5.	Insurance Operations

The Company’s primary product is homeowners insurance currently offered by APPCIC in one state (Florida) and by UPCIC in seven states, including Florida.

The following table provides the percentage of concentrations with respect to the Insurance Entities’ nationwide policies-in-force as of the periods presented:


	As of June 30, 2013			As of December 31, 2012

Percentage of Policies-In-Force:
In Florida		95	%		96	%
With wind coverage		98	%		98	%
With wind coverage in South Florida (1)		28	%		28	%

(1)	South Florida is comprised of Miami-Dade, Broward and Palm Beach counties.

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,
	2013			2012			2013			2012
DPAC, beginning of period (1)	$	55,391		$	51,872		$	54,431		$	50,200
Capitalized Costs		30,241			29,536			58,933			55,680
Amortization of DPAC		(26,599	)		(24,486	)		(54,331	)		(48,958	)

DPAC, end of period	$	59,033		$	56,922		$	59,033		$	56,922


DRCC, beginning of period (1)	$	38,014		$	40,074		$	37,149		$	38,845
Ceding Commissions Written		26,222			21,286			48,534			44,775
Earned Ceding Commissions		(22,444	)		(22,182	)		(43,891	)		(44,442	)

DRCC, end of period	$	41,792		$	39,178		$	41,792		$	39,178


DPAC (DRCC), net, beginning of period (1)	$	17,377		$	11,798		$	17,282		$	11,355
Capitalized Costs, net		4,019			8,250			10,399			10,905
Amortization of DPAC (DRCC), net		(4,155	)		(2,304	)		(10,440	)		(4,516	)

DPAC (DRCC), net, end of period	$	17,241		$	17,744		$	17,241		$	17,744

(1)	The beginning balances for the six months ended June 30, 2012 have been adjusted in connection with the adoption of the FASB’s updated guidance related to deferred policy acquisition costs as discussed below.

As discussed in “—Note 2 (Significant Accounting Policies)”, the Company prospectively adopted new accounting guidance effective January 1, 2012 related to accounting for costs associated with acquiring or renewing insurance contracts. This guidance resulted in a 13% reduction of our net deferred policy acquisition costs as of December 31, 2011, and a corresponding pre-tax charge of $1.6 million against earnings during the first quarter of 2012. This charge represents a charge-off of capitalized costs existing at December 31, 2011, which would have been amortized to earnings within a twelve-month period under the old guidance. In the period of adoption (three months ended March 31, 2012), approximately $9 million of net costs would have been deferred under the old guidance compared to the $5.6 million under the new guidance. The effect of this change in periods subsequent to March 31, 2012, on income and per share amounts is not determinable as the historical methodology was discontinued after adoption.

Liability for Unpaid Losses and Loss Adjustment Expenses

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


	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012

Balance at beginning of period	$	182,528		$	172,300		$	193,241		$	187,215
Less reinsurance recoverable		(75,680	)		(79,285	)		(81,415	)		(88,002	)

Net balance at beginning of period		106,848			93,015			111,826			99,213

Incurred (recovered) related to:
Current year		26,675			29,362			53,329			55,711
Prior years		(1,476	)		75			(1,647	)		(100	)

Total incurred		25,199			29,437			51,682			55,611

Paid related to:
Current year		16,303			14,382			17,475			15,335
Prior years		17,304			16,614			47,593			48,033

Total paid		33,607			30,996			65,068			63,368

Net balance at end of period		98,440			91,456			98,440			91,456
Plus reinsurance recoverable		67,820			73,169			67,820			73,169

Balance at end of period	$	166,260		$	164,625		$	166,260		$	164,625

Regulatory Requirements and Restrictions

The Insurance Entities are subject to regulations and standards of the Florida Office of Insurance Regulation (“OIR”). 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 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” and generally can be paid without prior regulatory approval. If the dividend, together with other dividends paid within the preceding twelve months, exceeds a specified statutory limit or is paid from sources other than earned surplus, the entire dividend is generally considered an “extraordinary dividend” and must receive prior regulatory approval.

Based on the 2012 statutory net income and statutory capital and surplus levels, UPCIC and APPCIC do not have the capacity to pay ordinary dividends during 2013. For the three and six months ended June 30, 2013, no dividends were paid from UPCIC or APPCIC to UIHCF. Dividends paid to the shareholders of UIH are paid from the equity of UIH and not from the capital and surplus of the Insurance Entities.

The Florida Insurance Code requires companies to maintain capitalization equivalent to the greater of ten percent of the insurer’s total liabilities or $5.0 million. The following table presents the amount of statutory capital and surplus, and an amount representing ten percent of total liabilities for both UPCIC and APPCIC as of the periods presented (in thousands):


	As of June 30, 2013		As of December 31, 2012
Ten percent of total liabilities
UPCIC	$	47,089	$	39,260
APPCIC	$	991	$	694

Statutory capital and surplus
UPCIC	$	137,665	$	134,034
APPCIC	$	14,229	$	14,330

At such 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 Company is required by various state laws and regulations to maintain certain assets in depository accounts. In addition, the Company at times maintains amounts on deposit with insurance regulators in connection with certain reinsurance agreements. The following table represents assets held by insurance regulators as of the periods presented (in thousands):


	As of June 30, 2013		As of December 31, 2012
Restricted cash and cash equivalents	$	2,600	$	33,009
Investments	$	3,743	$	4,009

The Company received an order from the OIR dated May 30, 2013 related to the OIR’s recent Target Market Conduct Final Examination Report of UPCIC for the period January 2009 through May 2013. The Order alleges certain violations and findings and seeks to impose certain requirements and a financial penalty of $1.3 million upon UPCIC which has been accrued for by the Company. UPCIC intends to exercise its right to a formal administrative hearing to dispute the Order, the examination report and other alleged violations.