Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549  
_______________________

FORM 10-Q
_______________________

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2018
Commission File Number 001-35761  
_____________________
United Insurance Holdings Corp.
(Exact name of Registrant as specified in its charter)
  _______________________
 
Delaware
 
75-3241967
 
 
(State of Incorporation)
 
(IRS Employer Identification Number)
 
800 2nd Avenue S
St. Petersburg, Florida 33701
(Address, including zip code, of principal executive offices)
727-895-7737
(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 shorter 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  R    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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  R    No  £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
£
 
Accelerated filer
þ
Non-accelerated filer
£
 
Smaller reporting company
£
 
 
 
Emerging growth company
£
If an emerging growth company, indicate by check mark if the registrant has elected to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) 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  R
As of May 4, 2018, 42,745,937 shares of common stock, par value $0.0001 per share, were outstanding.

 


UNITED INSURANCE HOLDINGS CORP.



PART I. FINANCIAL INFORMATION
 
 
Item 1. Financial Statements
 
    Consolidated Balance Sheets
 
    Unaudited Consolidated Statements of Comprehensive Income
 
    Unaudited Consolidated Statements of Cash Flows
 
    Notes to Unaudited Consolidated Financial Statements
 
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
 
Item 3. Quantitative and Qualitative Disclosures About Market Risk
 
Item 4. Controls and Procedures
PART II. OTHER INFORMATION
 
 
Item 1. Legal Proceedings
 
Item 1A. Risk Factors
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
Item 3. Defaults Upon Senior Securities
 
Item 4. Mine Safety Disclosures
 
Item 5. Other Information
 
Item 6. Exhibits
Signatures
 
Throughout this Quarterly Report on Form 10-Q (Form 10-Q), we present amounts in all tables in thousands, except for share amounts, per share amounts, policy counts or where more specific language or context indicates a different presentation. In the narrative sections of this Form 10-Q, we show full values rounded to the nearest thousand.

2

UNITED INSURANCE HOLDINGS CORP.



FORWARD-LOOKING STATEMENTS

Statements in this Form 10-Q contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements about anticipated growth in revenues, gross written premium growth expectations, earnings per share, estimated unpaid losses on insurance policies, investment returns, diversification and expectations about our liquidity, and our ability to meet our investment objectives and to manage and mitigate market risk with respect to our investments. Without limiting the generality of the foregoing, words such as “may,” “will,” “expect,” “endeavor,” “project,” “believe,” "plan," “anticipate,” “intend,” “could,” “would,” “estimate,” or “continue” or the negative variations there of or comparable terminology are intended to identify forward-looking statements. These statements are based on current expectations, estimates and projections about the industry and market in which we operate, and management's beliefs and assumptions. Forward-looking statements are not guarantees of future performance and involve certain known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. The risks and uncertainties include, without limitation:

our exposure to catastrophic events and severe weather conditions;
the regulatory, economic and weather conditions present in Florida, the state in which we are most concentrated;
the effectiveness of our diversification strategy;
our ability to cultivate and maintain agent relationships, particularly our relationship with AmRisc, LLC;
the possibility that actual claims incurred may exceed our loss reserves for claims;
assessments charged by various governmental agencies;
our ability to implement and maintain adequate internal controls over financial reporting;
our ability to maintain adequate technology, data security, and outsourcing relationships;
our reliance on key vendor relationships, and the ability of our vendors to protect the personal information of our customers;
our ability to attract and retain the services of senior management;
risks and uncertainties relating to our acquisitions, including our ability to successfully integrate the acquired companies:
our ability to increase or maintain our market share;
changes in the regulatory environment present in the states in which we operate;
the impact of new federal or state regulations that affect the property and casualty insurance market;
the cost, variability and availability of reinsurance;
our ability to collect from our reinsurers on our reinsurance claims;
dependence on investment income and the composition of our investment portfolio and related market risks;
the possibility of the pricing and terms for our products to decline due to the historically cyclical nature of the property and casualty insurance and reinsurance industry;
the outcome of litigation pending against us, including the terms of any settlements;
downgrades in our financial strength ratings;
the impact of future sales of substantial amounts of our common stock by us to our existing stockholders on our stock price;
our ability to pay dividends in the future;
the ability of R. Daniel Peed and his affiliates to exert significant control over us due to substantial ownership of our common stock, subject to certain restrictive covenants that may restrict our ability to pursue certain opportunities;
the ability of others to obtain control of us due to provisions in our charter documents; and
other risks and uncertainties described in the section entitled "Risk Factors" in Part I, Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2017.

We caution you not to place reliance on these forward-looking statements, which are valid only as of the date they were made. Except as may be required by applicable law, we undertake no obligation to update or revise any forward-looking statements to reflect new information, the occurrence of unanticipated events or otherwise.

3

UNITED INSURANCE HOLDINGS CORP.


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets


March 31,
2018

December 31, 2017
ASSETS

(Unaudited)

 
Investments, at fair value:

 

 
Fixed maturities, available-for-sale (amortized cost of $799,077 and $763,434, respectively)

$
787,145


$
762,855

Equity securities (adjusted cost of $67,300 and $50,996, respectively)

77,155


63,295

Other investments (amortized cost of $7,763 and $8,057, respectively)

8,144


8,381

   Portfolio loans
 
20,000

 
20,000

Total investments

$
892,444


$
854,531

Cash and cash equivalents

216,703


276,275

Accrued investment income

5,488


5,577

Property and equipment, net
 
17,557

 
17,291

Premiums receivable, net

79,296


75,275

Reinsurance recoverable on paid and unpaid losses

496,619


395,774

Prepaid reinsurance premiums

127,888


201,904

Goodwill
 
73,045

 
73,045

Deferred policy acquisition costs

108,093


103,882

Intangible assets
 
35,446

 
45,271

Other assets

13,814


11,096

Total Assets

$
2,066,393


$
2,059,921

LIABILITIES AND STOCKHOLDERS' EQUITY




Liabilities:




Unpaid losses and loss adjustment expenses

$
544,249


$
482,232

Unearned premiums

556,540


555,873

Reinsurance payable

86,079


149,117

Payments outstanding
 
55,119

 
41,786

Accounts payable and accrued expenses
 
51,404

 
46,594

Other liabilities

76,913


85,830

Notes payable

161,009

 
161,364

Total Liabilities

$
1,531,313


$
1,522,796

Commitments and contingencies (Note 11)






Stockholders' Equity:




Preferred stock, $0.0001 par value; 1,000,000 shares authorized; none issued or outstanding




Common stock, $0.0001 par value; 50,000,000 shares authorized; 42,958,020 and 42,965,137 issued, respectively; 42,745,937 and 42,753,054 outstanding, respectively

4


4

Additional paid-in capital

387,631


387,145

Treasury shares, at cost: 212,083 shares

(431
)

(431
)
Accumulated other comprehensive income (loss)

(8,451
)

9,221

Retained earnings

156,327


141,186

Total Stockholders' Equity

$
535,080


$
537,125

Total Liabilities and Stockholders' Equity

$
2,066,393


$
2,059,921



See accompanying Notes to Unaudited Consolidated Financial Statements.

4

UNITED INSURANCE HOLDINGS CORP.


Consolidated Statements of Comprehensive Income
(Unaudited)


Three Months Ended
 
 
March 31,


2018

2017
REVENUE:




Gross premiums written

$
279,617

 
$
168,842

Change in gross unearned premiums

(667
)
 
13,223

Gross premiums earned

278,950

 
182,065

Ceded premiums earned

(116,275
)
 
(74,882
)
Net premiums earned

162,675

 
107,183

Investment income

5,686

 
2,951

Net realized investment gains (losses)

211

 
(351
)
Net unrealized losses on equity securities

(2,444
)
 

Other revenue

13,999

 
12,850

Total revenue

180,127

 
122,633

EXPENSES:




Losses and loss adjustment expenses

77,246

 
63,333

Policy acquisition costs

57,135

 
35,436

Operating expenses

8,318

 
5,872

General and administrative expenses

23,325

 
11,333

Interest expense

2,458

 
759

Total expenses

168,482

 
116,733

Income before other income

11,645

 
5,900

Other income

71

 
38

Income before income taxes

11,716

 
5,938

Provision for income taxes

3,347

 
2,039

Net income

$
8,369

 
$
3,899

OTHER COMPREHENSIVE INCOME:




Change in net unrealized gains (losses) on investments

(23,384
)
 
3,731

Reclassification adjustment for net realized investment losses (gains)

(211
)
 
351

Income tax benefit (expense) related to items of other comprehensive income

5,923

 
(1,542
)
Total comprehensive income (loss)

$
(9,303
)
 
$
6,439






Weighted average shares outstanding




Basic

42,581,939

 
21,471,185

Diluted
 
42,748,627

 
21,688,733






Earnings per share




Basic

$
0.20

 
$
0.18

Diluted
 
$
0.20

 
$
0.18



 
 
 
Dividends declared per share

$
0.06

 
$
0.06




See accompanying Notes to Unaudited Consolidated Financial Statements.

5

UNITED INSURANCE HOLDINGS CORP.


Consolidated Statements of Cash Flows
(Unaudited)
 
 
Three Months Ended
March 31,
 
 
2018
 
2017
OPERATING ACTIVITIES
 
 
 
 
Net income
 
$
8,369

 
$
3,899

Adjustments to reconcile net income to net cash used by operating activities:
 
 
 
 
Depreciation and amortization
 
10,658

 
1,997

Bond amortization and accretion
 
1,396

 
1,042

Net realized losses (gains) on investments
 
(211
)
 
351

Net unrealized losses (gains) on equity securities
 
2,444

 

Provision for uncollectable premiums
 
(199
)
 
80

Deferred income taxes, net
 
(4,031
)
 
(2,703
)
Stock based compensation
 
487

 
642

Changes in operating assets and liabilities:
 
 
 
 
Accrued investment income
 
89

 
90

Premiums receivable
 
(3,822
)
 
1,129

Reinsurance recoverable on paid and unpaid losses
 
(100,845
)
 
(11,760
)
Prepaid reinsurance premiums
 
74,016

 
39,819

Deferred policy acquisition costs, net
 
(4,211
)
 
1,667

Other assets
 
(2,718
)
 
3,166

Unpaid losses and loss adjustment expenses
 
62,017

 
247

Unearned premiums
 
667

 
(13,223
)
Reinsurance payable
 
(63,038
)
 
(42,931
)
Payments outstanding
 
280

 
(8
)
Accounts payable and accrued expenses
 
4,810

 
(1,956
)
Other liabilities
 
(1,926
)
 
13,521

Net cash used in operating activities
 
$
(15,768
)
 
$
(4,931
)
INVESTING ACTIVITIES
 
 
 
 
Proceeds from sales and maturities of investments
 
43,144

 
40,710

Purchases of investments
 
(95,982
)
 
(50,480
)
Cost of property, equipment and capitalized software acquired
 
(1,010
)
 
(208
)
Net cash used in investing activities
 
$
(53,848
)
 
$
(9,978
)
FINANCING ACTIVITIES
 
 
 
 
Repayments of borrowings
 
(444
)
 
(381
)
Dividends
 
(2,565
)
 
(1,301
)
Outstanding checks in excess of funds on deposit
 
13,053

 
(9,878
)
Net cash provided by (used in) financing activities
 
$
10,044

 
$
(11,560
)
Decrease in cash
 
(59,572
)
 
(26,469
)
Cash and cash equivalents at beginning of period
 
276,275

 
150,688

Cash and cash equivalents at end of period
 
$
216,703

 
$
124,219

Supplemental Cash Flows Information
 
 
 
 
Interest paid
 
$
99

 
$
743

Income taxes paid
 
$
1,551

 
$
814


See accompanying Notes to Unaudited Consolidated Financial Statements.

6

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
March 31, 2018




1)    ORGANIZATION, CONSOLIDATION AND PRESENTATION

(a)Business

United Insurance Holdings Corp. (referred to in this document as we, our, us, the Company or UPC Insurance) is a property and casualty insurance holding company that sources, writes and services residential and commercial property and casualty insurance policies using a network of agents and four wholly-owned insurance subsidiaries. Our largest insurance subsidiary is United Property & Casualty Insurance Company (UPC), which was formed in Florida in 1999 and has operated continuously since that time. Our three other insurance subsidiaries are Family Security Insurance Company, Inc. (FSIC), acquired via merger on February 3, 2015, Interboro Insurance Company (IIC), acquired via merger on April 29, 2016, and American Coastal Insurance Company (ACIC), acquired via merger on April 3, 2017. See Note 4 in our Notes to Unaudited Consolidated Financial Statements for additional information regarding acquisitions.

Our other subsidiaries include United Insurance Management L.C. (UIM), a managing general agent that manages
substantially all aspects of UPC, FSIC and IIC's business; Skyway Claims Services, LLC that provides services to UPC, FSIC and IIC; AmCo Holding Company (AmCo) and Family Security Holdings (FSH) (holding company subsidiaries) that consolidate their respective insurance companies; BlueLine Cayman Holdings that reinsures portfolios of excess and surplus policies; UPC Re that is not currently, but can provide a portion of the reinsurance protection purchased by our insurance subsidiaries when needed; and Skyway Reinsurance Services that provides reinsurance brokerage services for our insurance companies.

Our primary product is homeowners' insurance, which we currently offer in 12 states, under authorization from the insurance regulatory authorities in each state. In addition, we write commercial residential insurance in the state of Florida. We are also licensed to write property and casualty insurance in six states; however, we have not commenced writing in these states.

We conduct our operations under one business segment.

(b)Consolidation and Presentation

We prepare our unaudited consolidated interim financial statements in conformity with U.S. generally accepted accounting principles (GAAP). We have condensed or omitted certain information and footnote disclosures normally included in annual consolidated financial statements presented in accordance with GAAP. In management's opinion, the accompanying unaudited consolidated financial statements reflect all adjustments, including normal recurring items, considered necessary for a fair presentation of interim periods. All significant intercompany balances and transactions have been eliminated. Our unaudited consolidated interim financial statements and footnotes should be read in conjunction with our consolidated financial statements and footnotes in our Annual Report on Form 10-K for the year ended December 31, 2017.

While preparing our unaudited consolidated financial statements, we make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the unaudited consolidated financial statements, as well as reported amounts of revenues and expenses during the reporting period. Accordingly, actual results could differ from those estimates. Reported amounts that require us to make extensive use of estimates include our reserves for unpaid losses and loss adjustment expenses, investments, and goodwill. Except for the captions on our Unaudited Consolidated Balance Sheets and Unaudited Consolidated Statements of Comprehensive Income, we generally use the term loss(es) to collectively refer to both loss and loss adjustment expenses.

We reclassified certain amounts in the 2017 financial statements to conform to the 2018 presentation. These reclassifications had no impact on our results of operations of stockholders' equity, as previously reported.

Our results of operations and our cash flows as of the end of the interim periods reported herein do not necessarily indicate our results for the remainder of the year or for any other future period.




7

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
March 31, 2018




2)    SIGNIFICANT ACCOUNTING POLICIES

(a) Changes to significant accounting policies

We have made no changes to our significant accounting policies as reported in our Annual Report on Form 10-K for the year ended December 31, 2017, except as noted below.

(b) Income Taxes

As of March 31, 2018, we have not fully completed our accounting for the tax effects of the enactment of the legislation commonly known as the Tax Cuts and Jobs Act of 2017 with regard to the deductibility of compensation expense for certain covered executives due to uncertainty surrounding the appropriate tax treatment of outstanding performance-based awards, and uncertainty surrounding the discount factors to be applied for loss reserve discounting. We are waiting for the Internal Revenue Service to publish additional guidance or information for both items.

(c) Fair value assumptions

The carrying amounts for the following financial instrument categories approximate their fair values at March 31, 2018 and December 31, 2017, because of their short-term nature: cash and cash equivalents, accrued investment income, premiums receivable, reinsurance recoverable, reinsurance payable, other assets, and other liabilities. The carrying amount of the notes payable to the Florida State Board of Administration, the Branch Banking & Trust Corporation (BB&T) and our senior notes approximate fair value as the interest rates and terms are variable.

(d) Recently Adopted Accounting Pronouncements

In January 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01). This update substantially revises standards for the recognition, measurement and presentation of financial instruments. This standard revised our accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. It also amended certain disclosure requirements associated with the fair value of financial instruments. ASU 2016-01 is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods, with early adoption permitted for certain requirements. We adopted this standard as of January 1, 2018, which resulted in a reclassification of a $9,338,000 gain, net of tax, on equity securities from accumulated other comprehensive income to retained earnings on our consolidated financial statements. Refer to Note 14 for a reconciliation. Additionally, as a result of the adoption of ASU 2016-01, we also recognized a $2,444,000 loss based on the change in fair value of equity securities in the Unaudited Consolidated Statements of Income for the three months ended March 31, 2018.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09). Insurance contracts are excluded from the scope of this standard. This standard provides guidance on revenue recognition for entities that enter into contracts with customers to transfer goods or services or enter into contracts for the transfer of nonfinancial assets. The transaction price is attributed to underlying performance obligations in the contract and revenue is recognized as the entity satisfies the performance obligation and transfers control of the good or service to the customer. We adopted this standard on January 1, 2018. We note that the standard is not applicable to our insurance contracts or other revenue streams, and therefore the adoption of this new accounting standard did not have a material impact on our consolidated financial statements and related disclosures.

In May 2017, the FASB issued ASU No. 2017-09, Compensation-Stock Compensation (Topic 718)-Scope of Modification Accounting (ASU 2017-09). This standard provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. ASU 2017-09 is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods, with early adoption permitted for certain requirements. We did not early adopt and the new guidance did not impact the way in which we account for share-based payment transactions. Therefore, the adoption as of January 1, 2018 had no impact on our results of operations.


8

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
March 31, 2018





(d) Pending Accounting Pronouncements

We have evaluated recent accounting pronouncements that have had or may have a significant effect on our financial statements or on our disclosures.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (ASU 2017-04). This update simplifies the manner in which an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. ASU 2017-07 is effective for annual periods beginning after December 15, 2019, including interim periods within those annual periods, with early adoption permitted for certain requirements. We do not intend to early adopt and are assessing the impact of adopting this new accounting standard on our consolidated financial statements and related disclosures.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (ASU 2016-02). This update is intended to replace existing lease guidance by requiring a lessee to recognize substantially all leases (whether operating or finance leases) on the balance sheet as a right-of-use asset and an associated lease liability. Short-term leases of 12 months or less are excluded from this amendment. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. We do not intend to early adopt and are assessing the impact of adopting this new accounting standard on our consolidated financial statements and related disclosures.


9

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
March 31, 2018



3)    INVESTMENTS

The following table details fixed maturity available-for-sale and equity securities, by major investment category, at March 31, 2018 and December 31, 2017:
 
Cost or Adjusted/Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
March 31, 2018
 
 
 
 
 
 
 
U.S. government and agency securities
$
247,505

 
$
71

 
$
5,317

 
$
242,259

Foreign government
2,020

 

 
8

 
2,012

States, municipalities and political subdivisions
187,419

 
657

 
2,208

 
185,868

Public utilities
24,587

 
26

 
444

 
24,169

Corporate securities
291,843

 
422

 
5,018

 
287,247

Asset backed securities
44,943

 
17

 
57

 
44,903

Redeemable preferred stocks
760

 
12

 
85

 
687

Total fixed maturities
$
799,077

 
$
1,205

 
$
13,137

 
$
787,145

 
 
 
 
 
 
 
 
Mutual funds
$
44,272

 
$
2,418

 
$
454

 
$
46,236

Public utilities
1,343

 
294

 
34

 
1,603

Other common stocks
19,967

 
7,841

 
231

 
27,577

Non-redeemable preferred stocks
1,718

 
38

 
17

 
1,739

Total equity securities
$
67,300

 
$
10,591

 
$
736

 
$
77,155

 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
U.S. government and agency securities
$
237,809

 
$
275

 
$
2,193

 
$
235,891

Foreign government
2,022

 
14

 

 
2,036

States, municipalities and political subdivisions
200,706

 
1,929

 
1,123

 
201,512

Public utilities
20,215

 
127

 
85

 
20,257

Corporate securities
287,025

 
1,746

 
1,209

 
287,562

Asset-backed securities
14,902

 
23

 
20

 
14,905

Redeemable preferred stocks
755

 
11

 
74

 
692

Total fixed maturities
$
763,434

 
$
4,125

 
$
4,704

 
$
762,855

 
 
 
 
 
 
 
 
Mutual fund
$
29,079

 
$
2,845

 
$

 
$
31,924

Public utilities
1,343

 
359

 

 
1,702

Other common stocks
18,856

 
9,093

 
47

 
27,902

Non-redeemable preferred stocks
1,718

 
53

 
4

 
1,767

Total equity securities
$
50,996

 
$
12,350

 
$
51

 
$
63,295


10

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
March 31, 2018



When we sell investments, we calculate the gain or loss realized on the sale by comparing the sales price (fair value) to the cost or adjusted/amortized cost of the security sold. We determine the cost or adjusted/amortized cost of the security sold using the specific-identification method. The following table details our realized gains (losses) by major investment category for the three months ended March 31, 2018 and 2017:

 
2018
 
2017
 
Gains
(Losses)
 
Fair Value at Sale
 
Gains
(Losses)
 
Fair Value at Sale
Three Months Ended March 31,
 
 
 
 
 
 
 
Fixed maturities
$
42

 
$
3,445

 
$
99

 
$
12,586

Equity securities
450

 
1,408

 

 

Total realized gains
492

 
4,853

 
99

 
12,586

Fixed maturities
(281
)
 
32,228

 
(450
)
 
23,548

Equity securities

 

 

 

Total realized losses
(281
)
 
32,228

 
(450
)
 
23,548

Net realized investment gains (losses)
$
211

 
$
37,081

 
$
(351
)
 
$
36,134


The table below summarizes our fixed maturities at March 31, 2018 by contractual maturity periods. Actual results may differ as issuers may have the right to call or prepay obligations, with or without penalties, prior to the contractual maturities of those obligations.

 
March 31, 2018
 
Cost or Amortized Cost
 
Percent of Total
 
Fair Value
 
Percent of Total
Due in one year or less
$
61,999

 
7.8
%
 
$
61,715

 
7.8
%
Due after one year through five years
325,696

 
40.8
%
 
321,403

 
40.8
%
Due after five years through ten years
185,127

 
23.2
%
 
181,628

 
23.1
%
Due after ten years
15,800

 
2.0
%
 
15,459

 
2.0
%
Asset and mortgage backed securities
210,455

 
26.2
%
 
206,940

 
26.3
%
Total
$
799,077

 
100.0
%
 
$
787,145

 
100.0
%


11

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
March 31, 2018



The following table summarizes our net investment income by major investment category:

 
Three Months Ended March 31,
 
2018
 
2017
Fixed maturities
$
4,812

 
$
2,498

Equity securities
463

 
220

Cash and cash equivalents
222

 
70

Other investments
182

 
152

Other assets
7

 
11

Investment income
5,686

 
2,951

Investment expenses
(243
)
 
(250
)
Net investment income
$
5,443

 
$
2,701


Portfolio monitoring

We have a comprehensive portfolio monitoring process to identify and evaluate each fixed income and equity security whose carrying value may be other-than-temporarily impaired.

For each fixed income security in an unrealized loss position, we determine if the loss is temporary or other-than-temporary. If our management decides to sell the security or determines that it is more likely than not that we will be required to sell the security before recovery of the cost or amortized cost basis for reasons such as liquidity needs, contractual or regulatory requirements, then the security's decline in fair value is considered other-than-temporary and is recorded in earnings.

If we have not made the decision to sell the fixed income security and it is more likely than not that we will be required to sell the fixed income security before recovery of its amortized cost basis, we evaluate whether we expect the security to receive cash flows sufficient to recover the entire cost or amortized cost basis of the security. We calculate the estimated recovery value by discounting the best estimate of future cash flows at the security's original or current effective rate, as appropriate, and compare this to the cost or amortized cost of the security. If we do not expect to receive cash flows sufficient to recover the entire cost or amortized cost basis of the fixed income security, the credit loss component of the impairment is recorded in earnings, with the remaining amount of the unrealized loss related to other factors recognized in other comprehensive income.

Our portfolio monitoring process includes a quarterly review of all fixed-income securities to identify instances where the fair value of a security compared to its cost or amortized cost (for fixed income securities) is below established thresholds. The process also includes the monitoring of other impairment indicators such as ratings, ratings downgrades and payment defaults. The securities identified, in addition to other securities for which we may have a concern, are evaluated for potential other-than-temporary impairment using information relevant to the collectability or recovery of the security that is reasonably available. Inherent in our evaluation of other-than-temporary impairment for these fixed income and equity securities are assumptions and estimates about the financial condition and future earnings potential of the issue or issuer. Some of the factors that may be considered in evaluating whether a decline in fair value is other-than-temporary are: (1) the financial condition, near-term and long-term prospects of the issue or issuer, including relevant industry specific market conditions and trends, geographic location and implications of rating agency actions and offering prices; (2) the specific reasons that a security is in an unrealized loss position, including overall market conditions which could affect liquidity; and (3) the length of time and extent to which the fair value has been less than amortized cost or cost.

12

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
March 31, 2018



The following table presents an aging of our unrealized investment losses by investment class:
 
 
Less Than Twelve Months
 
Twelve Months or More
 
Number of Securities(1)
 
Gross Unrealized Losses
 
Fair Value
 
Number of Securities(1)
 
Gross Unrealized Losses
 
Fair Value
March 31, 2018
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency securities
177

 
$
3,252

 
$
163,624

 
120

 
$
2,065

 
$
69,114

Foreign governments
2

 
8

 
2,012

 

 

 

States, municipalities and political subdivisions
159

 
1,773

 
133,508

 
24

 
435

 
16,616

Public utilities
39

 
381

 
21,114

 
5

 
63

 
994

Corporate securities
500

 
4,406

 
240,811

 
52

 
612

 
17,182

Asset backed securities
31

 
57

 
31,532

 

 

 

Redeemable preferred stocks
1

 
4

 
121

 
3

 
81

 
302

Total fixed maturities
909

 
9,881

 
592,722

 
204

 
3,256

 
104,208

Mutual Fund
2

 
454

 
14,743

 

 

 

Public utilities
2

 
34

 
416

 

 

 

Other common stocks
23

 
202

 
3,236

 
1

 
29

 
97

Non-redeemable preferred stocks
13

 
17

 
604

 

 

 

Total equity securities
40

 
707

 
18,999

 
1

 
29

 
97

Total
949

 
$
10,588

 
$
611,721

 
205

 
$
3,285

 
$
104,305

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency securities
129

 
$
641

 
$
103,328

 
123

 
$
1,552

 
$
74,190

States, municipalities and political subdivisions
106

 
734

 
91,245

 
31

 
389

 
19,718

Public utilities
16

 
44

 
7,052

 
5

 
41

 
1,016

Corporate securities
263

 
871

 
134,755

 
52

 
338

 
16,476

Asset-backed securities
18

 
20

 
11,682

 

 

 

Redeemable preferred stocks

 

 

 
3

 
74

 
303

Total fixed maturities
532

 
2,310

 
348,062

 
214

 
2,394

 
111,703

Mutual Funds
1

 

 
131

 

 

 

Other common stocks
5

 
47

 
748

 

 

 

Non-redeemable preferred stocks
4

 
4

 
87

 

 

 

Total equity securities
10

 
51

 
966

 

 

 

Total
542

 
$
2,361

 
$
349,028

 
214

 
$
2,394

 
$
111,703

(1) This amount represents the actual number of discrete securities, not the number of shares or units of those securities. The numbers are not presented in thousands.

During our quarterly evaluations of our securities for impairment, we determined that none of our investments in debt and equity securities that reflected an unrealized loss position were other-than-temporarily impaired. The issuers of our debt securities continue to make interest payments on a timely basis. We do not intend to sell nor is it likely that we would be required to sell the debt securities before we recover our amortized cost basis. Due to the adoption of ASU 2016-01, equity securities are reported at fair value with changes in fair value recognized in valuation of equity investments and are no longer included in impairment write-downs, change in intent write-downs and sales.

During the three months ended March 31, 2018 and 2017, we recorded no other-than-temporary impairment charges.


13

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
March 31, 2018



Fair value measurement

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The hierarchy for inputs used in determining fair value maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Assets and liabilities recorded on our Unaudited Consolidated Balance Sheets at fair value are categorized in the fair value hierarchy based on the observability of inputs to the valuation techniques as follows:

Level 1: Assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that we can access.

Level 2: Assets and liabilities whose values are based on the following:
(a) Quoted prices for similar assets or liabilities in active markets;
(b) Quoted prices for identical or similar assets or liabilities in markets that are not active; or
(c) Valuation models whose inputs are observable, directly or indirectly, for substantially the full term of the asset or liability.

Level 3: Assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. Unobservable inputs reflect our estimates of the assumptions that market participants would use in valuing the assets and liabilities.

We estimate the fair value of our investments using the closing prices on the last business day of the reporting period, obtained from active markets such as the NYSE, Nasdaq and NYSE MKT. For securities for which quoted prices in active markets are unavailable, we use a third-party pricing service that utilizes quoted prices in active markets for similar instruments, benchmark interest rates, broker quotes and other relevant inputs to estimate the fair value of those securities for which quoted prices are unavailable. Our estimates of fair value reflect the interest rate environment that existed as of the close of business on March 31, 2018 and December 31, 2017. Changes in interest rates subsequent to March 31, 2018 may affect the fair value of our investments.

The fair value of our fixed maturities is initially calculated by a third-party pricing service. Valuation service providers typically obtain data about market transactions and other key valuation model inputs from multiple sources and, through the use of proprietary models, produce valuation information in the form of a single fair value for individual fixed income and other securities for which a fair value has been requested. The inputs used by the valuation service providers include, but are not limited to, market prices from recently completed transactions and transactions of comparable securities, interest rate yield curves, credit spreads, liquidity spreads, currency rates and other information, as applicable. Credit and liquidity spreads are typically implied from completed transactions and transactions of comparable securities. Valuation service providers also use proprietary discounted cash flow models that are widely accepted in the financial services industry and similar to those used by other market participants to value the same financial information. The valuation models take into account, among other things, market observable information as of the measurement date, as described above, as well as the specific attributes of the security being valued, including its term, interest rate, credit rating, industry sector and, where applicable, collateral quality and other issue or issuer specific information. Executing valuation models effectively requires seasoned professional judgment and experience.

For our Level 3 assets, our internal pricing methods are primarily based on models using discounted cash flow methodologies that determine a single best estimate of fair value for individual financial instruments. In addition, our models use a discount rate and internally assigned credit ratings as inputs (which are generally consistent with any external ratings) and those we use to report our holdings by credit rating. Market related inputs used in these fair values, which we believe are representative of inputs other market participants would use to determine fair value of the same instruments include: interest rate yield curves, quoted market prices of comparable securities, credit spreads and other applicable market data. As a result of the significance of non-market observable inputs, including internally assigned credit ratings as described above, judgment is required in developing these fair values. The fair value of these financial assets may differ from the amount actually received if we were to sell the asset. Moreover, the use of different valuation assumptions may have a material effect on the fair values on the financial assets.



14

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
March 31, 2018



Any change in the estimated fair value of our fixed-income securities would impact the amount of unrealized gain or loss we have recorded, which could change the amount we have recorded for our investments and other comprehensive income on our Unaudited Consolidated Balance Sheet as of March 31, 2018.

The following table presents the fair value of our financial instruments measured on a recurring basis by level at March 31, 2018 and December 31, 2017:

 
Total
 
Level 1
 
Level 2
 
Level 3
March 31, 2018
 
 
 
 
 
 
 
U.S. government and agency securities
$
242,259

 
$

 
$
242,259

 
$

Foreign government
2,012

 

 
2,012

 

States, municipalities and political subdivisions
185,868

 

 
185,868

 

Public utilities
24,169

 

 
24,169

 

Corporate securities
287,247

 

 
287,247

 

Asset backed securities
44,903

 

 
44,903

 

Redeemable preferred stocks
687

 
687

 

 

Total fixed maturities
787,145

 
687

 
786,458

 

Mutual funds
46,236

 
46,236

 

 

Public utilities
1,603

 
1,603

 

 

Other common stocks
27,577

 
27,577

 

 

Non-redeemable preferred stocks
1,739

 
1,739

 

 

Total equity securities
77,155

 
77,155

 

 

Other long-term investments
8,144

 
300

 
7,190

 
654

Total investments
$
872,444

 
$
78,142

 
$
793,648

 
$
654

 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
U.S. government and agency securities
$
235,891

 
$

 
$
235,891

 
$

Foreign government
2,036

 

 
2,036

 

States, municipalities and political subdivisions
201,512

 

 
201,512

 

Public utilities
20,257

 

 
20,257

 

Corporate securities
287,562

 

 
287,562

 

Asset-backed securities
14,905

 

 
14,905

 

Redeemable preferred stocks
692

 
692

 

 

Total fixed maturities
762,855

 
692

 
762,163

 

Mutual Funds
31,924

 
31,924

 

 

Public utilities
1,702

 
1,702

 

 

Other common stocks
27,902

 
27,902

 

 

Non-redeemable preferred stocks
1,767

 
1,767

 

 

Total equity securities
63,295

 
63,295

 

 

Other long-term investments
8,381

 
300

 
7,447

 
634

Total investments
$
834,531

 
$
64,287

 
$
769,610

 
$
634





15

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
March 31, 2018



The table below presents the rollforward of our Level 3 investments held at fair value during the three months ended March 31, 2018:
 
 
Other Investments
December 31, 2017
 
$
634

Partnership income
 
53

Return of capital
 
(90
)
Unrealized gains in accumulated other comprehensive income
 
57

March 31, 2018
 
$
654



We are responsible for the determination of fair value and the supporting assumptions and methodologies. We have implemented a system of processes and controls designed to provide assurance that our assets and liabilities are appropriately valued. For fair values received from third parties, our processes are designed to provide assurance that the valuation methodologies and inputs are appropriate and consistently applied, the assumptions are reasonable and consistent with the objective of determining fair value, and the fair values are accurately recorded.

At the end of each quarter, we determine whether we need to transfer the fair values of any securities between levels of the fair value hierarchy and, if so, we report the transfer as of the end of the quarter. During the first three months of 2018, we did not transfer any investments between levels. We used unobservable inputs to derive our estimated fair value for Level 3 investments, and the unobservable inputs are significant to the overall fair value measurement.

For our investments in U.S. government securities that do not have prices in active markets, agency securities, state and municipal governments, and corporate bonds, we obtain the fair values from our investment custodians, which use a third-party valuation service. The valuation service calculates prices for our investments in the aforementioned security types on a month-end basis by using several matrix-pricing methodologies that incorporate inputs from various sources. The model the valuation service uses to price U.S. government securities and securities of states and municipalities incorporates inputs from active market makers and inter-dealer brokers. To price corporate bonds and agency securities, the valuation service calculates non-call yield spreads on all issuers, uses option-adjusted yield spreads to account for any early redemption features, and adds final spreads to the U.S. Treasury curve at 3 p.m. (ET) as of quarter end. Since the inputs the valuation service uses in its calculations are not quoted prices in active markets, but are observable inputs, they represent Level 2 inputs.


16

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
March 31, 2018



Other investments

We acquired investments in limited partnerships, recorded in the other investments line of our Consolidated Balance Sheets and are currently being accounted for at fair value utilizing a discounted cash flow methodology. The estimated fair value of our investments in the limited partnership interests at March 31, 2018 was $7,844,000. We have fully funded two investments and are still obligated to fund an additional $1,320,000 for the remaining three investments.

The information presented in the table below is as of March 31, 2018:

 
 
Book Value
 
Unrealized Gain
 
Unrealized Loss
 
Fair Value
Limited partnership investments
 
$
7,463

 
$
381

 
$

 
$
7,844

Certificates of deposit
 
300

 

 

 
300

Total other investments
 
$
7,763

 
$
381

 
$

 
$
8,144


The following table summarizes the quantitative impact that the significant unobservable inputs used to estimate the fair value of our Level 3 investments has on the estimated fair value of our investments shown in the tables above. Those limited partnership investments being carried at cost are excluded from the table below. Our investment in DCR Mortgage Partners VI, L.P. (DCR VI) was valued using a duration of 60 months for both periods presented below.
 
 
Fair Value
 
Valuation
 
 
 
Rate
 
 
Impact
 
Technique
 
Unobservable Input
 
Adjustment
March 31, 2018
 
 
 
 
 
 
 
 
DCR VI
 
$
(33
)
 
Discounted cash flow
 
Discount rate based on D&B paydex scale
 
2.35%
 
 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
 
DCR VI
 
$
(37
)
 
Discounted cash flow
 
Discount rate based on D&B paydex scale
 
2.35%

Portfolio loans

At March 31, 2018, we held commercial portfolio loans of $20,000,000. We believe that making sound loans is a necessary and desirable means of employing funds available for investment. Recognizing our obligation to our stockholders, management is expected to seek to develop and make sound, profitable loans that resources permit and that opportunity affords. These are short-term collateralized loans (less than one year), which we expect to be repaid primarily from cash flows of the borrowers.

We have not calculated an allowance for a loan loss at March 31, 2018. The allowance would represent an estimate of the amount of probable losses believed to be inherent in our portfolio. Due to the short-term nature of the loans, the projects being substantially complete and the fact that all loans are current with respect to their scheduled payments, we determined that an allowance for loan losses was not necessary, and therefore the related disclosures on the allowance for loan losses and past due loans have been omitted. Our loans were repaid in full upon completion of the projects in April 2018.

4)
ACQUISITIONS

We account for business acquisitions in accordance with the acquisition method of accounting, which requires, among other things, that most assets acquired, liabilities assumed and earn-out consideration be recognized at their fair values as of the acquisition date. Measurement period adjustments to provisional purchase price allocations are recognized in the period in which they are determined as if the accounting had been completed on the acquisition date.


17

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
March 31, 2018



On April 3, 2017, we completed our acquisition of AmCo and its subsidiaries. The transaction was completed through a series of mergers that ultimately resulted in the Company issuing 20,956,355 shares of its common stock as merger consideration to the equity holders of RDX Holding, LLC, the former parent company of AmCo. As a result of the mergers, AmCo merged with and into a wholly-owned subsidiary of the Company. The acquisition of AmCo supported our growth strategy and further strengthened our overall position in the commercial property and casualty insurance market. Goodwill recorded in the transaction, which reflected the synergies expected from the acquisition and enhanced reinsurance opportunities, is not tax deductible.

The operations of AmCo are included in our Unaudited Consolidated Statements of Comprehensive Income effective April 3, 2017. The final purchase price allocation is as follows:

Cash and cash equivalents
$
95,284

Investments
222,920

Premium and agents' receivable
31,439

Reinsurance recoverable
20,230

Prepaid reinsurance premiums
22,544

Intangible assets
30,286

Insurance contract asset
33,812

Goodwill
59,475

Other assets
4,591

Unpaid losses and loss adjustment expenses
(60,529
)
Unearned premiums
(128,824
)
Reinsurance payable
(22,406
)
Deferred taxes
(17,093
)
Other liabilities
(6,261
)
Total purchase price
$
285,468


The unaudited pro forma financial information below has been prepared as if the acquisition of AmCo had taken place on January 1, 2017. The unaudited pro forma financial information is not necessarily indicative of the results that we would have achieved had the transaction taken place on January 1, 2017, and the unaudited pro forma information does not purport to be indicative of future financial operating results.

 
Three Months Ended March 31,
 
2017
 
As
 
Pro Forma
 
 
 
Reported
 
Adjustments
 
Pro Forma
Revenues
$
122,633

 
$
38,096

 
$
160,729

 
 
 
 
 
 
Net income (loss)
$
3,899

 
$
6,712

 
$
10,611

 
 
 
 
 
 
Diluted earnings per share
$
0.18

 
$

 
$
0.25





5)    EARNINGS PER SHARE


18

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
March 31, 2018



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 vesting of restricted stock awards. The following table shows the computation of basic and diluted EPS for the three-month periods ended March 31, 2018 and 2017, respectively:

 
 
Three Months Ended March 31,
 
 
2018
 
2017
Numerator:
 
 
 
 
Net income attributable to common stockholders
 
$
8,369

 
$
3,899

 
 
 
 
 
Denominator:
 
 
 
 
Weighted-average shares outstanding
 
42,581,939

 
21,471,185

Effect of dilutive securities
 
166,688

 
217,548

Weighted-average diluted shares
 
42,748,627

 
21,688,733

 
 
 
 
 
Basic earnings per share
 
$
0.20

 
$
0.18

Diluted earnings per share
 
$
0.20

 
$
0.18


See Note 16 for additional information on the stock grants related to dilutive securities.




6)    PROPERTY AND EQUIPMENT, NET

Property and equipment, net consisted of the following:
 
 
March 31,
2018
 
December 31,
2017
Land
 
$
2,114

 
$
2,114

Building and building improvements
 
6,000

 
5,695

Computer hardware and software
 
19,283

 
18,985

Office furniture and equipment
 
3,801

 
3,413

Leasehold improvements
 
19

 

Total, at cost
 
31,217

 
30,207

Less: accumulated depreciation and amortization
 
(13,660
)
 
(12,916
)
Property and equipment, net
 
$
17,557

 
$
17,291


Depreciation and amortization expense under property and equipment was $744,000 and $615,000 for the three months ended March 31, 2018 and 2017, respectively.


7) GOODWILL AND INTANGIBLE ASSETS

Goodwill

The carrying amount of goodwill, both at March 31, 2018 and December 31, 2017, was $73,045,000. There was no goodwill acquired or disposed of during the three-month period ended March 31, 2018.


19

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
March 31, 2018



Using a qualitative assessment, we completed our most recent goodwill impairment testing during the fourth quarter of 2017 and determined that there was no impairment in the value of the asset as of December 31, 2017.

No impairment loss in the value of goodwill was recognized during the three-months ended March 31, 2018. Additionally, there was no accumulated impairment or accumulated amortization related to goodwill at March 31, 2018 or December 31, 2017.

Intangible Assets

The following is a summary of intangible assets excluding goodwill recorded as other assets:
 
 
March 31, 2018
 
December 31, 2017
Intangible assets subject to amortization
 
$
31,890

 
$
41,715

Indefinite-lived intangible assets(1)
 
3,556

 
3,556

Total
 
$
35,446

 
$
45,271

(1) Indefinite-lived intangible assets are comprised of state insurance and agent licenses, as well as perpetual software licenses.


Intangible assets subject to amortization consisted of the following:
 
 
Weighted-average remaining amortization period (in years)
 
Gross carrying amount
 
Accumulated amortization
 
Net carrying amount
March 31, 2018
 
 
 
 
 
 
 
 
Value of business acquired
 
 
$
42,788

 
$
(42,788
)
 
$

Agency agreements acquired
 
7.8
 
34,661

 
(7,793
)
 
26,868

Trade names acquired
 
5.8
 
6,381

 
(1,359
)
 
5,022

Total
 
 
 
$
83,830

 
$
(51,940
)
 
$
31,890

 
 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
 
Value of business acquired
 
0.3
 
$
42,788

 
$
(34,335
)
 
$
8,453

Agency agreements acquired
 
8.0
 
34,661

 
(6,669
)
 
27,992

Trade names acquired
 
6.0
 
6,381

 
(1,111
)
 
5,270

Total
 
 
 
$
83,830

 
$
(42,115
)
 
$
41,715


No impairment in the value of amortizing or non-amortizing intangible assets was recognized during the three months ended March 31, 2018 and 2017.
Amortization expense of our intangible assets was $9,825,000 for the three months ended March 31, 2018. Amortization expense of our intangible assets was $1,794,000 for the three months ended March 31, 2017.
Estimated amortization expense of our intangible assets to be recognized by the Company over the next five years is as follows:
Year ending December 31,
 
Estimated Amortization Expense
Remaining 2018
 
$
4,095

2019
 
5,355

2020
 
4,267

2021
 
3,555

2022
 
3,246

2023
 
3,246


20

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
March 31, 2018



8)    REINSURANCE

Our reinsurance program is designed, utilizing our risk management methodology, to address our exposure to catastrophes. According to the Insurance Service Office (ISO), a catastrophe loss is defined as a single unpredictable incident or series of closely related incidents that result in $25,000,000 or more in U.S. industry-wide direct insured losses to property and that affect a significant number of policyholders and insurers (ISO catastrophes). In addition to ISO catastrophes, we also include as catastrophes those events (non-ISO catastrophes), which may include losses, that we believe are, or will be, material to our operations, either in amount or in number of claims made.

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 stockholders an acceptable return on the risks assumed in our property business, and to reduce variability of earnings, while providing protection to our policyholders.

Effective January 1, 2018, UPC Insurance, through its wholly-owned insurance subsidiaries UPC, ACIC, IIC and FSIC, renewed the aggregate excess of loss agreement with a private reinsurer. The treaty provides coverage for all catastrophe perils other than hurricanes, tropical storms, tropical depressions and earthquakes. Under this agreement, we will retain, in the aggregate, 100% of those losses up to 4.75% of the covered companies’ gross earned premium. The reinsurer will then be liable for all losses in excess of 4.75% of the covered companies’ gross earned premium in the aggregate not to exceed $20,000,000 over the term of the treaty. Recoveries under this treaty will be calculated quarterly based on the cumulative gross earned premium. We ceded $19,189,000 of catastrophe losses to this treaty for the three months ended March 31, 2018. Reinsurance recoveries under this agreement may change in future periods as the cumulative subject gross earned premiums and eligible gross catastrophe losses incurred are recognized in subsequent calendar quarters during 2018 in accordance with the terms of the agreement. No allowance has been recorded against the $19,189,000 reinsurance recoverable at March 31, 2018 since future catastrophe losses are inherently unpredictable and can't be reasonably estimated.

Effective December 31, 2017, UPC Insurance, through our wholly-owned insurance subsidiary UPC, replaced its quota share agreement with private reinsurers. The quota share agreement has a term of 12 months and a cession rate of 20% for all subject business. The quota share agreement provides coverage for all catastrophe perils and attritional losses. For all catastrophe perils, the quota share agreement provides ground-up protection effectively reducing our retention for catastrophe losses. Quota share reinsurers’ participation in paying attritional losses is subject to an attritional loss ratio cap.

Effective June 1, 2017, UPC Insurance, through our wholly owned insurance subsidiaries UPC, ACIC, FSIC and IIC, entered into reinsurance agreements with several private reinsurers and with the Florida State Board of Administration (SBA), which administers the Florida Hurricane Catastrophe Fund (FHCF). These agreements provide coverage for catastrophe losses from named or numbered windstorms and earthquakes in all states in which UPC operates except for the FHCF agreement, which only provides coverage in Florida against storms that the National Hurricane Center designates as hurricanes.

Highlights of the coverage embedded in these contracts include:
More frequency and severity protection than in any prior year, with an overall program exhaustion point of $2,747,500,000;
Sufficient coverage for a single 1-in-400 year event (AIR Touchstone v3.1 Standard Event Set);
Sufficient coverage for a 1-in-100 year event followed by a 1-in-50 year event in the same season;
Group retention of $55,000,000 for a first event and $30,000,000 for a second and subsequent events including a $5,000,000 retention related to our captive reinsurer BlueLine Cayman Holdings; this represents approximately 11% of group equity for a first event, lower than in any prior year for UPC Insurance;
Realized cost synergies by placing a combined program with ACIC that surpassed our previously stated goal of $20,000,000 annually;
Coverage from 43 reinsurers with 70% of the open market limit placed on a fully collateralized basis to mitigate credit risk; carriers providing uncollateralized limit have minimum A.M. Best financial strength ratings of A-;
Approximately $87,500,000 of multi-year limit; and
Coverage expanded to include the entire life of a hurricane in lieu of an hours clause

For the FHCF reimbursement contracts effective June 1, 2017, UPC Insurance has elected a 45% coverage for all its insurance subsidiaries with Florida exposure. We estimate the mandatory FHCF layer will provide approximately $789,000,000

21

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
March 31, 2018



of aggregate coverage with varying retentions and limits among the three FHCF contracts that all inure to the benefit of the open market coverage secured from private reinsurers.

The $1,928,000,000 of aggregate open market catastrophe reinsurance coverage is structured into multiple layers with a cascading feature that all layers drop down as layers below them are exhausted. Any remaining unused layer protection drops down for subsequent events until exhausted, ensuring there are no potential gaps in coverage up to the $2,747,500,000 program exhaustion point.

We amortize our prepaid reinsurance premiums over the annual agreement period, and we record that amortization in ceded premiums earned on our Unaudited Consolidated Statements of Comprehensive Income. The table below summarizes the amounts of our ceded premiums written under the various types of agreements, as well as the amortization of prepaid reinsurance premiums:
 
Three Months Ended March 31,
 
2018
 
2017
Quota share
$
(22,607
)
 
$
(19,370
)
Excess-of-loss
(13,861
)
 
(10,229
)
Equipment & identity theft
(2,120
)
 
(2,073
)
Flood
(3,671
)
 
(3,391
)
Ceded premiums written
$
(42,259
)
 
$
(35,063
)
Increase (decrease) in ceded unearned premiums
(74,016
)
 
(39,819
)
Ceded premiums earned
$
(116,275
)
 
$
(74,882
)

Current year catastrophe losses disaggregated between named and numbered storms and all other catastrophe loss events are shown in the following table:
 
 
2018
 
2017
 
 
Number of Events
 
Incurred Loss and LAE (1) 
 
Combined Ratio Impact
 
Number of Events
 
Incurred Loss and LAE (1) 
 
Combined Ratio Impact
Three Months Ended March 31,
 
 
 
 
 
 
 
 
 
 
 
 
Current period catastrophe losses incurred
 
 
 
 
 
 
 
 
 
 
 
 
Named and numbered storms
 

 
$

 
%
 

 
$

 
%
All other catastrophe loss events
 
8

 
6,317

 
3.9
%
 
5

 
10,612

 
9.9
%
Total
 
8

 
$
6,317

 
3.9
%
 
5

 
$
10,612

 
9.9
%
(1) Incurred loss and LAE (as defined below) is equal to losses and LAE paid plus the change in case and incurred but not reported reserves. Shown net of losses ceded to reinsurers. Incurred loss and LAE and number of events includes the development on storms during the year in which it occurred.

We collected cash recoveries under our reinsurance agreements totaling $122,512,000 and $2,484,000 for the three-month periods ended March 31, 2018 and 2017, respectively.
 
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 $388,000 and $294,000 for the three-month periods ended March 31, 2018 and 2017, respectively.


9) LIABILITY FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSE (LAE)

22

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
March 31, 2018



We determine the reserve for unpaid losses on an individual-case basis for all incidents reported. The liability also includes amounts for incurred but not reported (IBNR) claims as of the balance sheet date.
The table below shows the analysis of our reserve for unpaid losses for the three months ended March 31, 2018 and 2017 on a GAAP basis:
 
March 31,
 
2018
 
2017
Balance at January 1
$
482,232

 
$
140,855

Less: reinsurance recoverable on unpaid losses
305,673

 
18,724

Net balance at January 1
$
176,559

 
$
122,131

 
 
 
 
Incurred related to:
 
 
 
Current year
77,927

 
63,859

Prior years
(681
)
 
(526
)
Total incurred
$
77,246

 
$
63,333

Paid related to:
 
 
 
Current year
34,800

 
21,986

Prior years
74,570

 
42,528

Total paid
$
109,370

 
$
64,514

 
 
 
 
Net balance at March 31
$
144,435

 
$
120,950

Plus: reinsurance recoverable on unpaid losses
399,814

 
20,152

Balance at March 31
$
544,249

 
$
141,102

 
 
 
 
Composition of reserve for unpaid losses and LAE:

 
 
 
     Case reserves
$
214,067

 
$
82,987

     IBNR reserves
330,182

 
58,115

Balance at March 31
$
544,249

 
$
141,102


Based upon our internal analysis and our review of the statement of actuarial opinion provided by our actuarial consultants, we believe that the reserve for unpaid losses reasonably represents the amount necessary to pay all claims and related expenses which may arise from incidents that have occurred as of the balance sheet date.
As reflected by our losses incurred related to prior years, the favorable development experienced in 2018 and 2017 was primarily the result of losses related to the 2017 and 2016 accident years coming in better than expected.


10)    LONG-TERM DEBT

Long-Term Debt

The table below presents all long-term debt outstanding as of March 31, 2018 and December 31, 2017:


23

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
March 31, 2018



 
 
 
Effective Interest Rate
 
Carrying Value at
 
Maturity
 
 
March 31, 2018
 
December 31, 2017
$150M Senior Notes Payable
December 15, 2027
 
6.25%
 
$
150,000

 
$
150,000

Florida State Board of Administration Note Payable
July 1, 2026
 
2.43%
 
9,706

 
10,000

BB&T Term Note Payable
May 26, 2031
 
3.31%
 
4,564

 
4,651

Total long-term debt
 
 
 
 
$
164,270

 
$
164,651


$150M Senior Notes Payable

On December 13, 2017, we issued $150,000,000 of senior notes (the $150M seniors notes) that will mature in 10 years and bear interest at a rate equal to 6.25% per annum payable semi-annually on each June 15 and December 15, commencing June 15, 2018. The $150M senior notes are senior unsecured obligations of the Company. We may redeem the $150M senior notes at our option, at any time and from time to time in whole or in part, at a redemption price equal to the greater of (i) 100% of the principal amount of the notes to be redeemed and (ii) the sum of the present values of the remaining scheduled payments of principal and interest thereon from the date of redemption to September 15, 2027. Thereafter, we may redeem the $150M senior notes at par.

Florida State Board of Administration Note Payable

On September 22, 2006, we issued a $20,000,000, 20-year note payable to the Florida State Board of Administration (the SBA note). For the first three years of the SBA note we were required to pay interest only. On October 1, 2009, we began to repay the principal in addition to interest. The note bears an annual interest rate equivalent to the 10-year U.S. Treasury Bond rate. The rate will be adjusted quarterly for the term of the SBA note based on the 10-year Constant Maturity Treasury rate.

BB&T Term Note Payable

On May 26, 2016, we issued a $5,200,000, 15-year term note payable to BB&T (the BB&T note) with the intent to use the funds to purchase, renovate, furnish and equip our home office. The note bears interest at 1.65% in excess of the one-month LIBOR. In the event of default, BB&T may, among other things, declare its loan immediately due and payable, require us to pledge additional collateral to the bank, and take possession of and foreclose upon our home office, which has been pledged to the bank as security for the loan.

Financial Covenants

The $150M senior notes, SBA note and BB&T note contain representations and warranties, conditions and covenants. If these requirements are not met, all amounts outstanding or otherwise owed could become due and payable immediately and other limitations could be placed on our ability to use any available borrowing capacity. At March 31, 2018, we were in compliance with all covenants as specified in the $150M senior notes, SBA note and BB&T note. Refer to Part I; Item 2 for additional information regarding financial covenants.

Debt Issuance Costs

The table below presents the rollforward of our debt issuance costs paid, in conjunction with the debt instruments described above, during the three months ended March 31, 2018:
 
2018
Balance at January 1,
$
3,287

Additions
63

Amortization
(89
)
Balance at March 31,
$
3,261



24

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
March 31, 2018



11)    COMMITMENTS AND CONTINGENCIES

We are involved in claims-related legal actions arising in the ordinary course of business. We accrue amounts resulting from claims-related legal actions in unpaid losses and LAE during the period that we determine an unfavorable outcome becomes probable and we can estimate the amounts. Management makes revisions to our estimates based on its analysis of subsequent information that we receive regarding various factors, including: (i) per claim information; (ii) company and industry historical loss experience; (iii) judicial decisions and legal developments in the awarding of damages, and (iv) trends in general economic conditions, including the effects of inflation.

At March 31, 2018, we were not involved in any material non-claims-related legal actions.

See Note 10 for information regarding commitments related to long-term debt, and Note 12 for commitments related to regulatory actions.

12)    STATUTORY ACCOUNTING AND REGULATION

The insurance industry is heavily regulated. State laws and regulations, as well as national regulatory agency requirements, govern the operations of all insurers such as our insurance subsidiaries. The various laws and regulations require that insurers maintain minimum amounts of statutory surplus and risk-based capital, restrict insurers' ability to pay dividends, specify allowable investment types and investment mixes, and subject insurers to assessments. Our insurance subsidiaries, UPC and ACIC, are domiciled in Florida, while FSIC and IIC are domiciled in Hawaii and New York, respectively. At March 31, 2018, and during the three months then ended, our insurance subsidiaries met all regulatory requirements of the states in which they operate. In March 2018, we received a recouperable assessment for $570,000 from the Texas Fair Plan Association. We did not receive any additional significant assessments from regulatory authorities in the states in which our insurance subsidiaries operate.

The National Association of Insurance Commissioners (NAIC) has Risk-Based Capital (RBC) guidelines for insurance companies that are designed to assess capital adequacy and to raise the level of protection that statutory surplus provides for policyholders. Most states, including Florida, Hawaii and New York, have enacted statutory requirements adopting the NAIC RBC guidelines, and insurers having less statutory surplus than required will be subject to varying degrees of regulatory action, depending on the level of capital inadequacy. State insurance regulatory authorities could require an insurer to cease operations in the event the insurer fails to maintain the required statutory capital.

The state laws of Florida, Hawaii and New York permit an insurer to pay dividends or make distributions out of that part of statutory surplus derived from net operating profit and net realized capital gains. The state laws further provide calculations to determine the amount of dividends or distributions that can be made without the prior approval of the insurance regulatory authorities in those states and the amount of dividends or distributions that would require prior approval of the insurance regulatory authorities in those states. Statutory RBC requirements may further restrict our insurance subsidiaries' ability to pay dividends or make distributions if the amount of the intended dividend or distribution would cause statutory surplus to fall below minimum RBC requirements.

The SBA note is considered a surplus note pursuant to statutory accounting principles. As a result, UPC is subject to the authority of the Insurance Commissioner of the State of Florida with regard to its ability to repay principal and interest on the SBA note. Any payment of principal or interest requires permission from the insurance regulatory authority.

We have reported our insurance subsidiaries' assets, liabilities and results of operations in accordance with GAAP, which varies from statutory accounting principles prescribed or permitted by state laws and regulations, as well as by general industry practices. The following items are principal differences between statutory accounting and GAAP:

Statutory accounting requires that we exclude certain assets, called non-admitted assets, from the balance sheet.
 
Statutory accounting requires us to expense policy acquisition costs when incurred, while GAAP allows us to defer to the extent realizable, and amortize policy acquisition costs over the estimated life of the policies.


25

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
March 31, 2018



Statutory accounting requires that surplus notes, also known as surplus debentures, be recorded in statutory surplus, while GAAP requires us to record surplus notes as a liability.

Statutory accounting allows certain investments to be carried at amortized cost or fair value based on the rating received from the Securities Valuation Office of the NAIC, while they are recorded at fair value for GAAP because the investments are held as available for sale.

Statutory accounting allows ceding commission income to be recognized when written if the cost of acquiring and renewing the associated business exceeds the ceding commissions, but under GAAP such income is deferred and recognized over the coverage period.

Statutory accounting requires that unearned premiums and loss reserves are presented net of related reinsurance rather than on a gross basis under GAAP.

Statutory accounting requires that a provision for reinsurance liability be established for reinsurance recoverable on paid losses aged over 90 days and for unsecured amounts recoverable from unauthorized reinsurers.  Under GAAP there is no charge for uncollateralized amounts ceded to a company not licensed in the insurance subsidiary's domiciliary state and a reserve for uncollectable reinsurance is charged through earnings rather than surplus or equity.

Statutory accounting requires an additional admissibility test and the change in deferred income tax is reported directly in capital and surplus, rather than being reported as a component of income tax expense under GAAP.

Our insurance subsidiaries must each file with the various insurance regulatory authorities an “Annual Statement” which reports, among other items, statutory net income (loss) and surplus as regards policyholders, which is called stockholders' equity under GAAP. For the three months ended March 31, 2018 and 2017, UPC, ACIC, FSIC and IIC recorded the following amounts of statutory net income (loss).
 
Three Months Ended March 31,
 
2018
 
2017
UPC
$
(22
)
 
$
(6,039
)
ACIC (1)
$
5,852

 
N/A

FSIC
$
2,798

 
$
2,937

IIC
$
358

 
2,079

(1) There is not a reportable value for ACIC for the three months ended March 31, 2017, as we did not own the company until April 2017.

Our insurance subsidiaries must maintain capital and surplus ratios or balances as determined by the regulatory authority of the states in which they are domiciled. The table below shows the minimum capital and surplus requirements, as well as the amount of surplus as regards policyholders for our regulated entities at March 31, 2018 and December 31, 2017, respectively.
 
Minimum Requirement
 
March 31, 2018
 
December 31, 2017
UPC (1)
$
43,448

 
$
167,127

 
$
164,281

ACIC (1)
$
16,168

 
$
166,988

 
$
160,238

FSIC
$
3,250

 
$
25,019

 
$
22,038

IIC
$
4,700

 
$
43,190

 
$
42,827

(1) UPC and ACIC are required to maintain capital and surplus equal to the greater of 10% of their total liabilities or $10,000,000.

13)    RELATED PARTY TRANSACTIONS
 
One of our executive officers, Ms. Salmon, is a former partner at the law firm of Groelle & Salmon, PA, where her spouse remains partner and co-owner. Groelle & Salmon, PA provides legal representation to us related to our claims litigation, and also provided representation to us for several years prior to Ms. Salmon joining UPC Insurance in 2014. During the three months ended March 31, 2018 and 2017, Groelle & Salmon, PA billed us approximately $708,000 and $868,000, respectively.

26

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
March 31, 2018



Ms. Salmon's spouse has a 50% interest in these billings, or approximately $354,000 and $434,000, for the three months ended March 31, 2018 and 2017, respectively.

AmRisc, LLC (AmRisc), a managing general agent, handles the underwriting, claims processing, premium collection and reinsurance review for AmCo. R. Daniel Peed, Vice Chairman of our Board of Directors (Board), beneficially owns approximately 7.7% of AmRisc and is also the Chief Executive Officer of AmRisc.
In accordance with the managing general agent underwriting contract with AmRisc, we recorded $94,005,000 of gross written premiums for the three-month period ended March 31, 2018, resulting in fees and commission (including a profit commission) of $25,599,000 due to AmRisc. Receivables are stated net of the fees and commission due under the contract.
In addition to the direct premiums written, we recorded $1,561,000 in ceded premiums to AmRisc as a reinsurance intermediary for the three-month period ended March 31, 2018. We also incurred $5,000 during that period for rent under a sublease agreement with AmRisc.
Net premiums receivable (net of commissions) of $35,971,000 were due from AmRisc as of March 31, 2018. These premiums were paid by AmRisc to our premium trust account by wire transfer within 15 days of collection pursuant to the underwriting contract with AmRisc.

14)    ACCUMULATED OTHER COMPREHENSIVE INCOME

We report changes in other comprehensive income items within comprehensive income on the Unaudited Consolidated Statements of Comprehensive Income, and we include accumulated other comprehensive income as a component of stockholders' equity on our Consolidated Balance Sheets.

The table below details the components of accumulated other comprehensive income at period end:

  
Pre-Tax Amount
 
Tax (Expense)Benefit
 
Net-of-Tax Amount
December 31, 2017
$
12,044

 
$
(2,823
)
 
$
9,221

Reclassification adjustment for adoption of ASU 2016-01(1)
$
(12,300
)
 
$
2,962

 
$
(9,338
)
Adjusted balance at December 31, 2017
(256
)
 
139

 
(117
)
 
 
 
 
 
 
Changes in net unrealized gains on investments
(11,084
)
 
2,908

 
(8,176
)
Reclassification adjustment for realized gains
(211
)
 
53

 
(158
)
March 31, 2018
$
(11,551
)
 
$
3,100

 
$
(8,451
)
(1) Reflects the fair value changes on equity securities as of December 31, 2017, which are reclassed under the new accounting guidance. Refer to Note 2 for further information.
15)    STOCKHOLDERS' EQUITY

Our Board declared dividends on our outstanding shares of common stock to stockholders of record as follows for the periods presented (in thousands except per share amounts):

 
 
Three Months Ended March 31,
 
 
2018
 
2017
 
 
Per Share Amount
 
Aggregate Amount
 
Per Share Amount
 
Aggregate Amount
First Quarter
 
$
0.06

 
$
2,565

 
$
0.06

 
$
1,301


See Note 16 for information regarding stock-based compensation activity.



27

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
March 31, 2018



16) STOCK-BASED COMPENSATION

We account for stock-based compensation under the fair value recognition provisions of ASC Topic 718 - Compensation - Stock Compensation.

Stock-based compensation cost for restricted stock grants is measured based on the closing fair market value of our common stock on the date of grant. We recognize stock-based compensation cost over the award’s requisite service period on a straight-line basis for time-based restricted stock grants.

We granted 9,960 shares of restricted common stock during the three-month period ended March 31, 2018, which had a weighted-average grant date fair value of $19.55 per share. We granted 90,122 shares of restricted common stock during the three-month period ended March 31, 2017, which had weighted-average grant date fair values of $16.04 per share.

The following table presents certain information related to the activity of our non-vested common stock grants:

 
Number of Restricted Shares
 
Weighted Average Grant Date Fair Value
Outstanding as of December 31, 2017
212,094

 
$
16.44

Granted
9,960

 
19.55

Less: Forfeited
17,077

 
18.07

Less: Vested
68,183

 
17.77

Outstanding as of March 31, 2018
136,794

 
$
15.80


We had approximately $1,081,000 of unrecognized stock compensation expense at March 31, 2018 related to non-vested stock-based compensation granted, which we expect to recognize over the next three years. We recognized $248,000 and $375,000 of stock-based compensation expense during the three-month periods ended March 31, 2018 and 2017, respectively.

We had approximately $104,000 of unrecognized director stock-based compensation expense at March 31, 2018 related to non-vested director stock-based compensation granted, which we expect to recognize ratably until vesting one year after the date of grant. We recognized $239,000 and $266,000 of director stock-based compensation expense during the three-month periods ended March 31, 2018 and 2017, respectively.


17)    SUBSEQUENT EVENTS

On May 8, 2018, our Board declared a $0.06 per share quarterly cash dividend payable on May 29, 2018, to stockholders of record on May 22, 2018.






28

UNITED INSURANCE HOLDINGS CORP.


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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Unaudited Consolidated Financial Statements and related notes appearing elsewhere in this Form 10-Q, as well as with the Consolidated Financial Statements and related footnotes under Part II. Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2017. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Actual results may differ materially from those expressed or implied in these forward-looking statements as a result of certain known and unknown risks and uncertainties. See "Forward-Looking Statements."

EXECUTIVE SUMMARY

Overview

United Insurance Holding Corp. (referred to in this document as we, our, us, the Company or UPC Insurance) is a holding company primarily engaged in residential and commercial property and casualty insurance in the United States. We conduct our business principally through four wholly-owned insurance subsidiaries: United Property & Casualty Insurance Company (UPC); American Coastal Insurance Company (ACIC); Family Security Insurance Company (FSIC); and Interboro Insurance Company (IIC). Collectively, we refer to the holding company and all our subsidiaries, including non-insurance subsidiaries, as “UPC Insurance,” which is the preferred brand identification for our Company.

Our Company’s primary source of revenue is generated from writing insurance in Connecticut, Florida, Georgia, Hawaii,
Louisiana, Massachusetts, New Jersey, New York, North Carolina, Rhode Island, South Carolina and Texas. Our target market
in such areas consists of states where the perceived threat of natural catastrophe has caused large national insurance carriers to
reduce their concentration of policies. We believe an opportunity exists for UPC Insurance to write profitable business in such
areas.

We have historically grown our business through strong organic growth complemented by strategic acquisitions, including
our acquisition of AmCo Holding Company (AmCo) and its subsidiaries, including ACIC, in April 2017, IIC in April 2016, and Family Security Holdings, LLC (FSH), including its subsidiary FSIC in February 2015. As a result of these acquisitions, along with the organic growth of premium in states in which we currently write premium, we have grown our policies in-force by 17.5% from 461,708 policies in-force at March 31, 2017 to 542,515 policies in-force at March 31, 2018.

Our business is subject to the impact of weather-related catastrophes on our loss and LAE. During the third quarter of 2017, Hurricane Harvey made landfall in Texas and Hurricane Irma made landfall in Florida. In 2017, we retained $83,000,000 of pre-tax catastrophe losses, net of reinsurance recoverable as a result of hurricanes. At March 31, 2018, we increased our loss and loss adjustment expense reserve as a result of development trends that indicated our ultimate gross loss estimate should be increased. There was no net change or impact to our first quarter 2018 results as a result of this reserve re-estimation as it was 100% ceded under our catastrophe reinsurance program.

The following discussion highlights significant factors influencing the consolidated financial position and results of
operations of UPC Insurance. In evaluating our results of operations, we use premiums written and earned, policies in-force and
new and renewal policies by geographic concentration. We also consider the impact of catastrophe losses and prior year
development on our loss ratios, expense ratios and combined ratios. In monitoring our investments, we use credit quality,
investment income, cash flows, realized gains and losses, unrealized gains and losses, asset diversification and portfolio
duration. To evaluate our financial condition, we consider our liquidity, financial strength, ratings, book value per share and
return on equity.




29

UNITED INSURANCE HOLDINGS CORP.


2018 Highlights

($ in thousands, except per share, ratios and policies in-force)
Three Months Ended
March 31,
 
2018
 
2017
 
 
 
 
Gross premiums written
$
279,617

 
$
168,842

Gross premiums earned
$
278,950

 
$
182,065

Net premiums earned
$
162,675

 
$
107,183

Total revenues
$
180,127

 
$
122,633

Earnings before income tax
$
11,716

 
$
5,938

Consolidated net income
$
8,369

 
$
3,899

Net income per diluted share
$
0.20

 
$
0.18

 
 
 
 
Reconciliation of net income to core income:
 
 
 
Plus: Non-cash amortization of intangible assets
$
9,825

 
$
1,354

Less: Realized gains (losses) on investment portfolio
$
211

 
$
(351
)
Less: Unrealized losses on equity securities
$
(2,444
)
 
$

Less: Net tax impact (1)
$
3,445

 
$
585

Core income(2)
$
16,982

 
$
5,019

Core income per diluted share(2)
$
0.40

 
$
0.23

 
 
 
 
Book value per share
$
12.52

 
$
11.37

Policies in-force
542,515

 
461,708

(1) In order to reconcile the net income to the core income measure, we included the tax impact of all adjustments using the effective rate at the end of each period.
(2) Core income, a measure that is not based on U.S. generally accepted accounting principles (GAAP), is reconciled above to net income, the most directly comparable GAAP measure. Additional information regarding non-GAAP financial measures presented in this document is in "Definitions of Non-GAAP Measures" below.

 

30

UNITED INSURANCE HOLDINGS CORP.


Consolidated Net Income
 
Three Months Ended
March 31,
 
2018
 
2017
REVENUE:
 
 
 
Gross premiums written
$
279,617

 
$
168,842

Change in gross unearned premiums
(667
)
 
13,223

Gross premiums earned
278,950

 
182,065

Ceded premiums earned
(116,275
)
 
(74,882
)
Net premiums earned
162,675

 
107,183

Investment income
5,686

 
2,951

Net realized investment gains (losses)
211

 
(351
)
Net unrealized loss on equity securities
(2,444
)
 

Other revenue
13,999

 
12,850

Total revenue
180,127

 
122,633

EXPENSES:
 
 
 
Losses and loss adjustment expenses
77,246

 
63,333

Policy acquisition costs
57,135

 
35,436

Operating expenses
8,318

 
5,872

General and administrative expenses
23,325

 
11,333

Interest expense
2,458

 
759

Total expenses
168,482

 
116,733

Income before other income
11,645

 
5,900

Other income
71

 
38

Income before income taxes
11,716

 
5,938

Provision for income taxes
3,347

 
2,039

Net income
$
8,369

 
$
3,899

Net income per diluted share
$
0.20

 
$
0.18

Book value per share
$
12.52

 
$
11.37

Return on equity based on trailing twelve months GAAP net income
2.8
 %
 
2.7
 %
Loss ratio, net (1)
47.5
 %
 
59.1
 %
Expense ratio (2)
54.6
 %
 
49.1
 %
Combined ratio (CR) (3)
102.1
 %
 
108.2
 %
Effect of current year catastrophe losses on CR
3.8
 %
 
9.9
 %
Effect of prior year development on CR
(0.4
)%
 
(0.5
)%
Effect of ceding commission income on CR
6.3
 %
 
7.9
 %
Underlying combined ratio (4)
92.4
 %
 
90.9
 %
(1) Loss ratio, net is calculated as losses and LAE, net of losses ceded to reinsurers, relative to net premiums earned.
(2) Expense ratio is calculated as the sum of all operating expenses less interest expense relative to net premiums earned.
(3) Combined ratio is the sum of the loss ratio, net and the expense ratio, net.
(4) Underlying combined ratio, a measure that is not based on GAAP, is reconciled above to the combined ratio, the most directly comparable GAAP measure. Additional information regarding non-GAAP financial measures presented in this document is in "Definitions of Non-GAAP Measures" below.

31

UNITED INSURANCE HOLDINGS CORP.




Definitions of Non-GAAP Measures

We believe that investors' understanding of UPC Insurance's performance is enhanced by our disclosure of the following non-GAAP measures. Our methods for calculating these measures may differ from those used by other companies and therefore comparability may be limited.

Combined ratio excluding the effects of current year catastrophe losses, prior year reserve development and ceding commission income earned (underlying combined ratio) is a non-GAAP ratio, which is computed by subtracting the effect of current year catastrophe losses, prior year development, and ceding commission income earned related to our quota share reinsurance agreement from the combined ratio. We believe that this ratio is useful to investors and it is used by management to reveal the trends in our business that may be obscured by current year catastrophe losses, losses from lines in run-off, prior year development, and ceding commission income earned. Current year catastrophe losses cause our loss trends to vary significantly between periods as a result of their incidence of occurrence and magnitude, and can have a significant impact on the combined ratio. Prior year development is caused by unexpected loss development on historical reserves. Ceding commission income compensates the Company for expenses it incurs in generating the premium ceded under our quota share reinsurance agreement. We believe it is useful for investors to evaluate these components separately and in the aggregate when reviewing our performance. The most direct comparable GAAP measure is the combined ratio. The underlying combined ratio should not be considered as a substitute for the combined ratio and does not reflect the overall profitability of our business.

Net loss and LAE excluding the effects of current year catastrophe losses and prior year reserve development (underlying loss and LAE) is a non-GAAP measure which is computed by subtracting the effect of current year catastrophe losses and prior year reserve development from net loss and LAE. We use underlying loss and LAE figures to analyze our loss trends that may be impacted by current year catastrophe losses and prior year development on our reserves. As discussed previously, these two items can have a significant impact on our loss trends in a given period. We believe it is useful for investors to evaluate these components separately and in the aggregate when reviewing the Company's performance. The most direct comparable GAAP measure is net loss and LAE. The underlying loss and LAE measure should not be considered a substitute for net loss and LAE and does not reflect the overall profitability of our business.

Operating expenses excluding the effects of ceding commission income earned, merger expenses, and amortization of intangible assets (underlying expense) is a non-GAAP measure which is computed by subtracting ceding income earned related to our quota share reinsurance agreement, merger expenses and amortization of intangibles. Ceding commission income compensates the Company for expenses it incurs in generating the premium ceded under our quota share reinsurance agreement. Merger expenses are directly related to past mergers and are not reflective of current period operating performance. Similarly, amortization expense is related to the amortization of intangible assets acquired through mergers and therefore the expense does not arise through normal operations. We believe it is useful for investors to evaluate these components separately and in the aggregate when reviewing our performance. The most direct comparable GAAP measure is operating expenses. The underlying expense measure should not be considered a substitute for the expense ratio and does not reflect the overall profitability of our business.

Net income excluding the effects of non-cash amortization of intangible assets, realized gains (losses) and unrealized gains (losses) on equity securities, net of tax (core income) is a non-GAAP measure which is computed by adding amortization, net of tax, to net income and subtracting realized gains (losses) on our investment portfolio, net of tax, and unrealized gains (losses) on our equity securities, net of tax, from net income. Amortization expense is related to the amortization of intangible assets acquired through mergers and therefore the expense does not arise through normal operations. Investment portfolio gains (losses) and unrealized equity security gains (losses) vary independent of our operations. We believe it is useful for investors to evaluate these components separately and in the aggregate when reviewing our performance. The most direct comparable GAAP measure is net income. The core income measure should not be considered a substitute for net income and does not reflect the overall profitability of our business.


CRITICAL ACCOUNTING POLICIES AND ESTIMATES

When we prepare our consolidated financial statements and accompanying notes in conformity with GAAP, we must make estimates and assumptions about future events that affect the amounts we report. Certain of these estimates result from judgments that can be subjective and complex. As a result of that subjectivity and complexity, and because we continuously evaluate these estimates and assumptions based on a variety of factors, actual results could materially differ from our estimates and assumptions if changes in one or more factors require us to make accounting adjustments. During the three months ended

32

UNITED INSURANCE HOLDINGS CORP.


March 31, 2018, we reassessed our critical accounting policies and estimates as disclosed in Note 1 to the Notes to Unaudited Consolidated Financial Statements and our Annual Report on Form 10-K for the year ended December 31, 2017; however, we have made no material changes or additions with regard to those policies and estimates, except for those standards adopted in the first quarter of 2018 as described in Note 2.


RECENT ACCOUNTING STANDARDS

Please refer to Note 2 in the Notes to Unaudited Consolidated Financial Statements for a discussion of recent accounting standards that may affect us.



33

UNITED INSURANCE HOLDINGS CORP.


ANALYSIS OF FINANCIAL CONDITION - MARCH 31, 2018 COMPARED TO DECEMBER 31, 2017

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our accompanying unaudited consolidated interim financial statements and related notes, and in conjunction with the section entitled MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS in our Annual Report on Form 10-K for the year ended December 31, 2017.

Investments

The primary goals of our investment strategy are to preserve capital, maximize after-tax investment income, maintain liquidity and minimize risk. To accomplish our goals, we purchase debt securities in sectors that represent the most attractive relative value, and we maintain a moderate equity exposure. Limiting equity exposure limits risk and helps to preserve capital for two reasons: first, bond market returns are less volatile than stock market returns, and second, should the bond issuer enter bankruptcy liquidation, bondholders generally have a higher priority than equityholders in a bankruptcy proceeding.

We must comply with applicable state insurance regulations that prescribe the type, quality and concentrations of investments our insurance subsidiaries can make; therefore, our current investment policy limits investment in non-investment-grade fixed maturities and limits total investment amounts in preferred stock, common stock and mortgage notes receivable. We do not invest in derivative securities.

Two outside asset management companies, which have authority and discretion to buy and sell securities for us, manage our investments subject to (i) the guidelines established by our Board of Directors and (ii) the direction of management. The Investment Committee of our Board of Directors reviews and approves our investment policy on a regular basis.

Our cash, cash equivalents and investment portfolio totaled $1,109,147,000 at March 31, 2018, compared to $1,130,806,000 at December 31, 2017.

The following table summarizes our investments, by type:
 
March 31, 2018
 
December 31, 2017
 
Estimated Fair Value
 
Percent of Total
 
Estimated Fair Value
 
Percent of Total
U.S. government and agency securities
$
242,259

 
21.8
%
 
$
235,891

 
20.9
%
Foreign government
2,012

 
0.2
%
 
2,036

 
0.2
%
States, municipalities and political subdivisions
185,868

 
16.8
%
 
201,512

 
17.8
%
Public utilities
24,169

 
2.2
%
 
20,257

 
1.8
%
Corporate securities
287,247

 
25.9
%
 
287,562

 
25.4
%
Asset backed securities
44,903

 
4.0
%
 
14,905

 
1.3
%
Redeemable preferred stocks
687

 
0.1
%
 
692

 
0.1
%
Total fixed maturities
787,145

 
71.0
%
 
762,855

 
67.5
%
Mutual funds
46,236

 
4.2
%
 
31,924

 
2.8
%
Public utilities
1,603

 
0.1
%
 
1,702

 
0.2
%
Other common stocks
27,577

 
2.5
%
 
27,902

 
2.5
%
Non-redeemable preferred stocks
1,739

 
0.2
%
 
1,767

 
0.2
%
Total equity securities
77,155

 
7.0
%
 
63,295

 
5.7
%
Other long-term investments
8,144

 
0.7
%
 
8,381

 
0.7
%
Portfolio loans
20,000

 
1.8
%
 
20,000

 
1.8
%
Total investments
892,444

 
80.5
%
 
854,531

 
75.7
%
Cash and cash equivalents
216,703

 
19.5
%
 
276,275

 
24.3
%
Total cash, cash equivalents and investments
$
1,109,147

 
100.0
%
 
$
1,130,806

 
100.0
%

We classify all of our fixed maturity investments as available-for-sale. Our investments at March 31, 2018 and December 31, 2017 consisted mainly of U.S. government and agency securities, states, municipalities and political subdivisions and securities of investment-grade corporate issuers. Our equity holdings consisted mainly of securities issued by companies in the energy, consumer products, financial, technology and industrial sectors. Most of the corporate bonds we hold reflected a

34

UNITED INSURANCE HOLDINGS CORP.


similar diversification. At March 31, 2018, approximately 86% of our fixed maturities were U.S. Treasuries or corporate bonds rated “A” or better, and 14% were corporate bonds rated “BBB” or "BB".

At March 31, 2018, there were 204 fixed maturity securities in an unrealized loss position for a period of 12 months or longer reflecting unrealized losses of $3,256,000 and one equity security in an unrealized position for a period of 12 months or longer reflecting unrealized losses of $29,000. We currently have no plans to sell these 205 securities, and we expect to fully recover our cost basis. We reviewed all of our securities and determined that we did not need to record any impairment charges at March 31, 2018. Similarly, we did not record impairment charges at December 31, 2017.

Reinsurance

We follow industry practice of reinsuring a portion of our risks. Reinsurance involves transferring, or "ceding", all or a
portion of the risk exposure on policies we write to another insurer, known as a reinsurer. To the extent that our reinsurers are
unable to meet the obligations they assume under our reinsurance agreements, we remain primarily liable for the entire insured loss under the policies we write.

During the second quarter of 2017, we placed our reinsurance program for the 2017 hurricane season. We purchased catastrophe excess of loss reinsurance protection of $2,747,500,000. The contracts reinsure for personal lines property excess catastrophe losses caused by multiple perils including hurricanes, tropical storms and tornadoes. The agreements are effective as of June 1, 2017, for a one-year term, and incorporate the mandatory coverage required by and placed with the Florida Hurricane Catastrophe Fund. The cost for this program increased by $122,669,000 to $314,169,000 in 2017 as a result of increasing our protection by 81.3% and including ACIC under the program.

Effective December 31, 2017, we replaced our 15% quota share agreement that expired on November 30, 2017 and our 5% quota share agreement that was set to renew on December 1, 2017 with a new quota share reinsurance agreement with a term of 12 months and a cession rate of 20% for all subject business.

Effective January 1, 2018, we placed a new aggregate excess of loss treaty to provide $20,000,000 of coverage against accumulated losses from specified catastrophe events in excess of 4.75% of cumulative subject gross premiums earned during each calendar quarter, for a term of 12 months.

Excluding our flood business, for which we cede 100% of the risk of loss, reinsurance costs in the first quarter of 2018 were 39.9% of our gross premiums earned, compared to 38.6% of gross premiums earned for the first quarter of 2017. The increase in this ratio was driven primarily by the costs related to the inclusion of AmCo's commercial property exposures in our 2017-18 combined catastrophe reinsurance program.
 
See Note 8 in our Notes to Unaudited Consolidated Financial Statements for additional information regarding our reinsurance program.

Unpaid Losses and Loss Adjustments

We generally use the term “loss(es)” to collectively refer to both loss and LAE. We establish reserves for both reported and unreported unpaid losses that have occurred at or before the balance sheet date for amounts we estimate we will be required to pay in the future, including provisions for claims that have been reported but are unpaid at the balance sheet date and for obligations on claims that have been incurred but not reported at the balance sheet date. Our policy is to establish these loss reserves after considering all information known to us at each reporting period. At any given point in time, our loss reserve represents our best estimate of the ultimate settlement and administration costs of our insured claims incurred and unpaid.

Unpaid losses and LAE totaled $544,249,000 and $482,232,000 as of March 31, 2018 and December 31, 2017, respectively. The balance has increased from year-end as a result of continuing development from Hurricane Irma, as well as from losses incurred from weather-related activity in the first quarter of 2018.

Since the process of estimating loss reserves requires significant judgment due to a number of variables, such as fluctuations in inflation, judicial decisions, legislative changes and changes in claims handling procedures, our ultimate liability will likely differ from these estimates. We revise our reserve for unpaid losses as additional information becomes available, and reflect adjustments, if any, in our earnings in the periods in which we determine the adjustments as necessary.

See Note 9 in our Notes to Unaudited Consolidated Financial Statements for additional information regarding our losses and loss adjustments.

35

UNITED INSURANCE HOLDINGS CORP.


RESULTS OF OPERATIONS - COMPARISON OF THE THREE-MONTH PERIODS ENDED MARCH 31, 2018 AND 2017

Revenue

Net income for the three months ended March 31, 2018 increased $4,470,000, or 114.6%, to $8,369,000 for the first quarter of 2018 from $3,899,000 for the same period in 2017. The increase in net income was primarily due to the lower catastrophe and non-catastrophe loss ratios for the first quarter of 2018 compared to the first quarter of 2017.

Our gross written premiums increased $110,775,000, or 65.6%, to $279,617,000 for the first quarter ended March 31, 2018 from $168,842,000 for the same period in 2017, primarily reflecting the Company's merger with AmCo in the second quarter of 2017, as well as organic growth in new and renewal business generated in all regions. The breakdown of the quarter-over-quarter changes in both direct written and assumed premiums by region and gross written premium by line of business are shown in the table below.

($ in thousands)
 
Three Months Ended March 31,
 
 
2018
 
2017
 
Change
Direct Written and Assumed Premium by Region (1)
 
 
 
 
 
 
Florida
 
$
157,952

 
$
75,364

 
$
82,588

Gulf
 
44,797

 
40,778

 
4,019

Northeast
 
34,892

 
31,137

 
3,755

Southeast
 
22,887

 
20,192

 
2,695

Total direct written premium by region
 
260,528

 
167,471

 
93,057

Assumed premium (2)
 
19,089

 
1,371

 
17,718

Total gross written premium by region
 
$
279,617

 
$
168,842

 
$
110,775

 
 
 
 
 
 
 
Gross Written Premium by Line of Business
 
 
 
 
 
 
Personal property
 
$
183,713

 
$
164,873

 
$
18,840

Commercial property
 
95,904

 
3,969

 
91,935

Total gross written premium by line of business
 
$
279,617

 
$
168,842

 
$
110,775

(1) "Gulf" is comprised of Hawaii, Louisiana and Texas; "Northeast" is comprised of Connecticut, Massachusetts, New Jersey, New York and Rhode Island; and "Southeast" is comprised of Georgia, North Carolina and South Carolina.
(2) Assumed premium written for 2018 is primarily commercial property business assumed from unaffiliated insurers.

 
Three Months Ended March 31,
New and Renewal Policies by Region (1)
2018
 
2017
 
Change
Florida
53,406

 
45,354

 
8,052

Gulf
30,064

 
27,305

 
2,759

Northeast
27,180

 
23,295

 
3,885

Southeast
19,910

 
16,956

 
2,954

Total
130,560

 
112,910

 
17,650

(1) Only includes new and renewal homeowner, commercial and dwelling fire policies written during the quarter.

We expect our gross written premium growth to continue as we increase our policies in-force in the states in which we currently write policies and as we expand into other states in which we are currently licensed to write property and casualty insurance.


36

UNITED INSURANCE HOLDINGS CORP.


Expenses

Expenses for the three months ended March 31, 2018 increased $51,749,000, or 44.3%, to $168,482,000 for the first quarter of 2018 from $116,733,000 for the same period in 2017. The increase in expenses was primarily due to increased losses and LAE, policy acquisition costs, and general and administrative expenses related to our merger with AmCo during the second quarter of 2017. The calculations of our loss ratios and underlying loss ratios are shown below.
 
 
Three Months Ended March 31,
2018
 
2017
 
Change
Net Loss and LAE
$
77,246

 
$
63,333

 
$
13,913

% of Gross earned premiums
27.7
%
 
34.8
%
 
(7.1) pts

% of Net earned premiums
47.5
%
 
59.1
%
 
(11.6) pts

Less:
 
 
 
 
 
Current year catastrophe losses
$
6,317

 
$
10,612

 
$
(4,295
)
Prior year reserve (favorable) development
(681
)
 
(526
)
 
(155
)
Underlying loss and LAE (1)
$
71,610

 
$
53,247

 
$
18,363

% of Gross earned premiums
25.7
%
 
29.2
%
 
(3.5) pts

% of Net earned premiums
44.0
%
 
49.7
%
 
(5.7) pts

(1) Underlying Loss and LAE is a non-GAAP measure and is reconciled above to Net Loss and LAE, the most directly comparable GAAP measure. Additional information regarding non-GAAP financial measures presented in this document is in the "Definitions of Non-GAAP Measures" section of this document.

The calculations of our expense ratio and underlying expense ratios are shown below.
 
Three Months Ended March 31,
2018
 
2017
 
Change
Policy acquisition costs
$
57,135

 
$
35,436

 
$
21,699

Operating and underwriting
8,318

 
5,872

 
2,446

General and administrative
23,325

 
11,333

 
11,992

Total Operating Expenses
$
88,778

 
$
52,641

 
$
36,137

% of Gross earned premiums
31.8
%
 
28.9
%
 
2.9 pts

% of Net earned premiums
54.6
%
 
49.1
%
 
5.5 pts

Less:
 
 
 
 
 
Ceding commission income
$
10,299

 
$
8,428

 
1,871

Non-cash amortization of intangibles
9,825

 
1,354

 
8,471

Underlying expense (1)
$
68,654

 
$
42,859

 
$
25,795

% of Gross earned premiums
24.6
%
 
23.5
%
 
1.1 pts

% of Net earned premiums
42.2
%
 
40.0
%
 
2.2 pts

(1) Underlying Expense is a non-GAAP measure and is reconciled above to total operating expenses, the most directly comparable GAAP measure. Additional information regarding non-GAAP financial measures presented in this document in the "Definitions of Non-GAAP Measures" section of this document.

Loss and LAE increased $13,913,000, or 22.0%, to $77,246,000 for the first quarter of 2018 from $63,333,000 for the first quarter of 2017. Loss and LAE expense as a percentage of net earned premiums decreased 11.6 points to 47.5% for the first quarter of 2018, compared to 59.1% for the same period last year. Excluding catastrophe losses and reserve development, our gross underlying loss and LAE ratio for the first quarter of 2018 was 25.7%, a decrease of 3.5 points from 29.2% during the first quarter of 2017.

Policy acquisition costs increased $21,699,000, or 61.2%, to $57,135,000 for the first quarter of 2018 from $35,436,000 for the first quarter of 2017. The primary driver of the increase in costs was the managing general agent fees paid to AmRisc in relation to AmCo commercial premium. The remaining change was the result of policy acquisition costs varying directly with changes in gross premiums earned and were generally consistent with our growth in premium production and higher average market commission rates outside of Florida.

37

UNITED INSURANCE HOLDINGS CORP.



Operating and underwriting expenses increased $2,446,000, or 41.7%, to $8,318,000 for the first quarter of 2018 from $5,872,000 for the first quarter of 2017, primarily due to increased costs related to incurred expenses for software tools, agent incentive costs, underwriting services and assessments.

General and administrative expenses increased $11,992,000, or 105.8%, to $23,325,000 for the first quarter of 2018 from $11,333,000 for the first quarter of 2017, primarily due to amortization costs related to the merger with AmCo during the second quarter of 2017 and salary expense related to increased claims personnel.

 
LIQUIDITY AND CAPITAL RESOURCES
 
We generate cash through premium collections, reinsurance recoveries, investment income, the sale or maturity of invested assets, the issuance of debt and the issuance of additional shares of our stock. We use our cash to pay reinsurance premiums, claims and related costs, policy acquisition costs, salaries and employee benefits, other expenses and stockholder dividends, acquire subsidiaries and pay associated costs, as well as to repay debts and purchase investments.

As a holding company, we do not conduct any business operations of our own and, as a result, we rely on cash dividends or intercompany loans from our management subsidiaries to pay our general and administrative expenses. Insurance regulatory authorities heavily regulate our insurance subsidiaries, including restricting any dividends paid by our insurance subsidiaries and requiring approval of any management fees our insurance subsidiaries pay to our management subsidiaries for services rendered; however, nothing restricts our non-insurance company subsidiaries from paying us dividends other than state corporate laws regarding solvency. Our management subsidiaries pay us dividends primarily using cash from the collection of management fees from our insurance subsidiaries, pursuant to the management agreements in effect between those entities. In accordance with state laws, our insurance subsidiaries may pay dividends or make distributions out of that part of their statutory surplus derived from their net operating profit and their net realized capital gains. The Risk-Based Capital (RBC) guidelines published by the National Association of Insurance Commissioners (NAIC) may further restrict our insurance subsidiaries’ ability to pay dividends or make distributions if the amount of the intended dividend or distribution would cause their respective surplus as it regards policyholders to fall below minimum RBC guidelines. See Note 12 in our Notes to Unaudited Consolidated Financial Statements for additional information.

During the three-month periods ended March 31, 2018 and 2017, we did not make any capital contributions to our insurance subsidiaries. We may make future contributions of capital to our insurance subsidiaries as circumstances require.

On December 13, 2017, we issued $150,000,000 of senior notes (the $150M senior notes) that will mature on December 15, 2027 and bear interest at a rate equal to 6.250% per annum payable semi-annually on each June 15 and December 15, commencing June 15, 2018. The $150M senior notes are senior unsecured obligations of the Company. We may redeem the $150M senior notes at our option, at any time and from time to time in whole or in part, at a redemption price equal to the greater of (i) 100% of the principal amount of the $150M senior notes to be redeemed and (ii) the sum of the present values of the remaining scheduled payments of principal and interest thereon from the date of redemption to the date that is three months prior to maturity. On and after that date, we may redeem the $150M senior notes at par.

On April 3, 2017, we successfully completed our acquisition of AmCo. The acquisition was completed through a series of mergers that ultimately resulted in the Company issuing 20,956,355 shares of its common stock as merger consideration to the equity holders of RDX Holding, LLC, the former parent company of AmCo. As a result of the mergers, AmCo merged with and into a wholly-owned subsidiary of the Company. We incurred $7,000,000 of merger-related expenses. Please refer to Note 4 in the Notes to Unaudited Consolidated Financial Statements for additional information on the merger transaction.

Financial Covenants

$150M Senior Notes Payable - Our $150M senior notes provide that the Company and its subsidiaries shall not incur any indebtedness unless no default exists and the Company’s leverage ratio as of the last day of any annual or quarterly period (the "Balance Sheet Date") immediately preceding the date on which such additional indebtedness is incurred would have been no greater than 0.3:1, determined on a pro forma basis as if the additional indebtedness and all other indebtedness incurred since the immediately preceding Balance Sheet Date had been incurred and the proceeds therefrom applied as of such day. The Company and its subsidiaries also may not create, assume, incur or permit to exist any indebtedness for borrowed money that is secured by a lien on the voting stock of any significant subsidiary without selling the $150M senior notes equally. The Company may not issue, sell, assign, transfer or otherwise dispose of, directly or indirectly, any of the capital stock of the Company’s significant subsidiaries as of the issue date of the notes (except to the Company or to one or more of the Company’s

38

UNITED INSURANCE HOLDINGS CORP.


other subsidiaries, or for the purpose of qualifying directors or as may be required by law or regulation), subject to certain exceptions. At March 31, 2018, we were in compliance with the covenants in the $150M senior notes.

Florida State Board of Administration Note Payable - Our $20,000,000, 20-year note payable to the Florida State Board of Administration (the SBA Note) requires that UPC maintain either a 2:1 ratio of net written premium to surplus, or net writing ratio, or a 6:1 ratio of gross written premium to surplus, or gross writing ratio, to avoid additional interest penalties. The SBA note agreement defines surplus for the purpose of calculating the required ratios as the $20,000,000 of capital contributed to UPC under the agreement plus the outstanding balance of the note. Should UPC fail to exceed either a net writing ratio of 1.5:1 or a gross writing ratio of 4.5:1, UPC's interest rate will increase by 450 basis points above the 10-year Constant Maturity Treasury rate (as defined in the SBA Note agreement) which was 2.33% at the end of March 2018. Any other writing ratio deficiencies result in an interest rate penalty of 25 basis points above the stated rate of the note, which was 2.43% at the end of March 2018. Our SBA note further provides that the Florida State Board of Administration may, among other things, declare its loan immediately due and payable upon any default existing under the SBA note; however, any payment is subject to approval by the insurance regulatory authority. At March 31, 2018, we were in compliance with the covenants in the SBA note.

BB&T Term Note Payable - Our $5,200,000, 15-year term note payable to the Branch Banking & Trust Company (the BB&T note) requires that, at all times while there has been no "Non-Recurring Losses" (as defined below), we will maintain a minimum Cash Flow Coverage ratio of 1.2:1. The Cash Flow Coverage ratio is defined as our cash flow to debt services. "Cash flow" is defined as earnings before taxes, plus depreciation and amortization and interest. "Debt service" is defined as the prior year's current maturities of long-term debt plus interest expense. This ratio will be tested annually, based on UPC Insurance's audited financial statements. For the one-year period following a Non-Recurring Loss, UPC Insurance is required to maintain a minimum Cash Flow Coverage ratio of 1.0:1. "Non-Recurring Losses" is defined as losses from our insurance subsidiaries' operations, as determined from time to time in BB&T's sole discretion. This covenant will only be effective if the Pre Non-Recurring Losses (as defined in the BB&T note) test is failed, and is only available and effective for one annual test period. Thereafter, the Non-Recurring Loss Cash Flow Coverage Ratio (as defined in the BB&T note) of 1.2:1 will immediately apply. At the time of the most recent annual test period, December 31, 2017, we were in compliance with the covenants in the BB&T note.

In addition, the BB&T note requires that we establish and maintain with BB&T at all times during the term of the loan a non-interest bearing demand deposit account with a minimum balance of $500,000, and an interest-bearing account with a minimum balance of $1,500,000. In the event of default, BB&T may, among other things, declare its loan immediately due and payable, require us to pledge additional collateral to the bank, and take possession of and foreclose upon our corporate headquarters, which has been pledged to the bank as security for the loan. At March 31, 2018, we were in compliance with the covenants in the BB&T note.

Cash Flows for the Three Months Ended March 31, 2018 and 2017 (in millions)
chart-3889a325f2ab5d618ca.jpgchart-35b45f688c935de2889.jpgchart-e57f5a5b0f5f58deac1.jpg

Operating Activities

The principal cash inflows from our operating activities come from premium collections, reinsurance recoveries and investment income. The principal cash outflows from our operating activities are the result of claims and related costs,

39

UNITED INSURANCE HOLDINGS CORP.


reinsurance premiums, policy acquisition costs and salaries and employee benefits. A primary liquidity concern with respect to these cash flows is the risk of large magnitude catastrophe events.

During the three months ended March 31, 2018, operating assets and liabilities were impacted by the continued settlement of catastrophe losses associated with Hurricanes Harvey and Irma, each of which occurred during the second half of 2017. Unpaid losses and LAE increased during the three months ended March 31, 2018 and, as a result, we expect a comparable increase in cash outflows related to the payment of catastrophe claims in the near future. However, reinsurance recoverables on paid and unpaid losses also increased during the three months ended March 31, 2018. We expect that a comparable increase in cash inflows related to reinsurance recoveries in the near future will largely offset the cash outflows from the payment of losses.

Investing Activities

The principal cash inflows from our investing activities come from repayments of principal, proceeds from maturities and sales of investments. We closely monitor and manage these risks through our comprehensive investment risk management process. The principal cash outflows relate to purchases of investments and cost of property, equipment and capitalized software acquired. The primary liquidity concerns with respect to these cash flows are the risk of default by debtors and market disruption.

Financing Activities

The principal cash inflows from our financing activities come from issuances of debt and other securities. The principal cash outflows come from repayments of debt and payments of dividends. The primary liquidity concern with respect to these cash flows is market disruption in the cost and availability of credit. We believe our current capital resources, together with cash provided from our operations, are sufficient to meet currently anticipated working capital requirements.

OFF-BALANCE SHEET ARRANGEMENTS

At March 31, 2018, we did not have any off-balance-sheet arrangements or material changes to our contractual obligations during the quarter.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risks, including interest rate risk related to changes in interest rates in our fixed-maturity securities, credit risk related to changes in the financial condition of the issuers of our fixed-maturities and equity price risk related to changes in equity security prices. These risks are disclosed in Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2017. We had no material changes in our market risk during the three months ended March 31, 2018.

Item 4. Controls and Procedures

We maintain a set of disclosure controls and procedures designed to ensure that the information we must disclose in reports we file or submit under the Securities Exchange Act of 1934, as amended (Exchange Act), is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. We designed our disclosure controls with the objective of ensuring we accumulate and communicate this information to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operations of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this report. Based on our evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this report, due to a previously disclosed material weakness in internal control over financial reporting as discussed below. This material weakness was identified and discussed in Part II, Item 9A of our Form 10-K for the year ended December 31, 2017.

Notwithstanding this material weakness, management has concluded that the consolidated financial statements included in this Form 10-Q fairly present, in all material respects, the financial position, results of operations and cash flows for the periods presented in accordance with U.S. generally accepted accounting principles.

40

UNITED INSURANCE HOLDINGS CORP.



Material Weakness in Internal Control Over Financial Reporting

We identified the following material weaknesses in the operation of our internal control over financial reporting as previously disclosed in our 2017 Form 10-K:

A failure of the operating effectiveness of a monitoring control designed to ensure that the Company obtains evidence of the design and operating effectiveness of the general information technology controls intended to prevent unauthorized system access and inappropriate change management to two third-party service organization's professional services systems and information contained within.
We did not maintain effective accounting policies and procedural controls over the financial reporting for income taxes, acquisition purchase accounting and investments to ensure accurate and consistent financial reporting in accordance with US GAAP.

Remediation Plans

Our management, with oversight from our Audit Committee, has initiated a plan to remediate the material weakness previously identified in the Form 10-K for the period ended December 31, 2017. These plans include implementing effective controls over third-party systems and working with the providers to receive timely SOC reports in the future, as well as focusing on the accounting and disclosure for unusual and complex transactions, while augmenting existing staff with additional skilled accounting resources and strengthening the review process to improve the operation of financial reporting and corresponding internal controls. These new controls and procedures are in the process of being implemented and will be tested in connection with audit procedures for the year ending December 31, 2018. Until management has tested the remediation and concluded that the controls are operating effectively as designed, the material weakness will continue to exist.

Changes in Internal Control over Financial Reporting

Except for the material weakness remediation efforts identified above, we did not make any changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting during the quarter ended March 31, 2018.


41

UNITED INSURANCE HOLDINGS CORP.


PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We are party to lawsuits arising out of the normal course of our business. In management's opinion, we are not party to any litigation or similar proceedings that would, individually or in the aggregate, be reasonably expected to have a material adverse effect on our consolidated results of operations, financial position, or cash flows.


Item 1A. Risk Factors

There have been no material changes to the risk factors previously disclosed in Part I, Item 1A "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2017.

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

During the three months ended March 31, 2018, we did not sell any unregistered equity securities or repurchase any of our equity securities.

Item 3. Defaults Upon Senior Securities

None.


Item 4. Mine Safety Disclosures

Not applicable.


Item 5. Other Information

None.


Item 6. Exhibits

The following exhibits are filed or furnished herewith or are incorporated herein by reference:
 
Exhibit
  
Description
 
 
 
  
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act.
 
 
 
  
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act.
 
 
 
  
Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act.
 
 
 
  
Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act.
 
 
 
101.INS
 
XBRL Instance Document
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase
 
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase
 
 
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase



42

UNITED INSURANCE HOLDINGS CORP.


SIGNATURES

Pursuant to 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.

 
 
UNITED INSURANCE HOLDINGS CORP.
 
 
 
May 9, 2018
By:
/s/ John Forney
 
 
John Forney, Chief Executive Officer
 (principal executive officer and duly authorized officer)
 
May 9, 2018
By:
/s/ B. Bradford Martz
 
 
B. Bradford Martz, Chief Financial Officer
(principal financial officer and principal accounting officer)




43