REINSURANCE

Our reinsurance program is designed, utilizing our risk management methodology, to address our exposure to catastrophes. Our program provides reinsurance protection for catastrophes including hurricanes, tropical storms, and tornadoes. These reinsurance agreements are part of our catastrophe management strategy, which is intended to provide our shareholders an acceptable return on the risks assumed in our property business, and to reduce variability of earnings, while providing protection to our policyholders.

During the second quarter of 2012, we placed our reinsurance program for the 2012 hurricane season. It comprises six contracts which reinsures for personal lines property excess catastrophe losses caused by multiple perils including hurricanes, tropical storms, and tornadoes. The agreements are effective June 1, 2012, for a one-year term and incorporate the mandatory coverage required by and placed with the Florida Hurricane Catastrophe Fund (FHCF). The FHCF is a Florida State-sponsored trust fund that provides reimbursement to Florida property insurers for covered hurricane losses. For UPC the FHCF coverage includes an estimated maximum provisional limit of 90% of $392,334,000 or $353,101,000, in excess of our retention and private reinsurance of $153,332,000, and also includes reimbursement of eligible loss adjustment expenses of 5%. The limit and retention of the FHCF coverage are subject to re-measurement based on June 30th exposure data. In addition, the FHCF's retention is subject to adjustment upward or downward to an actual retention based on submitted exposures to the FHCF by all participants.

In addition to FHCF coverage, we purchase private reinsurance below, alongside, and above the FHCF layer. The contracts comprising our program are described below:


•	Below FHCF - provides coverage on $138,332,000 of losses in excess of $15,000,000 and is 100% placed. The first reinstatement of limits is prepaid and the second and final reinstatement requires additional premium.


•	Mandatory FHCF - provides 90% of $392,334,000 excess of $153,332,000 with no reinstatement of limits.


•	Excess - provides coverage on $45,886,000 of losses in excess of the private and FHCF reinsurance coverage and is 100% placed.

Our non-catastrophe reinsurance agreement provides excess-of-loss coverage for losses arising out of property business up to $1,700,000 in excess of $1,000,000 per risk. Should a loss recovery, or series of loss recoveries, exhaust the coverage provided under the agreement for losses arising out of property business, one reinstatement of the full coverage amount is included at 50% additional premium. The agreement, including reinstatements, provides aggregate coverage of $3,400,000 for losses arising out of property business, while any single occurrence is limited to $1,700,000. The agreement also provides coverage for losses arising out of a combination of property and casualty business up to $2,200,000 in excess of $1,000,000 per occurrence, subject to a maximum recovery on any one loss occurrence, regardless of the number of risks involved for property or the number or type of insureds for casualty, of $2,200,000.

We write flood insurance under an agreement with the National Flood Insurance Program. We cede 100% of the premiums written and the related risk of loss to the Federal Government. We earn commissions for the issuance of flood policies based upon a fixed percentage of net written premiums and the processing of flood claims based upon a fixed percentage of incurred losses, and we can earn additional commissions by meeting certain growth targets for the number of in-force policies. We recognized commission revenue from our flood program of $144,000 and $112,000, for the three-month periods ended June 30, 2012, and 2011, respectively, and $241,000 and $193,000 for the six-month periods ended June 30, 2012, and 2011, respectively.

We realized recoveries under our reinsurance agreements totaling $838,000 and $5,407,000 for the three-month periods ended June 30, 2012 and 2011, respectively, and $1,563,000 and $6,579,000 for the six-month periods ended June 30, 2012, and 2011, respectively. These recoveries were primarily related to losses from Hurricane Wilma, which occurred in October 2005.