share	$	0.50		$	0.47		$	0.91		$	0.76
Diluted earnings per common share	$	0.49		$	0.44		$	0.87		$	0.73

(1)	Represents the dilutive effect of unvested restricted stock and unexercised stock options.

11.

Other Comprehensive Income (Loss)

The following table provides the components of other comprehensive income (loss) on a pre-tax and after-tax basis for the period presented (in thousands):


	For the Three Months Ended June 30,
	2014									2013
	Pre-tax			Tax			After-tax			Pre-tax			Tax			After-tax
Net unrealized gains (losses) on investments available for sale arising during the period	$	3,366		$	1,299		$	2,067		$	(4,246	)	$	(1,638	)	$	(2,608	)
Less: Amounts reclassified from accumulated other comprehensive income (loss)		(3,950	)		(1,524	)		(2,426	)		1			—			—

Net current period other comprehensive income (loss)	$	(584	)	$	(225	)	$	(359	)	$	(4,245	)	$	(1,638	)	$	(2,608	)


	For the Six Months Ended June 30,
	2014									2013
	Pre-tax			Tax			After-tax			Pre-tax			Tax			After-tax
Net unrealized gains (losses) on investments available for sale arising during the period	$	4,450		$	1,717		$	2,733		$	(4,246	)	$	(1,638	)	$	(2,608	)
Less: Amounts reclassified from accumulated other comprehensive income (loss)		(4,852	)		(1,872	)		(2,980	)		1			—			—

Net current period other comprehensive income (loss)	$	(402	)	$	(155	)	$	(247	)	$	(4,245	)	$	(1,638	)	$	(2,608	)

The following table provides the reclassifications out of accumulated other comprehensive income for the period presented (in thousands):


Details about Accumulated Other Comprehensive Income Components	Amounts Reclassified from Accumulated Other Comprehensive Income						Affected Line Item in the Statement
	Three Months Ended June 30,						Affected Line Item in the Statement
	2014			2013			Where Net income is Presented
Unrealized gains (losses) on investments available for sale
	$	3,950		$	(1	)	Net realized gains (losses) on investments
		(1,524	)		—		Income taxes, current

	$	2,426		$	—		Net of tax


Details about Accumulated Other Comprehensive Income Components	Amounts Reclassified from Accumulated Other Comprehensive Income						Affected Line Item in the Statement
	Six Months Ended June 30,						Affected Line Item in the Statement
	2014			2013			Where Net income is Presented
Unrealized gains (losses) on investments available for sale
	$	4,852		$	(1	)	Net realized gains (losses) on investments
		(1,872	)		—		Income taxes, current

	$	2,980		$	—		Net of tax

12.

Commitments and Contingencies

Litigation

Certain lawsuits have been filed against the Company. These lawsuits involve routine matters 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 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.

Other

In July 2013, UPCIC entered into a lease agreement (“Lease Agreement”) for an office building adjacent to its principal office in Fort Lauderdale, Florida (“Property”) and expects to use the Property for additional office and storage space. The Company took possession of the office building and began monthly rental payments in October 2013.

Also in July 2013, UPCIC entered into a purchase agreement to acquire the Property (“Purchase Agreement”). The Purchase Agreement provides that the closing for the sale of the Property will take place no later than February 5, 2015. The closing for the sale of the Property is subject to certain closing conditions. The purchase price for the Property is $5.99 million, and UPCIC will receive a credit toward the purchase price for a portion of the rent it pays under the Lease Agreement.

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

•

Level 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 and restricted cash and cash equivalents: Cash equivalents and restricted cash 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 and restricted cash and cash equivalents approximates fair value due to its liquid nature.

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.

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.

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.

Corporate Bonds: Comprise investment-grade fixed income securities. 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.

Mortgage-backed and asset-backed securities: Comprise securities that are collateralized by mortgage obligations and other assets. 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, collateral performance and credit spreads.

Redeemable Preferred Stock: Comprise preferred stock securities that are redeemable. The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not 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 the placement of the asset or liability 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 the dates presented (in thousands):


	Fair Value Measurements June 30, 2014
	Level 1		Level 2		Level 3		Total
Cash and cash equivalents	$	201,357	$	—	$	—	$	201,357
Restricted cash and cash equivalents		2,635		—		—		2,635
Fixed maturities:
U.S. government obligations and agencies		—		116,422		—		116,422
Corporate bonds		—		106,745		—		106,745
Mortgage-backed and asset-backed securities		—		94,908		—		94,908
Redeemable preferred stock		—		5,070		—		5,070
Equity securities:
Common stock		590		—		—		590
Mutual funds		11,830		—		—		11,830

Total investments	$	12,420	$	323,145	$	—	$	335,565

Total assets accounted for at fair value	$	216,412	$	323,145	$	—	$	539,557


	Fair Value Measurements December 31, 2013
	Level 1		Level 2		Level 3		Total
Cash and cash equivalents	$	117,275	$	—	$	—	$	117,275
Restricted cash and cash equivalents		2,600		—		—		2,600
Fixed maturities:
U.S. government obligations and agencies		—		104,215		—		104,215
Corporate bonds		—		94,203		—		94,203
Mortgage-backed and asset-backed securities		—		91,000		—		91,000
Equity securities:
Common stock		9,295		—		—		9,295
Mutual funds		55,727		—		—		55,727

Total investments	$	65,022	$	289,418	$	—	$	354,440

Total assets accounted for at fair value	$	184,897	$	289,418	$	—	$	474,315

The Company utilizes third-party independent pricing services that provide a price quote for each fixed maturity and equity security. 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 fixed maturities or equity securities included in the tables above.

The following table summarizes the carrying value and estimated fair values of the Company’s financial instruments that are not carried at fair value as of the dates presented (in thousands):


	June 30, 2014				December 31, 2013
	Carrying value		(Level 3) Estimated Fair Value		Carrying value		(Level 3) Estimated Fair Value
Liabilities (debt):
Surplus note	$	18,015	$	15,289	$	18,750	$	15,900
Term loan	$	12,969	$	12,969	$	18,490	$	18,490

Level 3

Long-term debt: The fair value of the surplus note was determined by management from the expected cash flows discounted using the interest rate quoted by the holder. The State Board of Administration of Florida (“SBA”) is the holder of the surplus note and the quoted interest rate 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.

The fair value of the Term Loan approximates the carrying value given the original issue discount which was calculated based on the present value of future cash flows using the Company’s effective borrowing rate for similar instruments.

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 June 30, 2014.

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 wholly-owned subsidiaries. You should read the following discussion together with our condensed consolidated financial statements (“Financial Statements”) and the related notes thereto included in Part I, Item 1 “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 Litigation Reform Act of 1995. Forward-looking statements are based on various factors and assumptions that include known and unknown risks and uncertainties, some of which are beyond our control and cannot be predicted or quantified. Certain statements made in this report reflect management’s expectations regarding future events, and the words “expect,” “estimate,” “anticipate,” “believe,” “intend,” “project,” “plan” and similar expressions and variations thereof, speak only as of the date the statement was made and are intended to identify forward-looking statements. 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. 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 which are a summary of those set forth in our Annual Report on Form 10-K for the year ended December 31, 2013.

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 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

•

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

•

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

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

•

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

Risks Relating to the Insurance Industry

•

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

•

Our insurance subsidiaries are subject to examination by state insurance departments

•

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 the Financial Stability Rating^® of our insurance subsidiaries 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

•

Loss of key executives could affect our operations

•

Data security breaches or denial of service on our website could have an adverse impact on our business and reputation

Risks Relating to Debt Obligations

•

Our revolving line of credit and term loan have restrictive terms and our failure to comply with any of these terms could have an adverse effect on our business and prospects and on our ability to pay dividends to our shareholders

Overview

Universal Insurance Holdings, Inc. (“UIH”), with its wholly-owned subsidiaries, 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 eight states.

We generate revenues primarily from the collection of premiums and invest funds in excess of those retained for claims-paying obligations and insurance operations. Other significant sources of revenue include commissions collected from reinsurers and policy fees collected from policyholders through our affiliated managing general agent. The nature of our business tends to be seasonal reflecting consumer behaviors in connection with the hurricane season which occurs during the period from June 1 through November 30 each year. The amount of written premium tends to increase just prior to the start of the hurricane season which is in the second quarter of our fiscal year and to decrease approaching the fourth quarter after the peak of the hurricane season.

From time to time, some of our competitors lower their premiums to a level that is below what we believe to be adequate in order to generate and maintain capital and surplus for the protection of our Insurance Entities and our policyholders. Our focus on long term capital strength and growth leads us to be selective in the risks we are willing to accept, which may limit the number of policies written. We believe these factors have contributed to recent policy attrition in Florida. While policy count is one measure of the overall growth of our business, we believe that our strategy of balancing competitive pricing with disciplined underwriting standards and expanding the size of our business through superior products and services, will maximize our long term growth.

The following table provides policy count and total insured value for Florida and other states as of June 30, 2014 and December 31, 2013 (dollars in thousands):


	As of June 30, 2014										As of December 31, 2013
State	Count		%			Total Insured Value		%			Count		%			Total Insured Value		%
Florida		494,542		92.1	%	$	110,462,527		89.2	%		499,949		93.3	%	$	110,785,839		90.7	%
Other states		42,447		7.9	%		13,403,606		10.8	%		36,039		6.7	%		11,305,295		9.3	%

Grand total		536,989		100.0	%	$	123,866,133		100.0	%		535,988		100.0	%	$	122,091,134		100.0	%

Our overall growth strategy includes taking prudent measures to address attrition. These initiatives include reducing rates in selected markets, while maintaining rate adequacy, and investing in personnel to improve our processes. For example, we have reduced overall rates for homeowners’ insurance in Florida by 2.4% effective in January 2014 for new business and March 2014 for renewals.

As a result of our growth strategy and initiatives, we have seen an increase in the Florida policy count for new business submissions in the first and second quarters of 2014 compared to 2013, and we continue to expand our business in states outside of Florida with growth in policy count of 17.8% since December 31, 2013 and 40.3% since June 30, 2013. We have also seen an increase in policy renewal rates in Florida during the second quarter of 2014 compared to the same period in 2013. Although the Florida policy count as of June 30, 2014 is down compared to December 31, 2013, it has increased from 492 thousand as of March 31, 2014.

2014 Developments

We repurchased an aggregate of 1,671,271 shares of UIH’s common stock since January 1, 2014. See “Item 1 — Note 7 (Stockholders’ Equity)” for additional information.

In January 2014, we announced that UPCIC submitted applications to the respective regulatory entities in Indiana, Minnesota and Delaware in order to begin writing business in those states.

In April 2014, we announced that UPCIC submitted applications to the regulatory entities in Pennsylvania, consistent with the Company’s strategy to increase its geographical diversification.

In April 2014, we announced that the Insurance Commissioner of Delaware issued a Certificate of Authority to UPCIC, thereby approving UPCIC as a licensed insurance entity in the state of Delaware.

In June 2014, we announced that the Insurance Commissioner of Delaware approved the homeowners insurance rates and forms of UPCIC, and that UPCIC has subsequently written its first homeowners insurance policy in Delaware.

In July 2014, Demotech, Inc. affirmed the Financial Stability Rating^® of “A” for APPCIC and UPCIC. According to Demotech, Inc., the affirmation represents a company’s continued positive surplus related to policyholders, liquidity of invested assets, an acceptable level of financial leverage, reasonable loss and loss adjustment expense reserves, and realistic pricing. The ratings of APPCIC and UPCIC are subject to at least annual review by Demotech, Inc., and may be revised upward or downward or revoked at the sole discretion of Demotech, Inc. Financial Stability Ratings^® are primarily directed towards policyholders, and are not evaluations directed toward the protection of investors in the Company, including holders of the Company’s common stock, and are not recommendations to buy, sell or hold securities.

During the six months ended June 30, 2014, we paid cash dividends totaling $0.20 per share.

In February 2014, UIH joined the S&P SmallCap 600 Index after the close of trading on February 28, 2014.

In July 2014, the North Carolina Department of Insurance notified UPCIC that the restriction on annual direct premiums of $20 million had been lifted. The removal of the annual restriction will allow growth in North Carolina to be at a pace governed more by the market than regulatory restraints.

Recent Accounting Pronouncements Not Yet Adopted

In June 2014, the Financial Accounting Standards Board issued guidance which clarifies that a performance target that affects vesting and could be achieved after the requisite service period should be treated as a performance condition and should not be reflected in estimating the grant-date fair value of the award. Compensation costs should reflect the amount attributable to the periods for which the requisite service has been rendered. Total compensation expense recognized during and after the requisite service period, which may differ from the vesting period, should reflect the number of awards that are expected to vest and should be adjusted to reflect the number of awards that ultimately vest. The guidance is effective for reporting periods beginning after December 15, 2015 and may be applied either prospectively or retrospectively. Early adoption is permitted. The adoption of this guidance is not expected to have a material effect on the Company’s results of operations, financial position or liquidity.

Investment Portfolio

As discussed in our Annual Report on Form 10-K for the year ended December 31, 2013 under “Item 1. Business — Investments,” during 2013, our investment committee authorized management to engage Deutsche Bank, a leading global investment adviser specializing in the insurance industry, to manage our investment portfolio. Working with the investment adviser, we transitioned the composition of our portfolio to include a greater percentage of fixed income securities and a smaller percentage of equity securities, which we expect will provide a more stable stream of investment income and reduce the effects of market volatility. Our overall investment objective is to maximize total rate of return while maintaining liquidity and minimizing risk. Our investment strategy includes maintaining investments to support unpaid losses and loss adjustment expenses for our insurance subsidiaries in accordance with guidelines established by insurance regulators.

We currently hold these investments in a portfolio available for sale with changes in fair value reflected in stockholders’ equity with the exception of any other than temporary impairments which are reflected in earnings. In the first quarter of 2013, we liquidated 100% of the equity securities that were held in our trading portfolio resulting in net losses of $8.2 million. See “Item 1 — Note 3 (Investments)” for the composition of our portfolio as of June 30, 2014.

2014 – 2015 Reinsurance Program

Effective June 1, 2014, we entered into multiple reinsurance agreements comprising our 2014-2015 reinsurance program.

See “Item 1 — Note 4 (Reinsurance).”

REINSURANCE GENERALLY

We use reinsurance to reduce our exposure to catastrophic and non-catastrophic losses through a combination of quota share, catastrophe and other forms of reinsurance. Below is a description of our 2014-2015 reinsurance program. We believe that the overall terms of the 2014-2015 reinsurance program are more favorable than the 2013-2014 reinsurance program. We realized cost reductions in part due to market conditions and our preparation and efforts to manage risk exposure. We also are retaining a greater percentage of gross written premiums with wind risk than we did under our 2013-2014 reinsurance program. While we believe the changes to the current reinsurance program are beneficial, there can be no assurance that our actual results of operations or financial condition will be positively affected. The Insurance Entities remain responsible for insured losses notwithstanding the failure of any reinsurer to make payments otherwise due to the Insurance Entities. A major catastrophic event, multiple catastrophes, or the insolvency of one of the larger participants in the reinsurance program could have a material adverse effect on the Insurance Entities’ solvency and our results of operations, financial condition and liquidity.

UPCIC REINSURANCE PROGRAM

UPCIC’s reinsurance program, which generally runs from June 1 through May 31 of the following year, consists of quota share, various forms of catastrophe coverage and individual property and liability per risk/per policy coverage. With the 2014-2015 reinsurance program, UPCIC retains a pre-tax liability of $21 million for the first, second and third catastrophic events under its Florida program with coverage up to $1.774 billion. UPCIC retains a pre-tax liability of $21 million for the first and second catastrophic events under its programs in Delaware, Georgia, Maryland, Massachusetts, North Carolina and South Carolina with coverage up to $125 million and a pre-tax liability of $7 million under its program in Hawaii with coverage up to $30 million. UPCIC reduced its quota share percentage to 30% under its 2014-2015 program compared to 45% under its 2013-2014 program thus retaining more risk and premium per policy. UPCIC has mandatory catastrophe coverage through the Florida Hurricane Catastrophe Fund (“FHCF”) plus voluntary quota share, catastrophe and per risk coverage with private reinsurers. The estimated total net cost after the proportional quota share deductions of UPCIC’s catastrophe, FHCF and per risk related coverage, including reinstatement premium protection coverage is $172.4 million. The largest private participants in UPCIC’s program include Odyssey Re, Everest Re, Renaissance Re, Nephila Capital, ACE Tempest Re and Lloyd’s of London syndicates.

APPCIC REINSURANCE PROGRAM

APPCIC’s reinsurance program, which generally runs from June 1 through May 31 of the following year, consists of various forms of catastrophe coverage and individual property and liability per risk/per policy coverage. With the 2014-2015 reinsurance program, APPCIC retains a pre-tax liability of $2.5 million for the first and second catastrophic events with coverage up to $40.8 million. APPCIC has mandatory catastrophe coverage through the FHCF and voluntary catastrophe and per risk coverage with private reinsurers. The estimated total cost of APPCIC’s catastrophe, FHCF and per risk related coverage, including reinstatement premium protection is $5.0 million. The largest private participants in APPCIC’s reinsurance program include ACE Tempest Re, Hiscox, Odyssey Re, Hannover Ruck, and Lloyd’s of London syndicates.

UIH PROGRAM

Separately from the Insurance Entities’ reinsurance programs, UIH protected its own assets against diminution in value due to catastrophe events by purchasing $80 million in the form of insurance proceeds plus an amount equal to the forgiveness of related debt through a catastrophe risk-linked transaction contract, effective June 1, 2013 through May 31, 2016. This contract provides for recovery by UIH in the event of exhaustion of UPCIC’s catastrophe coverage. The total cost to UIH of this risk-linked transaction contract is $9.0 million per year for each of the three years.

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 Florida Office of Insurance Regulation. The level of wind mitigation discounts mandated by the Florida Legislature which were effective June 1, 2007 for new business and August 1, 2007 for renewal business have had a significant negative effect on the Insurance Entities’ premium. The percentage reduction of in-force premium from wind mitigation credits for UPCIC policies as of June 30, 2014 was 35.2% compared to 32.0% as of June 30, 2013. The percentage reduction of in-force premium from wind mitigation credits for APPCIC policies as of June 30, 2014 was 63.6% compared to 62.9% as of June 30, 2013.

Results of Operations - Three Months Ended June 30, 2014, Compared to Three Months Ended June 30, 2013

Net income increased by $97 thousand to $17.1 million for the three months ended June 30, 2014 compared to $17.0 million the three months ended June 30, 2013. Diluted earnings per common share increased by $0.05 to $0.49 for the three months ended June 30, 2014 compared to $0.44 the three months ended June 30, 2013.

The increase in net income of $97 thousand, or 0.6%, for the three months ended June 30, 2014 compared to the same period in 2013 reflects an increase in net earned premiums and income generated from our investment portfolio, offset by a decrease in commission revenue and increases in operating expenses. A more detailed discussion of these factors follows the table below.

The following table summarizes changes in each component of our Condensed Consolidated Statements of Income and Comprehensive Income for the three months ended June 30, 2014 compared to the same period in 2013 (in thousands):


	Three Months Ended June 30,						Change
	2014			2013			$			%
PREMIUMS EARNED AND OTHER REVENUES
Direct premiums written	$	220,009		$	219,946		$	63			0.0	%
Ceded premiums written		(76,483	)		(133,897	)		57,414			-42.9	%

Net premiums written		143,526			86,049			57,477			66.8	%
Change in net unearned premium		(70,164	)		(19,182	)		(50,982	)		265.8	%

Premiums earned, net		73,362			66,867			6,495			9.7	%
Net investment income (expense)		412			137			275			200.7	%
Net realized gains (losses) on investments		3,950			(1	)		3,951			NM
Net change in unrealized gains (losses) on investments		—			23			(23	)		-100.0	%
Commission revenue		3,670			5,271			(1,601	)		-30.4	%
Policy fees		3,899			3,819			80			2.1	%
Other revenue		1,696			1,640			56			3.4	%

Total premiums earned and other revenues		86,989			77,756			9,233			11.9	%

OPERATING COSTS AND EXPENSES
Losses and loss adjustment expenses		27,679			25,199			2,480			9.8	%
General and administrative expenses		28,901			22,869			6,032			26.4	%

Total operating costs and expenses		56,580			48,068			8,512			17.7	%

INCOME BEFORE INCOME TAXES		30,409			29,688			721			2.4	%
Income taxes, current		13,398			12,351			1,047			8.5	%
Income taxes, deferred		(115	)		308			(423	)		NM

Income taxes, net		13,283			12,659			624			4.9	%

NET INCOME	$	17,126		$	17,029		$	97			0.6	%

Other comprehensive income (loss), net of taxes		(359	)		(2,608	)		2,249			-86.2	%

COMPREHENSIVE INCOME	$	16,767		$	14,421		$	2,346			16.3	%

NM - Not meaningful.

The following discussion provides comparative information for significant changes to the components of net income and comprehensive income in the table above.

Net earned premiums were $73.4 million for the three months ended June 30, 2014, compared to $66.9 million for the three months ended June 30, 2013. The increase in net earned premiums of $6.5 million, or 9.7%, reflects a decrease in direct earned premiums of $5.2 million offset by a decrease in ceded earned premiums of $11.7 million. Premium earned in the current period reflects premium written over the past 12 months and any changes in rates or policy count during that time. The decrease in direct earned premiums is due primarily to a reduction in the number of policies in force in Florida and rate decreases for new business and renewals in Florida which went into effect in January and March 2014, respectively. We have taken prudent measures to address attrition by reducing rates in selective markets, while maintaining rate adequacy and investing in personnel to improve our processes. The decrease in ceded earned premiums is attributable to lower reinsurance costs with the 2013-2014 and 2014-2015 reinsurance programs reflected in the results for 2014 compared to the costs of the 2012-2013 and 2013-2014 reinsurance programs reflected in the results for 2013. In addition, we reduced the rate of quota share ceded premium from 45% in our 2012-2013 and 2013-2014 reinsurance programs to 30% in our 2014-2015 reinsurance program. This reduction is reflected in the results for the month of June 2014.

Net investment income was $412 thousand for the three months ended June 30, 2014 generated from the investments we held in our portfolio of securities available for sale, compared to $137 thousand for the same three months during 2013. The increase in net investment income reflects a change in the composition of the investment portfolio including a shift in cash and cash equivalents to fixed income securities.

We sold investment securities available for sale during the three months ended June 30, 2014, resulting in a net realized gain of $4.0 million compared to a net realized loss of $1.0 thousand during the three months ended June 30, 2013. The securities sold during the three months ended June 30, 2014 were comprised primarily of equity securities. We took the opportunity in the second quarter of 2014 to realize gains ahead of a potential market correction in the equity markets. These realized gains will be applied towards deferred tax assets that were established from capital loss carryforwards for state income tax purposes.

Commission revenue is comprised principally of brokerage commissions we earn from reinsurers. For the three months ended June 30, 2014, commission revenue was $3.7 million, compared to $5.3 million for the three months ended June 30, 2013. The decrease in commission revenue of $1.6 million, or 30.4%, was the result of a decrease in the cost of certain reinsurance contracts upon which brokerage commissions are earned as well as overall changes in the structure of the reinsurance programs in effect during the three months ended June 30, 2014 compared to the three months ended June 30, 2013.

Losses and loss adjustment expenses, net (“LAE”) were $27.7 million for the three months ended June 30, 2014 compared to $25.2 million during the same period in 2013. The increase in net loss and LAE of $2.5 million was driven by the decrease in the amount of loss and LAE ceded to reinsurers under our quota share reinsurance contracts effective with the 2014-2015 reinsurance program discussed above. The net loss and LAE ratios, or net losses and LAE as a percentage of net earned premiums, were 37.7% during both the three-month periods ended June 30, 2014 and 2013 and were comprised of the following components (in thousands):


	Three Months Ended June 30, 2014
	Direct			Ceded			Net
Loss and loss adjustment expenses	$	46,970		$	19,291		$	27,679
Premiums earned	$	192,061		$	118,699		$	73,362
Loss & LAE ratios		24.5	%		16.3	%		37.7	%

	Three Months Ended June 30, 2013
	Direct			Ceded			Net
Loss and loss adjustment expenses	$	50,350		$	25,151		$	25,199
Premiums earned	$	197,302		$	130,435		$	66,867
Loss & LAE ratios		25.5	%		19.3	%		37.7	%

See “Item 1 — Note 5 (Insurance Operations)” for change in liability for unpaid losses and LAE.

For the three months ended June 30, 2014, general and administrative expenses were $28.9 million, compared to $22.9 million for the same period in 2013. The majority of the overall increase in general and administrative expenses of $6.0 million, or 26.4%, is due to an increase of $3.2 million in the amortization of deferred acquisition costs resulting mostly from changes with the 2014-2015 reinsurance program including a reduction in the rate of ceded premium from 45% to 30% in our quota share contracts. We also had an increase of $1.8 million in the amount of stock-based compensation, an increase of $1.0 million in advertising and promotional expenses, and an increase of $0.5 million related to insurance premiums paid for UIH-level coverage, most of which is related to additional protection in the form of catastrophe-linked insurance. Also, our recovery of Florida Insurance Guarantee Association (“FIGA”) assessments declined by $1.7 million as compared to the same quarter last year. FIGA assessments are initially charged to insurance companies, which then are allowed to recover the assessed amounts from their policyholders. UPCIC recovered the amount of its FIGA assessment over a 12-month period ending in early February 2014. We therefore recovered more of the assessment in 2013 than in 2014 due to the timing of the initial assessment and the associated recovery period. These increases were partially offset by a reduction of $1.2 million in regulatory fees and $0.8 million in accrued performance bonuses.

Income taxes increased by $624 thousand, or 4.9% primarily as a result of an increase in income before income taxes. The effective tax rate increased to 43.7% for the three months ended June 30, 2014 from 42.6% for the same period in the prior year primarily from an increase in the amount of non-deductible expenses including certain compensation.

Comprehensive income includes net income and other comprehensive income or loss. The other comprehensive income for the three months ended June 30, 2014 and 2013, reflect after tax changes in fair value of securities held in our portfolio of securities available for sale and reclassification out of cumulative other comprehensive income for securities sold. See “Item 1 — Note 11 (Other Comprehensive Income (Loss))”.

Results of Operations - Six Months Ended June 30, 2014, Compared to Six Months Ended June 30, 2013

Net income increased by $1.7 million for the six months ended June 30, 2014 compared to the six months ended June 30, 2013. Diluted earnings per common share increased by $0.14 for the six months ended June 30, 2014 compared to the six months ended June 30, 2013.

The increase in net income of $1.7 million, or 5.8%, for the six months ended June 30, 2014 compared to the same period in 2013 reflects the absence of trading losses generated in the first quarter of 2013, an increase in net earned premiums and an increase in net investment income. These were partially offset by a decrease in commissions and an increase in operating expenses. A more detailed discussion of these factors follows the table below.

The following table summarizes changes in each component of our Condensed Consolidated Statements of Income and Comprehensive Income for the six months ended June 30, 2014 compared to the same period in 2013 (in thousands):


	Six Months Ended June 30,						Change
	2014			2013			$			%
PREMIUMS EARNED AND OTHER REVENUES
Direct premiums written	$	411,926		$	424,085		$	(12,159	)		-2.9	%
Ceded premiums written		(198,132	)		(275,214	)		77,082			-28.0	%

Net premiums written		213,794			148,871			64,923			43.6	%
Change in net unearned premium		(76,625	)		(16,595	)		(60,030	)		361.7	%

Premiums earned, net		137,169			132,276			4,893			3.7	%
Net investment income (expense)		930			149			781			524.2	%
Net realized gains (losses) on investments		4,852			(16,038	)		20,890			NM
Net change in unrealized gains (losses) on investments		—			7,897			(7,897	)		-100.0	%
Commission revenue		7,759			10,257			(2,498	)		-24.4	%
Policy fees		7,411			7,505			(94	)		-1.3	%
Other revenue		3,173			3,165			8			0.3	%

Total premiums earned and other revenues		161,294			145,211			16,083			11.1	%

OPERATING COSTS AND EXPENSES
Losses and loss adjustment expenses		54,504			51,682			2,822			5.5	%
General and administrative expenses		53,264			44,079			9,185			20.8	%

Total operating costs and expenses		107,768			95,761			12,007			12.5	%

INCOME BEFORE INCOME TAXES		53,526			49,450			4,076			8.2	%
Income taxes, current		22,457			16,298			6,159			37.8	%
Income taxes, deferred		394			4,164			(3,770	)		-90.5	%

Income taxes, net		22,851			20,462			2,389			11.7	%

NET INCOME	$	30,675		$	28,988		$	1,687			5.8	%

Other comprehensive income (loss), net of taxes		(247	)		(2,608	)		2,361			-90.5	%

COMPREHENSIVE INCOME	$	30,428		$	26,380		$	4,048			15.3	%

NM - Not meaningful.

The following discussion provides comparative information for significant changes to the components of net income and comprehensive income in the table above.

Net earned premiums were $137.2 million for the six months ended June 30, 2014, compared to $132.3 million for the six months ended June 30, 2013. The increase in net earned premiums of $4.9 million, or 3.7%, reflects a decrease in direct earned premiums of $8.8 million offset by a decrease in ceded earned premiums of $13.7 million. Premium earned in the current period reflects premium written over the past 12 months and any changes in rates or policy count during that time. The decrease in direct earned premiums is due primarily to a reduction in the number of policies in force in Florida and rate decreases for new business and renewals in Florida which went into effect in January and March 2014, respectively. We have taken prudent measures to address attrition by reducing rates in selective markets, while maintaining rate adequacy and investing in personnel to improve our processes. The decrease in ceded earned premiums is attributable to lower reinsurance costs with the 2013-2014 and 2014-2015 reinsurance programs reflected in the results for 2014 compared to the costs of the 2012-2013 and 2013-2014 reinsurance programs reflected in the results for 2013. In addition, we reduced the rate of quota share ceded premium from 45% in our 2012-2013 and 2013-2014 reinsurance programs to 30% in our 2014-2015 reinsurance program. This reduction is reflected in the results for the month of June 2014.

Net investment income was $930 thousand for the six months ended June 30, 2014 generated from the investments we held in our portfolio of securities available for sale, compared to $149 thousand for the same six months during 2013. The increase in net investment income reflects a change in the composition of the investment portfolio including a shift in cash and cash equivalents to fixed income securities.

We sold investment securities available for sale during the six months ended June 30, 2014, resulting in a net realized gain of $4.9 million. We took the opportunity in the second quarter of 2014 to realize gains ahead of a potential market correction in the equity markets. These realized gains will be applied to capital loss carryforwards for state income taxes. For the six months ended June 30, 2013, we realized net losses on investments of $16.0 million, reflecting the underlying market conditions as we liquidated one hundred percent of the equity securities held in our trading portfolio during March 2013.

The decrease of $7.9 million in the net change in unrealized gains for the six months ended June 30, 2014 compared to the same period in 2013 reflects the absence of investment securities held in the trading portfolio during the six months ended June 30, 2014. The investment securities held during the six months ended June 30, 2014 were available for sale with changes in fair value recorded in equity. The majority of the net change in unrealized gains on investments for the six months ended June 30, 2013 reflects the reversal of unrealized losses on investments held at December 31, 2012 and sold during the three months ended March 31, 2013 as we liquidated one hundred percent of the equity securities held in the trading portfolio through March 31, 2013.

Commission revenue is comprised principally of brokerage commissions we earn from reinsurers. For the six months ended June 30, 2014, commission revenue was $7.8 million, compared to $10.3 million for the six months ended June 30, 2013. The decrease in commission revenue of $2.5 million, or 24.4%, was the result of a decrease in the cost of certain reinsurance contracts upon which brokerage commissions are earned as well as overall changes in the structure of the reinsurance programs in effect during the six months ended June 30, 2014 compared to the six months ended June 30, 2013.

Losses and LAE were $54.5 million for the six months ended June 30, 2014 compared to $51.7 million for the same period in 2013. The increase in net losses and LAE of $2.8 million is driven by the decrease in the amount of loss and LAE ceded to reinsurers under our quota share reinsurance contracts effective with the 2014-2015 reinsurance program discussed above. The net loss and LAE ratios, or net losses and LAE as a percentage of net earned premiums, were 39.7% and 39.1% during the six-month periods ended June 30, 2014 and 2013, respectively, and were comprised of the following components (in thousands):


	Six Months Ended June 30, 2014
	Direct			Ceded			Net
Loss and loss adjustment expenses	$	97,692		$	43,188		$	54,504
Premiums earned	$	382,705		$	245,536		$	137,169
Loss & LAE ratios		25.5	%		17.6	%		39.7	%

	Six Months Ended June 30, 2013
	Direct			Ceded			Net
Loss and loss adjustment expenses	$	100,946		$	49,264		$	51,682
Premiums earned	$	391,470		$	259,194		$	132,276
Loss & LAE ratios		25.8	%		19.0	%		39.1	%

See “Item 1 — Note 5 (Insurance Operations)” for change in liability for unpaid losses and LAE.

For the six months ended June 30, 2014, general and administrative expenses were $53.3 million, compared to $44.1 million for the same period in 2013. The overall increase in general and administrative expenses of $9.2 million, or 20.8%, includes an increase of $2.6 million related to insurance premiums paid for UIH-level coverage, most of which is related to additional protection in the form of catastrophe-linked insurance. We also had increases of $2.3 million in the amount of stock-based compensation, $1.3 million of advertising and promotional expenses and $1.8 million in amortization of deferred acquisition costs. Also, our recovery of FIGA assessments declined by $2.3 million during the six months ended June 30, 2014 as compared to the same period last year. UPCIC recovered the amount of its FIGA assessment over a 12-month period ending in early February 2014. We therefore recovered more of the assessment in 2013 than in 2014 due to the timing of the initial assessment and the associated recovery period. These increases were partially offset by a reduction of $1.2 million in regulatory fees.

Income taxes increased by $2.4 million, or 11.7% primarily as a result of an increase in income before income taxes. The effective tax rate increased to 42.7% for the six months ended June 30, 2014 from 41.4% for the same period in the prior year primarily from an increase in the amount of non-deductible expenses including certain compensation.

Comprehensive income includes net income and other comprehensive income or loss. The other comprehensive income for the six months ended June 30, 2014 and 2013, reflect after tax changes in fair value of securities held in our portfolio of securities available for sale and reclassification out of cumulative other comprehensive income for securities sold. See “Item 1 — Note 11 (Other Comprehensive Income (Loss))”.

Analysis of Financial Condition - As of June 30, 2014 Compared to December 31, 2013

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.

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


Type of Investment	June 30, 2014		December 31, 2013
Cash and cash equivalents	$	201,357	$	117,275
Restricted cash and cash equivalents		2,635		2,600
Fixed maturities		323,145		289,418
Equity securities		12,420		65,022

Total	$	539,557	$	474,315

Prepaid reinsurance premiums represent the amount of ceded unearned premiums. The decrease of $47.4 million to $193.8 million is due to a reduction in reinsurance premiums.

Reinsurance recoverable represents ceded losses and LAE. The decrease of $30.3 million to $77.6 million was primarily due to the timing of settlements and amounts available for right of offset with our reinsurers.

Reinsurance receivable, net, represents inuring premiums receivable, net of ceded premiums payable with our quota share reinsurer. The increase of $26.1 million to $26.4 million as of June 30, 2014 was primarily due to the timing of settlements and amounts available for right of offset with our reinsurers.

Premiums receivable represent amounts due from policyholders. The increase of $8.5 million to $55.0 million reflects the seasonal pattern of written premium as described under “—Overview”.

See “Item 1 — Note 5 (Insurance Operations)” for a roll-forward in the balance of our deferred policy acquisition costs and our unpaid losses and LAE.

Unearned premium represents the portion of direct written premium that will be earned pro-rata in the future. The increase of $29.2 million to $412.7 million reflects the seasonal pattern of written premium as described under “—Overview”.

Book overdrafts represent outstanding checks in excess of cash on deposit and are examined monthly to determine if legal right of offset exists for accounts with the same banking institution. The decrease of $10.6 million to $4.3 million in book overdrafts as of June 30, 2014 is attributed to an increase in cash deposits applied in the right to offset.

Reinsurance payable, net, represents our liability to reinsurers for ceded written premiums, net of ceding commissions receivable. The increase of $33.9 million to $120.1 million as of June 30, 2014 was primarily due to the timing of settlements and amounts available for right of offset with our reinsurers.

Other liabilities and accrued expenses represent liabilities for commissions and various general and administrative expenses. The decrease of $7.2 million to $27.2 million as of June 30, 2014 was due to the payment of 2013 performance bonuses during the first quarter of 2014 and payments for state premium taxes during the first and second quarter of 2014.

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 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 June 30, 2014 was $201.4 million compared to $117.3 million at December 31, 2013. See “Item 1 — Condensed Consolidated Statements of Cash Flows” for a reconciliation of the balance of cash and cash equivalents between June 30, 2014 and December 31, 2013. The increase in cash and cash equivalents was driven by cash flows generated from operations and investing in excess of those used for financing activities. The balance of restricted cash and cash equivalents as of June 30, 2014 and December 31, 2013 was mostly comprised of cash equivalents on deposit with regulatory agencies in the various states in which our Insurance Entities do business. Most of the balance of cash and cash equivalents maintained is available to pay claims in the event of a catastrophic event in addition to any amounts recovered under our reinsurance agreements.

As discussed in “Item 1 — Note 6 (Long-Term Debt)”, UIH entered into a revolving loan agreement and related revolving note (“DB Loan”) with Deutsche Bank in March 2013, amended in May 2013. The DB Loan makes available to UIH an unsecured line of credit in an aggregate amount not to exceed $10 million. Draws under the DB Loan have a maturity date of March 27, 2015 and carry an interest rate of LIBOR plus a margin of 5.50% or Deutsche Bank’s prime rate plus a margin of 3.50% at the election of UIH. The DB Loan contains certain covenants and restrictions applicable while amounts are outstanding thereunder, including limitations with respect to our indebtedness, liens, distributions, mergers or dispositions of assets, organizational structure, transactions with affiliates and business activities. We had not drawn any amounts under the unsecured line of credit as of July 31, 2014.

In May 2013, UIH also entered into a $20 million unsecured term loan agreement and related term note (“Term Loan”) with RenaissanceRe Ventures Ltd. (“RenRe Ventures”) also discussed in “Item 1 — Note 6 (Long-Term Debt)”. The Term Loan bears interest at the rate of 50 basis points per annum and matures on the earlier of May 23, 2016 or the date that all principal under the Term Loan is pre-paid or deemed paid in full. The Term Loan is amortized over the three-year term and UIH may prepay the loan without penalty. The Term loan contains certain covenants and restrictions applicable while amounts are outstanding thereunder, including limitations with respect to our indebtedness, liens, distributions, mergers or dispositions of assets, organizational structure, transactions with affiliates and business activities. The Company used the net proceeds of the Term Loan to repurchase 4,666,000 shares of common stock owned by Mr. Bradley Meier in May 2013. In May 2014, the Company made a principal payment of $6.0 million on the Term Loan. The Term Loan had a carrying amount of $13.0 million as of June 30, 2014.

Liquidity requirements for UIH and its non-insurance subsidiaries include the payment of general operating expenses, dividends to shareholders (if and when authorized and declared by our Board of Directors), payment for the possible repurchase of our common stock (if and when authorized by our Board of Directors), payment of income taxes, and interest and principal payments on debt obligations. The declaration and payment of future dividends by UIH to its shareholders, and any future repurchases of UIH common stock, will be at the discretion of our Board of Directors and will depend upon many factors, including our operating results, financial condition, debt covenants and any regulatory constraints. Principal sources of liquidity for UIH and its non-insurance subsidiaries include revenues generated from fees paid by the Insurance Entities for managing general agency, policy administration, inspections and claims adjusting services. Additional sources of liquidity include brokerage commissions earned on reinsurance contracts and any unused credit lines. UIH also maintains investments in equity securities which would generate funds upon sale.

Liquidity requirements for the Insurance Entities primarily include payments for reinsurance premiums, claims payments including potential payments of catastrophe losses offset by recovery of any reimbursement amounts under our reinsurance agreements, fees paid to affiliates for managing general agency, inspections and claims adjusting services, agent commissions, premium and income taxes, regulatory assessments, general operating expenses, and interest and principal payments on debt obligations. The principal source of liquidity for the Insurance Entities consists of the revenue generated from the collection of net premiums, after deductions for expenses and the collection of reinsurance recoverable.

Our insurance operations provide liquidity in that premiums are generally received months or even years before losses are paid under the policies written. The Insurance Entities maintain substantial investments in highly liquid, marketable securities which would generate funds upon sale.

The Insurance Entities are responsible for losses related to catastrophic events with incurred losses in excess of coverage provided by the 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 the Insurance Entities’ or our business, financial condition, results of operations and liquidity.

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 June 30, 2014, we had total capital of $209.1 million, comprised of stockholders’ equity of $178.1 million and total long term debt of $31.0 million. Our debt-to-total-capital ratio and debt-to-equity ratio were 14.8% and 17.4%, respectively, at June 30, 2014. At December 31, 2013, we had total capital of $212.8 million, comprised of stockholders’ equity of $175.6 million and total long term debt of $37.2 million. Our debt-to-total-capital ratio and debt-to-equity ratio were 17.5% and 21.2%, respectively, at December 31, 2013. The increase in stockholders’ equity during the six months ended June 30, 2014 is attributed to net income partially offset by dividends declared and common share repurchases.

At June 30, 2014, UPCIC was in compliance with all of the covenants under its surplus note and its total adjusted capital was in excess of regulatory requirements. At June 30, 2014, UIH was in compliance with all of the covenants under the Term Loan and the DB Loan.

During the six months ended June 30, 2014, the Company repurchased an aggregate of 1.225 million shares of UIH’s common stock owned by Bradley I. Meier, the Company’s former Chairman, President and Chief Executive Officer, as discussed under “Item 1 —Note 7 (Stockholders’ Equity)”. The repurchase cost was an aggregate of $14.7 million and was funded using cash on hand.

During the six months ended June 30, 2014, the Company also repurchased an aggregate of 446,271 shares of UIH’s common stock in the open market, in compliance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended (“Rule 10b-18”), as discussed under “Item 1 — Note 7 (Stockholders’ Equity)”. The repurchase cost was an aggregate of $5.5 million and was funded using cash on hand.

In June 2014, UIH announced that its Board of Directors authorized a share repurchase program under which the Company may repurchase in the open market in compliance with Rule 10b-18 up to $10 million of its outstanding shares of common stock through August 1, 2015. The Company repurchased 38,424 shares of UIH’s common stock, included in the 446,271 shares repurchased during the six months ended June 30, 2014, and may repurchase up to an additional $9.5 million of its outstanding shares of common stock pursuant to such authorization.

As discussed under “Item 1 — Note 12 (Commitments and Contingencies)”, in July 2013, UPCIC entered into a purchase agreement to acquire an office building adjacent to its principal office in Fort Lauderdale, Florida which provides that the closing for the sale of the property will take place no later than February 5, 2015. The closing is subject to certain closing conditions. The purchase price for the property is $5.99 million, and UPCIC will receive a credit toward the purchase price for a portion of the rent it pays under the lease agreement under which it currently leases the property. The Company currently intends to pay the purchase price using cash on hand.

Cash Dividends

Contractual Obligations

The following table represents our contractual obligations for which cash flows are fixed or determinable as of June 30, 2014 (in thousands):


	Total		Less than 1 year		1-3 years		3-5 years		Over 5 years
Unpaid losses and LAE, direct (1)	$	144,625	$	73,325	$	46,569	$	16,632	$	8,099
Long-term debt		35,316		8,542		10,849		3,654		12,271
Operating leases		610		610		—		—		—
Employment Agreements (2)		13,362		8,756		4,606		—		—

Total contractual obligations	$	193,913	$	91,233	$	62,024	$	20,286	$	20,370

(1)

There are generally no notional or stated amounts related to unpaid losses and LAE. Both the amounts and timing of future loss and LAE payments are estimates and subject to the inherent variability of legal and market conditions affecting the obligations and make the timing of cash outflows uncertain. The ultimate amount and timing of unpaid losses and LAE could differ materially from the amounts in the table above. Further, the unpaid losses and LAE do not represent all of the obligations that will arise under the contracts, but rather only the estimated liability incurred through June 30, 2014.

(2)

These amounts represent minimum salaries, which may be subject to annual percentage increases, non-equity incentive compensation based on pre-tax or net income levels, and fringe benefits based on the remaining term of employment agreements we have with our executives. These amounts do not reflect equity awards of approximately 500 thousand shares of restricted common stock to be granted to executives in 2015 under their employment agreements.

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, 2013.

Related Party Transactions

See “Item 1 — Note 8 (Related Party Transactions)” for information about related party transactions.

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. We carry all of our investments at market value in our statement of financial condition. Our investment portfolio as of June 30, 2014, is comprised of fixed maturities and equity securities exposing us to changes in interest rates and equity prices. See “Item 1 — Note 3 (Investments)” for a schedule of investment holdings as of June 30, 2014 and December 31, 2013. To a lesser extent, we also have exposure on our debt obligations which are in the form of a surplus note, and on any amounts we draw under the DB Loan. The surplus note accrues interest at an adjustable rate based on the 10-year Constant Maturity Treasury rate. Draws under the DB Loan accrue interest at a rate based on LIBOR or Deutsche Bank’s prime rate plus an applicable margin.

Our investments have been, and may in the future be, subject to significant volatility. We have taken steps which we expect will reduce the effects of market volatility by liquidating the investments held in our trading portfolio. We now maintain an investment portfolio which we expect will provide a stable stream of investment income and reduce the effects of market volatility. Our investment objectives with respect to fixed maturities are to maximize after-tax investment income without exposing the surplus of our Insurance Entities to excessive volatility. Our investment objectives with respect to equity securities are to enhance our long-term surplus levels through capital appreciation and earn a competitive rate of total return versus appropriate benchmarks. We cannot provide any assurance that we will be able to achieve our investment objectives.

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 investment securities decline.

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 available for sale as of the dates presented (in thousands):


	June 30, 2014
	Amortized Cost																								Fair Value
	2014			2015			2016			2017			2018			Thereafter			Other (1)			Total			Total
Fixed maturities		—		$	59,905		$	61,750		$	35,658		$	53,099		$	15,017		$	97,996		$	323,425		$	323,145
Weighted average interest rate		—			1.25	%		1.15	%		3.09	%		1.80	%		2.64	%		1.90	%		1.79	%		1.79	%

	December 31, 2013
	Amortized Cost																								Fair Value
	2014			2015			2016			2017			2018			Thereafter			Other (1)			Total			Total
Fixed maturities	$	3,827		$	47,366		$	62,287		$	27,668		$	54,201		$	4,588		$	91,502		$	291,439		$	289,418
Weighted average interest rate		7.43	%		1.16	%		1.29	%		3.88	%		1.79	%		1.97	%		1.73	%		1.84	%		1.83	%

(1)	Comprised of mortgage-backed and asset-backed securities which have multiple maturity dates, and perpetual maturity securities, and are presented separately for the purposes of this table.

The tables above represent average contract rates which differ from the book yield of the fixed maturities. The fixed maturity investments in our available for sale portfolio are comprised of United States government and agency securities, corporate bonds, redeemable preferred stock and mortgage-backed and asset-backed securities.

Equity and Commodity Price Risk

Equity and commodity price risk is the potential for loss in fair value of investments in common stock, preferred stock, and mutual funds from adverse changes in the prices of those instruments.

The following table provides information about the composition of equity securities held in the Company’s available for sale portfolio as of the dates presented (in thousands):


	June 30, 2014					December 31, 2013
	Fair Value		Percent			Fair Value		Percent
Equity securities:
Common stock	$	590		4.8	%	$	4,754		7.3	%
Mutual funds		11,830		95.2	%		60,268		92.7	%

Total equity securities	$	12,420		100.0	%	$	65,022		100.0	%

A hypothetical decrease of 20% in the market prices of each of the equity securities held at June 30, 2014, would have resulted in decreases of $2.5 million, in the fair value of the equity securities investment portfolio.

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 end 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 June 30, 2014, 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

We are subject to litigation in the normal course of our business. As of June 30, 2014, we were not a party to any non-routine litigation which is expected by management to have a material effect on our results of operations, financial condition or liquidity.

Item 1A.

Risk Factors

In the opinion of management, there have been no 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, 2013.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

A summary UIH’s repurchases of common stock for the three months ended June 30, 2014 is as follows:


	Total Number of Shares Purchased		Average Price Paid per Share (1)		Total Number of Shares Purchased As Part of Publicly Announced Plans or Programs		Maximum Number of Shares That May Yet be Purchased Under the Plans or Programs (2)
4/1/14 - 4/30/14		—	$	—		—		—
5/1/14 - 5/31/14		326,566	$	12.20		326,566		—
6/1/14 - 6/30/14		119,705	$	12.51		119,705		732,756

Total		446,271	$	12.28		446,271		732,756

(1)	Average price paid per share does not reflect brokerage commissions paid to acquire shares in open market transactions.

(2)	Number of shares were calculated using a closing price at June 30, 2014 of $12.97 per share.

In May 2014, we repurchased in the open market in compliance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended (“Rule 10b-18”) a total of 326,566 shares of UIH’s common stock at an average price of $12.20 per share.

In June 2014, we repurchased in the open market in compliance with Rule 10b-18 a total of 119,705 shares of UIH’s common stock at an average price of $12.51 per share.

In June 2014, we announced that the Board of Directors authorized a share repurchase program under which the Company may repurchase in the open market in compliance with Rule 10b-18 up to $10 million of its outstanding shares of common stock through August 1, 2015. We repurchased 38,424 shares through such repurchase program through June 30, 2014.

Under the DB Loan and Term Loan, so long as any amounts are outstanding thereunder, UIH will be restricted from paying dividends to its shareholders if an event of default (or an event, the giving of notice of which or with the lapse of time or both, would become an event of default) is continuing at the time of and immediately after paying such dividend. No amounts were outstanding under the DB Loan as of June 30, 2014. The Term Loan had a carrying value of $13.0 million as of June 30, 2014.

Item 6.

Exhibits


Exhibit No.		Exhibit

10.1		Director Services Agreement, dated June 5, 2014, between Ralph J. Palmieri and the Company (1)

10.2		Director Services Agreement, dated June 5, 2014, between Richard D. Peterson and the Company (1)

15.1		Accountants’ Acknowledgment

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 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.DEF-XBRL		Taxonomy Extension Definition Linkbase Document *

101.LAB-XBRL		Taxonomy Extension Label Linkbase Document *

101.PRE-XBRL		Taxonomy Extension Presentation Linkbase Document *

*	Filed herewith.

**	Furnished herewith.

(1)	Incorporated by reference to the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on June 6, 2014.

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: August 6, 2014				/s/ Sean P. Downes
				Sean P. Downes, President and Chief Executive Officer

Date: August 6, 2014				/s/ Frank C. Wilcox
				Frank C. Wilcox, Chief Financial Officer and Principal Accounting Officer