10-Q Document 30JUN13
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 June 30, 2013
Commission File Number 000-52833
_____________________
United Insurance Holdings Corp.
(Exact name of Registrant as specified in its charter)
_______________________
|
| | | | |
| Delaware | | 75-3241967 | |
| (State of Incorporation) | | (IRS Employer Identification Number) | |
360 Central Avenue, Suite 900
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 or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
|
| | | | |
Large accelerated filer | £ | | Accelerated filer | £ |
Non-accelerated filer | £ | | Smaller reporting company | þ |
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 August 8, 2013; 16,202,739 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 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 Quarterly Report, we show full values rounded to the nearest thousand.
UNITED INSURANCE HOLDINGS CORP.
FORWARD-LOOKING STATEMENTS
Statements in this Quarterly Report on Form 10-Q as of June 30, 2013, and for the three and six months ended June 30, 2013 (Form 10-Q) or in documents incorporated by reference that are not historical fact are “forward-looking statements” within the meaning of the Private Securities Reform Litigation Act of 1995. These forward-looking statements include statements about anticipated growth in revenues, earnings per share, estimated unpaid losses on insurance policies, investment returns and expectations about our liquidity. 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. Without limiting the generality of the foregoing, words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “would,” “estimate,” or “continue” or the negative variations thereof or comparable terminology are intended to identify forward-looking statements. 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;
| |
• | the regulatory, economic and weather conditions 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 of reinsurance; |
| |
• | assessments charged by various governmental agencies; |
| |
• | pricing competition and other initiatives by competitors; |
| |
• | our ability to attract and retain the services of senior management; |
| |
• | the outcome of litigation pending against us, including the terms of any settlements; |
| |
• | dependence on investment income and the composition of our investment portfolio and related market risks; |
| |
• | our exposure to catastrophic events and severe weather conditions; |
| |
• | downgrades in our financial strength ratings; 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, 2012. |
We caution you to not place reliance on these forward-looking statements, which are valid only as of the date they were made. We undertake no obligation to update or revise any forward-looking statements to reflect new information or the occurrence of unanticipated events or otherwise. In addition, we prepare our financial statements in accordance with U.S. generally accepted accounting principles (GAAP), which prescribes when we may reserve for particular risks, including litigation exposures. Accordingly, our results for a given reporting period could be significantly affected if and when we establish a reserve for a major contingency. Therefore, the results we report in certain accounting periods may appear to be volatile.
These forward-looking statements are subject to numerous risks, uncertainties and assumptions about us described in our filings with the SEC. The forward-looking events that we discuss in our Form 10-Q are valid only as of the date of our Form 10-Q and may not occur in light of the risks, uncertainties and assumptions that we describe in our filings with the SEC. A detailed discussion of these and other risks and uncertainties that could cause actual results and events to differ materially from our forward-looking statements is included 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, 2012. Except as required by applicable law, we undertake no obligation and disclaim any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
UNITED INSURANCE HOLDINGS CORP.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
|
| | | | | | | | |
|
| June 30, 2013 |
| December 31, 2012 |
ASSETS |
| (Unaudited) | | |
Investments available for sale, at fair value: |
| | | |
Fixed maturities (amortized cost of $231,970 and $145,089, respectively) |
| $ | 231,493 |
|
| $ | 149,157 |
|
Equity securities (adjusted cost of $9,654 and $2,537, respectively) |
| 10,170 |
|
| 2,723 |
|
Other long-term investments |
| 300 |
|
| 300 |
|
Total investments |
| $ | 241,963 |
|
| $ | 152,180 |
|
Cash and cash equivalents |
| 50,815 |
|
| 71,205 |
|
Accrued investment income |
| 1,521 |
|
| 760 |
|
Premiums receivable, net of allowances for credit losses of $37 and $24, respectively |
| 29,695 |
|
| 17,154 |
|
Reinsurance recoverable on paid and unpaid losses |
| 1,873 |
|
| 2,272 |
|
Prepaid reinsurance premiums |
| 112,297 |
|
| 49,916 |
|
Deferred policy acquisition costs |
| 25,914 |
|
| 16,978 |
|
Other assets |
| 3,061 |
|
| 3,149 |
|
Total Assets |
| $ | 467,139 |
|
| $ | 313,614 |
|
LIABILITIES AND STOCKHOLDERS' EQUITY |
|
|
|
|
Liabilities: |
|
|
|
|
Unpaid losses and loss adjustment expenses |
| $ | 38,234 |
|
| $ | 35,692 |
|
Unearned premiums |
| 175,057 |
|
| 128,785 |
|
Reinsurance payable |
| 114,067 |
|
| 26,063 |
|
Other liabilities |
| 27,555 |
|
| 19,206 |
|
Notes payable |
| 15,294 |
| | 15,882 |
|
Total Liabilities |
| $ | 370,207 |
|
| $ | 225,628 |
|
Commitments and contingencies (Note 7) |
|
|
|
|
|
|
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; 16,414,822 and 15,660,922 issued; 16,202,739 and 15,448,839 outstanding for 2013 and 2012, respectively |
| 2 |
|
| 2 |
|
Additional paid-in capital |
| 27,723 |
|
| 24,076 |
|
Treasury shares, at cost; 212,083 shares |
| (431 | ) |
| (431 | ) |
Accumulated other comprehensive income |
| 24 |
|
| 2,613 |
|
Retained earnings |
| 69,614 |
|
| 61,726 |
|
Total Stockholders' Equity |
| $ | 96,932 |
|
| $ | 87,986 |
|
Total Liabilities and Stockholders' Equity |
| $ | 467,139 |
|
| $ | 313,614 |
|
See accompanying Notes to Unaudited Consolidated Financial Statements.
UNITED INSURANCE HOLDINGS CORP.
Consolidated Statements of Comprehensive Income
(Unaudited)
|
| | | | | | | | | | | | | | | | |
|
| Three Months Ended June 30, | | Six Months Ended June 30, |
|
| 2013 |
| 2012 | | 2013 | | 2012 |
REVENUE: |
|
|
|
| | | | |
Gross premiums written |
| $ | 103,303 |
|
| $ | 77,928 |
| | 191,049 |
| | 135,924 |
|
Increase in gross unearned premiums |
| (28,403 | ) |
| (23,479 | ) | | (46,273 | ) | | (30,799 | ) |
Gross premiums earned |
| 74,900 |
|
| 54,449 |
| | 144,776 |
| | 105,125 |
|
Ceded premiums earned |
| (28,929 | ) |
| (24,727 | ) | | (56,508 | ) | | (47,613 | ) |
Net premiums earned |
| 45,971 |
|
| 29,722 |
| | 88,268 |
| | 57,512 |
|
Net investment income |
| 831 |
|
| 777 |
| | 1,555 |
| | 1,524 |
|
Net realized gains (losses) |
| (149 | ) |
| 37 |
| | (161 | ) | | 118 |
|
Other revenue |
| 1,999 |
|
| 1,028 |
| | 3,160 |
| | 1,913 |
|
Total revenue |
| 48,652 |
|
| 31,564 |
| | 92,822 |
| | 61,067 |
|
EXPENSES: |
|
|
|
| | | | |
Losses and loss adjustment expenses |
| 23,007 |
|
| 12,969 |
| | 43,554 |
| | 22,451 |
|
Policy acquisition costs |
| 12,169 |
|
| 8,878 |
| | 23,452 |
| | 17,131 |
|
Operating expenses |
| 2,620 |
|
| 1,757 |
| | 4,679 |
| | 3,190 |
|
General and administrative expenses |
| 3,530 |
|
| 2,300 |
| | 6,654 |
| | 5,093 |
|
Interest expense |
| 80 |
|
| 129 |
| | 153 |
| | 212 |
|
Total expenses |
| 41,406 |
|
| 26,033 |
| | 78,492 |
| | 48,077 |
|
Income before other expenses |
| 7,246 |
|
| 5,531 |
| | 14,330 |
| | 12,990 |
|
Other expenses |
| — |
|
| (293 | ) | | — |
| | (269 | ) |
Income before income taxes |
| 7,246 |
|
| 5,238 |
| | 14,330 |
| | 12,721 |
|
Provision for income taxes |
| 2,737 |
|
| 2,247 |
| | 5,470 |
| | 4,982 |
|
Net income |
| $ | 4,509 |
|
| $ | 2,991 |
| | $ | 8,860 |
| | $ | 7,739 |
|
OTHER COMPREHENSIVE INCOME: |
|
|
|
| | | | |
Change in net unrealized gains (losses) on investments |
| (4,745 | ) |
| 966 |
| | (4,376 | ) | | 1,600 |
|
Reclassification adjustment for net realized investment (gains) losses |
| 149 |
|
| (37 | ) | | 161 |
| | (118 | ) |
Income tax benefit (expense) related to items of other comprehensive income |
| 1,775 |
|
| (359 | ) | | 1,626 |
| | (572 | ) |
Total comprehensive income |
| $ | 1,688 |
|
| $ | 3,561 |
| | $ | 6,271 |
| | $ | 8,649 |
|
|
|
|
|
| | | | |
Weighted average shares outstanding |
|
|
|
| | | | |
Basic |
| 16,115,099 |
|
| 10,361,849 |
| | 16,072,047 |
| | 10,361,849 |
|
Diluted | | 16,199,489 |
| | 10,361,849 |
| | 16,157,729 |
| | 10,361,849 |
|
|
|
|
|
| | | | |
Earnings per share |
|
|
|
| | | | |
Basic |
| $ | 0.28 |
|
| $ | 0.29 |
| | $ | 0.55 |
| | $ | 0.75 |
|
Diluted | | $ | 0.28 |
| | $ | 0.29 |
| | $ | 0.55 |
| | $ | 0.75 |
|
|
|
|
|
| | | | |
Dividends declared per share |
| $ | 0.03 |
|
| $ | — |
| | $ | 0.06 |
| | $ | 0.05 |
|
See accompanying Notes to Unaudited Consolidated Financial Statements.
UNITED INSURANCE HOLDINGS CORP.
Consolidated Statements of Cash Flows
(Unaudited)
|
| | | | | | | | |
| | Six Months Ended June 30, |
| | 2013 | | 2012 |
OPERATING ACTIVITIES | | | | |
Net income | | $ | 8,860 |
| | $ | 7,739 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | | |
Depreciation and amortization | | 897 |
| | 641 |
|
Net realized gains | | 161 |
| | (118 | ) |
Provision for uncollectible premiums/over and short | | 24 |
| | 16 |
|
Deferred income taxes, net | | 1,976 |
| | 323 |
|
Stock based compensation | | 56 |
| | — |
|
Changes in operating assets and liabilities: | | | | |
Accrued investment income | | (761 | ) | | 3 |
|
Premiums receivable | | (12,565 | ) | | (6,749 | ) |
Reinsurance recoverable on paid and unpaid losses | | 399 |
| | 988 |
|
Prepaid reinsurance premiums | | (62,381 | ) | | (62,866 | ) |
Deferred policy acquisition costs, net | | (8,936 | ) | | (4,455 | ) |
Other assets | | (612 | ) | | (389 | ) |
Unpaid losses and loss adjustment expenses | | 2,542 |
| | (450 | ) |
Unearned premiums | | 46,273 |
| | 30,799 |
|
Reinsurance payable | | 88,004 |
| | 89,692 |
|
Other liabilities | | 6,372 |
| | (1,914 | ) |
Net cash provided by operating activities | | $ | 70,309 |
| | $ | 53,260 |
|
INVESTING ACTIVITIES | | | | |
Proceeds from sales and maturities of investments available for sale | | 82,895 |
| | 25,527 |
|
Purchases of investments available for sale | | (177,601 | ) | | (27,333 | ) |
Net cash used in investing activities | | $ | (94,706 | ) | | $ | (1,806 | ) |
FINANCING ACTIVITIES | | | | |
Repayments of borrowings | | (588 | ) | | (588 | ) |
Dividends | | (972 | ) | | (518 | ) |
Bank overdrafts | | 1,976 |
| | 143 |
|
Proceeds from issuance of common stock | | 3,591 |
| | — |
|
Net cash provided by (used in) financing activities | | $ | 4,007 |
| | $ | (963 | ) |
Increase (decrease) in cash | | (20,390 | ) | | 50,491 |
|
Cash and cash equivalents at beginning of period | | 71,205 |
| | 41,639 |
|
Cash and cash equivalents at end of period | | $ | 50,815 |
| | $ | 92,130 |
|
| | | | |
Supplemental Cash Flows Information | | | | |
Interest paid | | $ | 142 |
| | $ | 175 |
|
Income taxes paid | | $ | 7,008 |
| | $ | 6,482 |
|
See accompanying Notes to Unaudited Consolidated Financial Statements.
UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
June 30, 2013
1) ORGANIZATION, CONSOLIDATION AND PRESENTATION
(a)Business
United Insurance Holdings Corp. (referred to in this document as we, our, us, the Company and UPC Insurance) is a property and casualty insurance holding company that sources, writes, and services residential property and casualty insurance policies using a network of agents and a group of wholly-owned insurance subsidiaries. Our primary insurance subsidiary is United Property & Casualty Insurance Company, our insurance affiliate, which was formed in Florida in 1999 and has operated continuously since that time. Our other subsidiaries include United Insurance Management, L.C., our management affiliate, the managing general agent that manages substantially all aspects of our insurance affiliate's business; Skyway Claims Services, LLC, our claims adjusting affiliate that provides services to our insurance affiliate; and UPC Re, our reinsurance affiliate that provides a portion of the reinsurance protection purchased by our insurance affiliate.
Our primary product is homeowners' insurance, which we currently offer in Florida, Massachusetts, North Carolina, Rhode Island and South Carolina under authorization from the insurance regulatory authorities in each state. In April 2013, we were authorized to write property and casualty lines in New Hampshire, New Jersey and Texas. Our insurance affiliate has also applied to insurance regulatory authorities in four additional states to write property and casualty lines.
We conduct our operations under one business segment.
(b)Consolidation and Presentation
We prepare our financial statements in conformity with U.S. generally accepted accounting principles (GAAP). While preparing our 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 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, reinsurance recoverable, deferred policy acquisition costs, and investments. 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 include all of our subsidiaries in our consolidated financial statements, eliminating all significant intercompany balances and transactions during consolidation.
We prepared the accompanying unaudited Consolidated Balance Sheet as of June 30, 2013, with the audited Consolidated Balance Sheet amounts as of December 31, 2012, presented for comparative purposes, and the related unaudited Consolidated Statements of Comprehensive Income and Statements of Cash Flows in accordance with the instructions for Form 10-Q and Article 8 of Regulation S-X. In compliance with those instructions, we have omitted certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with GAAP, though management believes the disclosures made herein are sufficient to ensure that the information presented is not misleading.
Our results of operations and our cash flows as of the end of the interim periods reported herein do not necessarily indicate the results we may experience for the remainder of the year or for any other future period.
Management believes our unaudited consolidated interim financial statements include all the normal recurring adjustments necessary to fairly present our Unaudited Consolidated Balance Sheet as of June 30, 2013, our Unaudited Consolidated Statements of Comprehensive Income and our Unaudited Consolidated Statements of Cash Flows for all periods presented. Our unaudited consolidated interim financial statements and footnotes should be read in conjunction with our consolidated financial statements and footnotes included within our Annual Report filed on Form 10-K for the year ended December 31, 2012 (2012 Form 10-K).
UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
June 30, 2013
2) SIGNIFICANT ACCOUNTING POLICIES
(a) Changes to significant accounting policies
We have made no material changes to our significant accounting policies as reported in our 2012 Form 10-K.
In February 2013, the FASB issued ASU 2013-02, Comprehensive Income (Topic 220): Reporting Amounts Reclassified Out of Accumulated Other Comprehensive Income, which finalizes Proposed ASU No. 2012-240, requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line in net income if the amount being reclassified is required under U.S. GAAP to be reclassified in its entirety to net income. For other amounts that are not required under GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under GAAP that provide additional detail about those amounts. The ASU is effective prospectively for reporting periods beginning after December 15, 2012, and early adoption is permitted. This ASU No. 2013-02 did not have a material impact on our consolidated financial statements.
(b) Fair value assumptions
The carrying amounts for the following financial instrument categories approximate their fair values at June 30, 2013, and December 31, 2012, because of their short-term nature: cash and cash equivalents, accrued investment income, premiums receivable, reinsurance recoverable, reinsurance payable, accounts payable and accrued expenses. The carrying amount of notes payable approximates fair value as the interest rate is variable.
(c) Pending Accounting Pronouncements
We have evaluated pending accounting pronouncements and do not believe they would have an impact on the operations or reporting of the Company.
UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
June 30, 2013
3) INVESTMENTS
The following table details the difference between cost or adjusted/amortized cost and estimated fair value, by major investment category, at June 30, 2013, and December 31, 2012:
|
| | | | | | | | | | | | | | | |
| Cost or Adjusted/Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
June 30, 2013 | | | | | | | |
U.S. government and agency securities | $ | 66,473 |
| | $ | 17 |
| | $ | 560 |
| | $ | 65,930 |
|
States, municipalities and political subdivisions | 45,810 |
| | 1,169 |
| | 414 |
| | 46,565 |
|
Public utilities | 9,643 |
| | 160 |
| | 72 |
| | 9,731 |
|
Other corporate securities | 110,044 |
| | 773 |
| | 1,550 |
| | 109,267 |
|
Total fixed maturities | $ | 231,970 |
| | $ | 2,119 |
| | $ | 2,596 |
| | $ | 231,493 |
|
Public utilities | 656 |
| | 27 |
| | 2 |
| | 681 |
|
Other common stocks | 8,726 |
| | 617 |
| | 114 |
| | 9,229 |
|
Nonredeemable preferred stocks | 272 |
| | — |
| | 12 |
| | 260 |
|
Total equity securities | $ | 9,654 |
| | $ | 644 |
| | $ | 128 |
| | $ | 10,170 |
|
Other long-term investments | 300 |
| | — |
| | — |
| | 300 |
|
Total investments | $ | 241,924 |
| | $ | 2,763 |
| | $ | 2,724 |
| | $ | 241,963 |
|
| | | | | | | |
December 31, 2012 | | | | | | | |
U.S. government and agency securities | $ | 95,296 |
| | $ | 201 |
| | $ | 289 |
| | $ | 95,208 |
|
States, municipalities and political subdivisions | 17,117 |
| | 1,918 |
| | — |
| | 19,035 |
|
Public utilities | 4,135 |
| | 225 |
| | — |
| | 4,360 |
|
Other corporate securities | 28,282 |
| | 2,013 |
| | 1 |
| | 30,294 |
|
Redeemable preferred stocks | 259 |
| | 2 |
| | 1 |
| | 260 |
|
Total fixed maturities | $ | 145,089 |
| | $ | 4,359 |
| | $ | 291 |
| | $ | 149,157 |
|
Public utilities | 316 |
| | 16 |
| | 6 |
| | 326 |
|
Other common stocks | 1,949 |
| | 228 |
| | 38 |
| | 2,139 |
|
Nonredeemable preferred stocks | 272 |
| | — |
| | 14 |
| | 258 |
|
Total equity securities | $ | 2,537 |
| | $ | 244 |
| | $ | 58 |
| | $ | 2,723 |
|
Other long-term investments | 300 |
| | — |
| | — |
| | 300 |
|
Total investments | $ | 147,926 |
| | $ | 4,603 |
| | $ | 349 |
| | $ | 152,180 |
|
UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
June 30, 2013
On September 25, 2012, we acquired an investment in a limited partnership, recorded in other assets, that is currently being accounted for at cost. Our total investment in the partnership of $750,000, has been reduced by two return of capital liquidity distributions totaling $7,000. At June 30, 2013, the cost basis of our investment approximated its fair value of $743,000. Our investment in the partnership is currently bifurcated between a note receivable of $375,000 and a capital contribution of $368,000 that will be utilized to fund our future required contributions. We are not required to fund any additional amounts in excess of our initial $750,000 investment.
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- and six-month periods ended June 30, 2013, and 2012:
|
| | | | | | | | | | | | | | | |
| 2013 | | 2012 |
| Gains (Losses) | | Fair Value at Sale | | Gains (Losses) | | Fair Value at Sale |
Three Months Ended June 30, | | | | | | | |
Fixed maturities | $ | 4 |
| | $ | 2,127 |
| | $ | 156 |
| | $ | 4,016 |
|
Realized gains on equity securities | 13 |
| | 50 |
| | 29 |
| | 150 |
|
Total realized gains | $ | 17 |
| | $ | 2,177 |
| | $ | 185 |
| | $ | 4,166 |
|
Fixed maturities | (164 | ) | | 21,651 |
| | (141 | ) | | 9,243 |
|
Realized losses on equity securities | (2 | ) | | 28 |
| | (7 | ) | | 38 |
|
Total realized losses | $ | (166 | ) | | $ | 21,679 |
| | $ | (148 | ) | | $ | 9,281 |
|
Net realized investment gains (losses) | $ | (149 | ) | | $ | 23,856 |
| | $ | 37 |
| | $ | 13,447 |
|
| | | | | | | |
Six Months Ended June 30, | | | | | | | |
Fixed maturities | $ | 28 |
| | $ | 14,127 |
| | $ | 156 |
| | $ | 4,274 |
|
Realized gains on equity securities | 31 |
| | 155 |
| | 119 |
| | 887 |
|
Total realized gains | $ | 59 |
| | $ | 14,282 |
| | $ | 275 |
| | $ | 5,161 |
|
Fixed maturities | (218 | ) | | 38,647 |
| | (141 | ) | | 9,243 |
|
Realized losses on equity securities | (2 | ) | | 28 |
| | (16 | ) | | 191 |
|
Total realized losses | $ | (220 | ) | | $ | 38,675 |
| | $ | (157 | ) | | $ | 9,434 |
|
Net realized investment gains (losses) | $ | (161 | ) | | $ | 52,957 |
| | $ | 118 |
| | $ | 14,595 |
|
We realized $(149,000) and $(161,000) of net investment losses during the three and six months ended June 30, 2013, respectively, compared to $37,000 and $118,000 of net investment gains during the three and six months ended June 30, 2012, respectively.
The table below summarizes our fixed maturities at June 30, 2013, 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 maturity of those obligations.
|
| | | | | | | | | | | | | |
| June 30, 2013 |
| Cost or Amortized Cost | | Percent of Total | | Fair Value | | Percent of Total |
Due in one year or less | $ | 19,292 |
| | 8.3 | % | | $ | 19,319 |
| | 8.4 | % |
Due after one year through five years | 122,489 |
| | 52.8 |
| | 122,040 |
| | 52.7 |
|
Due after five years through ten years | 58,574 |
| | 25.3 |
| | 58,112 |
| | 25.1 |
|
Due after ten years | 31,615 |
| | 13.6 |
| | 32,022 |
| | 13.8 |
|
Total | $ | 231,970 |
| | 100.0 | % | | $ | 231,493 |
| | 100.0 | % |
UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
June 30, 2013
The following table summarizes our net investment income by major investment category:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
Fixed maturities | $ | 769 |
| | $ | 737 |
| | $ | 1,443 |
| | $ | 1,445 |
|
Equity securities | 48 |
| | 36 |
| | 81 |
| | 70 |
|
Cash, cash equivalents and short-term investments | 10 |
| | 4 |
| | 20 |
| | 9 |
|
Other investments | 4 |
| | — |
| | 11 |
| | — |
|
Net investment income | $ | 831 |
| | $ | 777 |
| | $ | 1,555 |
| | $ | 1,524 |
|
Investment expenses | (41 | ) | | (23 | ) | | (119 | ) | | (94 | ) |
Net investment income, less investment expenses | $ | 790 |
| | $ | 754 |
| | $ | 1,436 |
| | $ | 1,430 |
|
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* | | Gross Unrealized Losses | | Fair Value | |
Number of Securities* | | Gross Unrealized Losses | | Fair Value |
June 30, 2013 | | | | | | | | | | | |
U.S. government and agency securities | 32 |
| | $ | 560 |
| | $ | 46,611 |
| | — |
| | $ | — |
| | $ | — |
|
States, municipalities and political subdivisions | 24 |
| | 414 |
| | 28,300 |
| | — |
| | — |
| | — |
|
Public utilities | 4 |
| | 72 |
| | 4,353 |
| | — |
| | — |
| | — |
|
Corporate securities | 61 |
| | 1,550 |
| | 71,515 |
| | — |
| | — |
| | — |
|
Total fixed maturities | 121 |
| | $ | 2,596 |
| | $ | 150,779 |
| | — |
| | $ | — |
| | $ | — |
|
Public utilities | 5 |
| | 2 |
| | 221 |
| | — |
| | — |
| | — |
|
All other common stocks | 37 |
| | 114 |
| | 3,784 |
| | — |
| | — |
| | — |
|
Nonredeemable preferred stocks | — |
| | — |
| | — |
| | 2 |
| | 12 |
| | 260 |
|
Total equity securities | 42 |
| | $ | 116 |
| | $ | 4,005 |
| | 2 |
| | $ | 12 |
| | $ | 260 |
|
Total | 163 |
| | $ | 2,712 |
| | $ | 154,784 |
| | 2 |
| | $ | 12 |
| | $ | 260 |
|
| | | | | | | | | | | |
December 31, 2012 | | | | | | | | | | | |
U.S. government and agency securities | 13 |
| | $ | 289 |
| | $ | 44,174 |
| | — |
| | $ | — |
| | $ | — |
|
Corporate securities | 1 |
| | 1 |
| | 2,000 |
| | — |
| | — |
| | — |
|
Redeemable preferred stocks | — |
| | — |
| | — |
| | 1 |
| | 1 |
| | 102 |
|
Total fixed maturities | 14 |
| | $ | 290 |
| | $ | 46,174 |
| | 1 |
| | $ | 1 |
| | $ | 102 |
|
Common stocks | 16 |
| | 41 |
| | 620 |
| | 1 |
| | 3 |
| | 53 |
|
Nonredeemable preferred stocks | — |
| | — |
| | — |
| | 2 |
| | 14 |
| | 258 |
|
Total equity securities | 16 |
| | $ | 41 |
| | $ | 620 |
| | 3 |
| | $ | 17 |
| | $ | 311 |
|
Total | 30 |
| | $ | 331 |
| | $ | 46,794 |
| | 4 |
| | $ | 18 |
| | $ | 413 |
|
* This amount represents the actual number of discrete securities, not the number of shares of those securities. The numbers are not presented in thousands.
UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
June 30, 2013
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 principal and 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. All the issuers of the equity securities we own had near-term prospects that indicated we could recover our cost basis, and we also have the ability and the intent to hold these securities until their value equals or exceeds their cost.
The following table presents the fair value of our financial instruments measured on a recurring basis by level at June 30, 2013, and December 31, 2012:
|
| | | | | | | | | | | |
| Total | | Level 1 | | Level 2 |
June 30, 2013 | | | | | |
U.S. government and agency securities | $ | 65,930 |
| | $ | — |
| | $ | 65,930 |
|
States, municipalities and political subdivisions | 46,565 |
| | — |
| | 46,565 |
|
Public utilities | 9,731 |
| | — |
| | 9,731 |
|
Corporate securities | 109,267 |
| | — |
| | 109,267 |
|
Total fixed maturities | $ | 231,493 |
| | $ | — |
| | $ | 231,493 |
|
Public utilities | 681 |
| | 681 |
| | — |
|
Common stocks | 9,229 |
| | 9,229 |
| | — |
|
Nonredeemable preferred stocks | 260 |
| | 260 |
| | — |
|
Total equity securities | $ | 10,170 |
| | $ | 10,170 |
| | $ | — |
|
Other long-term investments | 300 |
| | 300 |
| | — |
|
Total investments | $ | 241,963 |
| | $ | 10,470 |
| | $ | 231,493 |
|
| | | | | |
December 31, 2012 | | | | | |
U.S. government and agency securities | $ | 95,208 |
| | $ | 66,710 |
| | $ | 28,498 |
|
States, municipalities and political subdivisions | 19,035 |
| | — |
| | 19,035 |
|
Public utilities | 4,360 |
| | — |
| | 4,360 |
|
Corporate securities | 30,294 |
| | — |
| | 30,294 |
|
Redeemable preferred stocks | 260 |
| | 260 |
| | — |
|
Total fixed maturities | $ | 149,157 |
| | $ | 66,970 |
| | $ | 82,187 |
|
Public utilities | 325 |
| | 325 |
| | — |
|
Common stocks | 2,140 |
| | 2,140 |
| | — |
|
Nonredeemable preferred stocks | 258 |
| | 258 |
| | — |
|
Total equity securities | $ | 2,723 |
| | $ | 2,723 |
| | $ | — |
|
Other long-term investments | 300 |
| | 300 |
| | — |
|
Total investments | $ | 152,180 |
| | $ | 69,993 |
| | $ | 82,187 |
|
UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
June 30, 2013
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 the 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 the Company 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 the Company’s estimates of the assumptions that market participants would use in valuing the assets and liabilities.
We are responsible for the determination of fair value and the supporting assumptions and methodologies. We gain assurance on the overall reasonableness and consistent application of valuation methodologies and inputs and compliance with accounting standards through the execution of various 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.
We do not hold any investments that require unobservable inputs to determine their fair value. 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. We made no such transfers during the three months ended June 30, 2013.
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 Synovus Trust Company, NA, which uses 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, then 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 their calculations are not quoted prices in active markets, but are observable inputs, they represent Level 2 inputs.
UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
June 30, 2013
4) EARNINGS PER SHARE
The table below reflects the diluted weighted-average number of common stock shares outstanding using the treasury stock method:
|
| | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
Weighted-average shares - basic | 16,115,099 | | 10,361,849 | | 16,072,047 | | 10,361,849 |
Effect of dilutive common stock equivalents: | | | | | | | |
Weighted-average restricted stock awards 1 | 84,390 |
| | — |
| | 85,682 |
| | — |
|
Weighted-average shares - diluted | 16,199,489 |
| | 10,361,849 |
| | 16,157,729 |
| | 10,361,849 |
1 Includes 86,990 shares of restricted common stock awarded to John Forney on June 14, 2012, 17,398 of which vested on June 14, 2013, and 3,900 shares of restricted common stock awarded on April 1, 2013 to Bradford Martz. See Note 12 for additional information.
The basic and diluted EPS computations are calculated as follows:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2013 | | 2012 | | 2013 | | 2012 |
Basic EPS: | | | | | | | | |
Net income attributable to common shareholders | | $ | 4,509 |
| | $ | 2,991 |
| | $ | 8,860 |
| | $ | 7,739 |
|
Weighted-average shares outstanding | | 16,115,099 |
| | 10,361,849 |
| | 16,072,047 |
| | 10,361,849 |
|
Basic EPS | | $ | 0.28 |
| | $ | 0.29 |
| | $ | 0.55 |
| | $ | 0.75 |
|
| | | | | | | | |
Diluted EPS: | | | | | | | | |
Net income attributable to common shareholders | | $ | 4,509 |
| | $ | 2,991 |
| | $ | 8,860 |
| | $ | 7,739 |
|
Weighted-average shares outstanding | | 16,115,099 |
| | 10,361,849 |
| | 16,072,047 |
| | 10,361,849 |
|
Weighted-average dilutive shares | | 84,390 |
| | — |
| | 85,682 |
| | — |
|
Total weighted-average dilutive shares | | 16,199,489 |
| | 10,361,849 |
| | 16,157,729 |
| | 10,361,849 |
|
Diluted EPS | | $ | 0.28 |
| | $ | 0.29 |
| | $ | 0.55 |
| | $ | 0.75 |
|
5) REINSURANCE
Our reinsurance program is designed, utilizing our risk management methodology, to address our exposure to catastrophes. We define "catastrophe" as an event that produces a number of claims in excess of a preset, per-event threshold of average claims in a specific area, occurring within a certain amount of time following the event. Catastrophes are caused by various natural events including high winds, winter storms, tornadoes, hailstorms, wildfires, tropical storms, hurricanes, earthquakes and volcanoes. The nature and level of catastrophes in any period cannot be reliably predicted.
Our program provides reinsurance protection for catastrophes including hurricanes, tropical storms, and tornadoes. These reinsurance agreements are part of our catastrophe management strategy, which is intended to provide our shareholders an acceptable return on the risks assumed in our property business, and to reduce variability of earnings, while providing protection to our policyholders.
UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
June 30, 2013
During the second quarter of 2013, we placed our reinsurance program for the 2013 hurricane season. The contracts reinsure for personal lines property excess catastrophe losses caused by multiple perils including hurricanes, tropical storms, and tornadoes. The agreements are effective June 1, 2013, for a one-year term and incorporate the mandatory coverage required by and placed with the Florida Hurricane Catastrophe Fund (FHCF). The FHCF is a Florida State-sponsored trust fund that provides reimbursement to Florida property insurers for covered hurricane losses. For UPC Insurance, the FHCF coverage includes an estimated maximum provisional limit of 90% of $490,600,000 or $441,540,000, in excess of our retention and private reinsurance of $360,060,000, and also includes reimbursement of eligible loss adjustment expenses of 5%. The limit and retention of the FHCF coverage are subject to re-measurement based on June 30th exposure data. In addition, the FHCF's retention is subject to adjustment upward or downward to an actual retention based on submitted exposures to the FHCF by all participants.
In addition to FHCF coverage, we purchase private reinsurance below, alongside, and above the FHCF layer. The contracts comprising our program are described below:
| |
• | Below FHCF - provides coverage on $167,200,000 of losses in excess of $20,000,000 and is 100% placed. The first reinstatement of limits is prepaid and the second and final reinstatement requires additional premium. |
| |
• | Mandatory FHCF - provides 90% of $490,600,000 excess of $187,200,000 with no reinstatement limits. |
| |
• | Excess - provides coverage on $172,860,000 of losses in excess of the private and FHCF reinsurance coverage and is 100% placed. |
Catastrophe losses by the size of the event are shown in the following table.
|
| | | | | | | | | | | | | | | | | | |
| | 2013 | | 2012 |
| | Number of Events | | Incurred Loss and LAE (5) | | Combined Ratio Impact | | Number of Events | | Incurred Loss and LAE (5) | | Combined Ratio Impact |
Three Months Ended June 30, | | | | | | | | | | | | |
Size of catastrophe loss | | | | | | | | | | | | |
$ 1 million to $5 million | (1) | — |
| | — |
| | — | % | | 1 |
| | 1,155 |
| | 3.9 | % |
Less than $1 million | (2) | 3 |
| | 1,777 |
| | 3.9 | % | | — |
| | — |
| | — | % |
Total | | 3 |
| | 1,777 |
| | 3.9 | % | | 1 |
| | 1,155 |
| | 3.9 | % |
| | | | | | | | | | | | |
Six Months Ended June 30, | | | | | | | | | | | | |
Size of catastrophe loss | | | | | | | | | | | | |
$ 1 million to $5 million | (3) | 1 |
| | 1,900 |
| | 2.2 | % | | 1 |
| | 1,155 |
| | 2.0 | % |
Less than $1 million | (4) | 2 |
| | 1,695 |
| | 1.9 | % | | — |
| | — |
| | — | % |
Total | | 3 |
| | 3,595 |
| | 4.1 | % | | 1 |
| | 1,155 |
| | 2.0 | % |
Note: A storm can be in one loss size for the quarter and a different loss size for the year dependent upon the losses paid for that particular storm during the specified time frame.
(1) Reflects losses from Tropical Storm Debby in 2012.
(2) Reflects losses from Winterstorm Nemo, the Orlando weather event in March and Tropical Storm Andrea in June 2013.
(3) Reflects losses from Winterstorm Nemo in 2013 and Tropical Storm Debby in 2012.
(4) Reflects losses from the Orlando weather event and Tropical Storm Andrea in 2013.
(5) Incurred loss and LAE is equal to losses and LAE paid plus the change in incurred but not reported reserves.
We realized recoveries under our reinsurance agreements totaling $3,033,000 and $838,000 for the three-month periods ended June 30, 2013 and 2012, respectively, and $3,226,000 and $1,563,000 for the six-month periods ended June 30, 2013 and 2012, respectively.
UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
June 30, 2013
Our non-catastrophe reinsurance agreement provides excess-of-loss coverage for losses arising out of property business up to $500,000 in excess of $500,000 per risk. Should a loss recovery, or series of loss recoveries, exhaust the coverage provided under the agreement for losses arising out of property-only business, excluding catastrophes, three reinstatements of the full coverage amount is included at no additional premium. The non-catastrophe reinsurance agreement expires on December 31, 2013. The Company intends to renegotiate a new contract that will run for the calendar year, beginning January 1, 2014.
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 $188,000 and $144,000, for the three-month periods ended June 30, 2013 and 2012, respectively, and $268,000 and $241,000 for the six-month periods ended June 30, 2013 and 2012, respectively.
6) LONG-TERM DEBT
Our long-term debt at June 30, 2013, consisted of a note payable to the Florida State Board of Administration. At June 30, 2013, and December 31, 2012, we owed $15,294,000 and $15,882,000, respectively, on the note and the interest rate was 1.87% and 1.66%, respectively. All other terms and conditions of the note remain as described in our 2012 Form 10-K.
The $15,294,000 note payable to Florida's State Board of Administration (SBA note) requires our insurance affiliate to maintain surplus as regards policyholders at or above a calculated level, which was $33,328,000 at June 30, 2013. We monitor our insurance affiliate's surplus as regards policyholders each quarter and, for various reasons, we occasionally provide additional capital to our insurance affiliate. During the three-and six-month periods ended June 30, 2013 and 2012, we did not contribute any capital to our insurance affiliate. We currently do not foresee a need for any material contributions of capital to our insurance affiliate; however, any future contributions of capital will depend on circumstances at the time.
Our SBA note requires that we maintain either a 2:1 ratio of net written premium to surplus, or net writing ratio, (the SBA note agreement defines surplus for the purpose of calculating the required ratios as the $20,000,000 of capital contributed to our insurance affiliate under the agreement plus the outstanding balance of the note) or a 6:1 ratio of gross written premium to surplus, or gross writing ratio, to avoid additional interest penalties. At June 30, 2013, our net written premium to surplus ratio was 3.1:1, which is well above the 2:1 required ratio. Our gross written premium to surplus ratio was 7.8:1, which meets the required ratio of 6:1. Should we fail to exceed either a net writing ratio of 1.5:1 or a gross writing ratio of 4.5:1, our interest rate will increase by 450 basis points above the 10-year Constant Maturity Treasury rate which was 2.52% at the end of June. Any other writing ratio deficiencies result in an interest rate penalty of 25 basis points above the stated rate of the note, which is 1.87%. Our SBA note further provides that the SBA may, among other things, declare its loan immediately due and payable for all defaults existing under the SBA note; however, any payment is subject to approval by the insurance regulatory authority. At June 30, 2013, we were in compliance with the covenants of the SBA note.
7) 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 loss adjustment expenses 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.
See Note 6 for information regarding commitments related to long-term debt, and Note 8 for commitments related to regulatory actions.
UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
June 30, 2013
8) 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 affiliate. The various laws and regulations require that insurers maintain minimum amounts of statutory surplus and risk-based capital, they restrict insurers' ability to pay dividends, they specify allowable investment types and investment mixes, and they subject insurers to assessments. At June 30, 2013, and during the three and six months then ended, our insurance affiliate met all regulatory requirements of the states in which it operates, and it did not incur any assessments during that same three- and six-month period.
The National Association of Insurance Commissioners published risk-based capital guidelines for insurance companies that are designed to assess capital adequacy and to raise the level of protection that statutory surplus provides for policy holders. Most states, including Florida, have enacted the NAIC guidelines as statutory requirements, 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.
Florida law permits 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 law further provides calculations to determine the amount of dividends or distributions that can be made without the prior approval of the insurance regulatory authority and the amount of dividends or distributions that would require prior approval of the insurance regulatory authority. Statutory risk-based capital requirements may further restrict our insurance affiliate's ability to pay dividends or make distributions if the amount of the intended dividend or distribution would cause statutory surplus to fall below minimum risk-based capital requirements.
The note payable to the SBA is considered a surplus note pursuant to statutory accounting principles. As a result, our insurance affiliate 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 surplus note. Any payment of principal or interest requires permission from the insurance regulatory authority.
We have reported our insurance subsidiary’s 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 and amortize policy acquisition costs over the estimated life of the policies. |
| |
• | 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 National Association of Insurance Commissioners, while they are recorded at fair value for GAAP. |
| |
• | 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. |
UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
June 30, 2013
| |
• | Statutory accounting requires a provision for reinsurance liability be established for reinsurance recoverable on paid losses aged over ninety 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 affiliate's domiciliary state and a reserve for uncollectable reinsurance is charged through earnings rather than surplus or equity. |
| |
• | Statutory accounting dictates how much of a deferred income tax asset that we can admit and requires an additional admissibility test outlined in Statements on Statutory Accounting Principles No. 101 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 subsidiary must file with the various insurance regulatory authorities an “Annual Statement” which reports, among other items, net income (loss) and surplus as regards policyholders, which is called stockholder’s equity under GAAP. For the three-month periods ended June 30, 2013, and 2012, our insurance affiliate recorded statutory net income of $410,000 and $88,000, respectively, and $630,000 and $174,000 for the six-month periods ended June 30, 2013, and 2012, respectively. Since our insurance affiliate is domiciled in Florida, it remains subject to the laws of that state, one of which requires that our insurance affiliate maintain capital and surplus equal to the greater of 10% of its total liabilities or $5,000,000. At June 30, 2013, and December 31, 2012, our insurance affiliate's surplus as regards policyholders was $70,954,000 and $68,007,000, respectively.
9) RELATED PARTY TRANSACTIONS
Effective March 30, 2011, our insurance affiliate purchased $2,250,000 of promissory notes offered by Hamilton Risk Management Co., a Florida corporation engaged in the business of providing automobile insurance in Florida through its wholly-owned subsidiaries. The interest rate on the HRM note was two percent per annum. All outstanding principal of and interest on the HRM notes was to be due on March 30, 2014. In consideration for its purchase of the HRM notes, our insurance affiliate received a Class A limited partnership interest in Acadia Acquisition Partners, L.P., the parent company of Hamilton Risk Management. One of our former directors acts as Executive Chairman of Hamilton Risk Management on an interim basis, and another of our former directors serves as one of two managers of the limited liability company that serves as general partner of Acadia Acquisition Partners. We bifurcated the cash consideration of $2,250,000 by allocating $1,948,000 to the note receivable based on its fair value (using a discounted cash flow model) and allocating the residual amount of $302,000 to our limited partnership interest. We reduced the carrying amount of the limited partnership interest to zero by recording a charge to other expenses because our share of Acadia's losses for the second quarter of 2011 exceeded the carrying amount of the partnership interest.
During the second quarter ended June 30, 2012, it came to our attention that Hamilton Risk Management breached a covenant contained in the Note Purchase Agreement, by reason of Kingsway Amigo Insurance Company's Surplus falling below $13,000,000. On July 17, 2012, we notified HRM of the breach and requested that HRM remedy the breach. On July 20, 2012, our Board of Directors unanimously agreed to enter into negotiations with HRM to settle the outstanding note receivable and to terminate our partnership interest in Acadia Acquisition Partners, L.P. We settled the total outstanding note receivable and the partnership interest at an amount equal to $1,750,000 and received the funds from HRM on August 13, 2012. We recorded a $316,000 impairment on the note receivable in June to reflect the difference between the carrying amount and the proposed settlement amount, which was recorded in other expenses on the Consolidated Statement of Comprehensive Income.
Effective August 29, 2011, we entered into a Management Services Agreement (MSA) with 1347 Advisors, LLC, a wholly-owned subsidiary of Kingsway Financial Services, Inc., a property and casualty insurance company. One of our former directors serves as the President and Chief Executive Officer of Kingsway, as well as a Managing Director of 1347 Advisors. The MSA, which was effective for a six-month period with automatic three-month extensions unless otherwise terminated, stipulated that 1347 Advisors was to provide us with the services of an interim CFO, in addition to actuarial and other services. Hassan Baqar served as our interim CFO under the MSA until April 2, 2012, when he submitted his resignation effective concurrently with the termination of the MSA described in the final paragraph of this section. Mr. Baqar serves as a Managing Director of 1347 Advisors and a Vice President of Kingsway America, Inc., a wholly-owned subsidiary of Kingsway Financial Services, Inc. In exchange for the services, we paid 1347 Advisors a monthly consulting fee of $60,000 plus any reasonable
UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
June 30, 2013
expenses. For the three and six months ended June 30, 2012, we incurred fees of $0 and $180,000, respectively under the MSA.
In response to a letter our insurance affiliate received from Florida's insurance regulatory authority more fully described in our Current Report on Form 8-K filed with the SEC on April 5, 2012, our management affiliate notified 1347 Advisors on April 2, 2012, of its desire to terminate the MSA. Effective April 2, 2012, our management affiliate and 1347 Advisors entered into a Termination Agreement and Release (Termination Agreement) pursuant to which the parties agreed to a mutual termination of the MSA effective immediately. As a result of the foregoing, our management affiliate is no longer obligated to pay 1347 Advisors the management services fee described above.
10) ACCUMULATED OTHER COMPREHENSIVE INCOME
We report changes in other comprehensive income items within comprehensive income on the Consolidated Statements of Comprehensive Income, and we include accumulated other comprehensive income as a component of stockholders' equity on the 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, 2012 | $ | 4,254 |
| | $ | (1,641 | ) | | $ | 2,613 |
|
Changes in net unrealized gain (loss) on investments | (4,376 | ) | | 1,688 |
| | (2,688 | ) |
Reclassification adjustment for realized gains | 161 |
| | (62 | ) | | 99 |
|
June 30, 2013 | $ | 39 |
| | $ | (15 | ) | | $ | 24 |
|
11) STOCKHOLDERS' EQUITY
On May 7, 2013, our Board declared a $0.03 per share quarterly cash dividend. We paid the $486,000 dividend on June 14, 2013, to shareholders of record on May 31, 2013.
On March 6, 2013, our Board declared a $0.03 per share quarterly cash dividend. We paid the $486,000 dividend on March 27, 2013, to shareholders of record on March 20, 2013.
On January 11, 2013, Raymond James, the lead underwriter on our public offering, exercised their over-allotment option to purchase 750,000 shares of our common stock and we received net proceeds less underwriting expenses of $3,591,000 from the exercise.
On December 18, 2012, our Board declared a $0.03 per share cash dividend. We paid the $464,000 dividend on December 31, 2012, to stockholders of record on December 28, 2012.
On December 14, 2012, we closed an underwritten public offering of 5,000,000 shares of our common stock. Certain of our stockholders sold an additional 300,075 shares of our common stock in that offering. Our total net proceeds from the offering were approximately $23,947,000.
On July 20, 2012, our Board of Directors declared a dividend of one preferred share purchase right for each outstanding share of common stock, $0.0001 par value per share, of the Company. The dividend was paid to the stockholders of record on August 3, 2012. Each right entitles the registered holder to purchase from the Company one one-hundredth of a share of Series A Junior Participating Preferred Stock, $0.0001 par value (Preferred Shares), of the Company, at a price of $27.00 per one one-hundredth of a Preferred Share, subject to adjustment. The rights are not exercisable until the distribution date, and will expire on July 20, 2022, unless the rights are earlier redeemed or exchanged by us.
UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
June 30, 2013
On March 14, 2012, our Board declared a $0.05 per share cash dividend. Our transfer agent paid the $518,000 dividend on April 5, 2012 to stockholders of record on March 26, 2012.
12) STOCK-BASED COMPENSATION
We account for stock-based compensation under the fair value recognition provisions of ASC Topic 718 - “Compensation - Stock Compensation.”
On June 14, 2012, John Forney began serving as our Chief Executive Officer and we awarded him 86,990 shares of restricted common stock in connection with his employment with our company. The restricted shares will vest in equal parts on each anniversary of Mr. Forney's commencement as CEO ending on the fifth anniversary of this date, provided that Mr. Forney is continuously employed by our company from June 14, 2012, through June 14, 2017. On June 14, 2013, 17,398 of Mr. Forney's restricted shares vested.
During the second quarter of 2013, our Chief Financial Officer, Brad Martz, finalized his restricted stock agreement and we awarded him 3,900 shares of restricted common stock. The restricted shares will vest on the one year anniversary of the effective date of the agreement, April 1, 2014.
The following table presents certain information related to shares awarded and vested:
|
| | | | | |
| Number of Shares | Weighted Average Grant Date Fair Value |
Outstanding as of December 31, 2012 | 86,990 |
| $ | 5.25 |
|
Granted | 3,900 |
| 5.77 |
|
Vested | 17,398 |
| 5.25 |
|
Outstanding as of June 30, 2013 | 73,492 |
| $ | 5.28 |
|
There was approximately $367,000 of unrecognized stock compensation expense related to non-vested compensation granted, which we expect to recognize over the next four years. We have recognized $28,000 and $56,000 of compensation expense during the three and six months ended June 30, 2013, respectfully.
13) SUBSEQUENT EVENTS
We evaluate all subsequent events and transactions for potential recognition or disclosure in our financial statements.
On August 7, 2013, our Board declared a $0.03 per share quarterly cash dividend, payable on September 13, 2013, to shareholders of record on August 30, 2013.
No additional events required disclosure.
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 Consolidated Financial Statements and related notes appearing elsewhere in this Form 10-Q.
OUR BUSINESS
United Insurance Holdings Corp. serves as the holding company for United Property & Casualty Insurance Company and its affiliated companies. Its business is conducted principally through four wholly-owned subsidiaries: United Property & Casualty Insurance Company (our insurance affiliate), United Insurance Management, L.C. (UIM), Skyway Claims Services, LLC (SCS) and UPC Re. Collectively, including United Insurance Holdings Corp., we refer to these entities as “UPC Insurance,” which is the preferred brand identification we are establishing for our company.
UPC Insurance is primarily engaged in the homeowners property and casualty insurance business in the United States. We currently write in Florida, North Carolina, South Carolina, Massachusetts, and Rhode Island and were recently licensed to write in New Hampshire, New Jersey and Texas. Our target market currently consists of areas where the perceived threat of natural catastrophe has caused large national insurance carriers to reduce their concentration of policies. In such areas we believe an opportunity exists for UPC Insurance to write profitable business. We manage our risk of catastrophic loss primarily through sophisticated pricing algorithms, avoidance of policy concentration, and the use of a comprehensive catastrophe reinsurance program. UPC Insurance has been operating continuously in Florida since 1999, and has successfully managed its business through various hurricane and other tropical storm events. We believe our record of successful risk management and experience in writing business in catastrophe-exposed areas provides us a competitive advantage as we grow our business in other states facing similar perceived threats.
Overview
The following discussion highlights significant factors influencing the consolidated financial position and results of operations of UPC Insurance. This discussion should be read in conjunction with the consolidated financial statements and related notes found under Part II. Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2012 (2012 Form 10-K).
The most important factors we monitor to evaluate the financial condition and performance of our company include:
| |
• | For results of Operations: premiums written, policies in-force, premiums earned, retention, price changes, claim frequency (rate of claim occurrence per policies in-force), severity (average cost per claim), catastrophes, loss ratio, expenses, combined ratio, underwriting results, reinsurance costs, premium to probable maximum loss, and geographic concentration; |
| |
• | For Investments: credit quality, maximizing total return, investment income, cash flows, realized gains and losses, unrealized gains and loses, asset diversification, and portfolio duration; and |
| |
• | For Financial Condition: liquidity, reserve strength, financial strength, ratings, operating leverage, book value per share, capital preservation, return on investment, and return on equity. |
Recent Events
On August 7, 2013, our Board declared a $0.03 per share quarterly cash dividend, payable on September 13, 2013, to shareholders of record on August 30, 2013.
UNITED INSURANCE HOLDINGS CORP.
2013 Highlights
| |
• | Consolidated net income was $4,509,000 for the three months ended June 30, 2013, compared to $2,991,000 for the three months ended June 30, 2012. Net income per diluted share was $0.28 for the three months ended June 30, 2013, compared to $0.29 for the three months ended June 30, 2012. |
| |
• | Our combined ratio (calculated as operating expenses less interest expense relative to net premiums earned) was 89.8% for the three months ended June 30, 2013, compared to 87.1% for the three months ended June 30, 2012. |
| |
• | Total revenues were $48,652,000 for the three months ended June 30, 2013, compared to $31,564,000 for the three months ended June 30, 2012. |
| |
• | Investment and cash holdings were $292,778,000 at June 30, 2013, compared to $223,385,000 at December 31, 2012. |
| |
• | Investment income was $831,000 for the three months ended June 30, 2013, compared to $777,000 for the three months ended June 30, 2012. |
| |
• | Realized losses were $(149,000) for the three months ended June 30, 2013, compared to gains of $37,000 for the three months ended June 30, 2012. |
| |
• | Book value per diluted share (ratio of shareholders' equity to total shares outstanding and dilutive potential shares outstanding) was $5.98 at June 30, 2013, a 4.9% increase from $5.70 at December 31, 2012. |
| |
• | Return on average equity for the six months ended June 30, 2013 was 14.7% compared to 26.6% for the six months ended June 30, 2012. |
| |
• | Policies in-force were 168,075 for the six months ended June 30, 2013, a 50% increase from 111,876 for the six months ended June 30, 2012. |
UNITED INSURANCE HOLDINGS CORP.
Consolidated Net Income |
| | | | | | | | | | | | | | | | |
($ in thousands) | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2013 | | 2012 | | 2013 | | 2012 |
REVENUE: | | | | | | | | |
Gross premiums written | | $ | 103,303 |
| | $ | 77,928 |
| | $ | 191,049 |
| | $ | 135,924 |
|
Increase in gross unearned premiums | | (28,403 | ) | | (23,479 | ) | | (46,273 | ) | | (30,799 | ) |
Gross premiums earned | | 74,900 |
| | 54,449 |
| | 144,776 |
| | 105,125 |
|
Ceded premiums earned | | (28,929 | ) | | (24,727 | ) | | (56,508 | ) | | (47,613 | ) |
Net premiums earned | | 45,971 |
| | 29,722 |
| | 88,268 |
| | 57,512 |
|
Net investment income | | 831 |
| | 777 |
| | 1,555 |
| | 1,524 |
|
Net realized gains (losses) | | (149 | ) | | 37 |
| | (161 | ) | | 118 |
|
Other revenue | | 1,999 |
| | 1,028 |
| | 3,160 |
| | 1,913 |
|
Total revenue | | 48,652 |
| | 31,564 |
| | 92,822 |
| | 61,067 |
|
EXPENSES: | | | | | | | | |
Losses and loss adjustment expenses | | 23,007 |
| | 12,969 |
| | 43,554 |
| | 22,451 |
|
Policy acquisition costs | | 12,169 |
| | 8,878 |
| | 23,452 |
| | 17,131 |
|
Operating expenses | | 2,620 |
| | 1,757 |
| | 4,679 |
| | 3,190 |
|
General and administrative expenses | | 3,530 |
| | 2,300 |
| | 6,654 |
| | 5,093 |
|
Interest expense | | 80 |
| | 129 |
| | 153 |
| | 212 |
|
Total expenses | | 41,406 |
| | 26,033 |
| | 78,492 |
| | 48,077 |
|
Income before other income | | 7,246 |
| | 5,531 |
| | 14,330 |
| | 12,990 |
|
Other income | | — |
| | (293 | ) | | — |
| | (269 | ) |
Income before income taxes | | 7,246 |
| | 5,238 |
| | 14,330 |
| | 12,721 |
|
Provision for income taxes | | 2,737 |
| | 2,247 |
| | 5,470 |
| | 4,982 |
|
Net income | | $ | 4,509 |
| | $ | 2,991 |
| | $ | 8,860 |
| | $ | 7,739 |
|
Net income per diluted share | | $ | 0.28 |
| | $ | 0.29 |
| | $ | 0.55 |
| | $ | 0.75 |
|
Book value per share | | | | | | $ | 5.98 |
| | $ | 6.09 |
|
Return on average equity | | | | | | 14.7 | % | | 26.6 | % |
Loss ratio, net1 | | 50.0 | % | | 43.6 | % | | 49.3 | % | | 39.0 | % |
Expense ratio2 | | 39.8 | % | | 43.5 | % | | 39.4 | % | | 44.2 | % |
Combined ratio (CR)3 | | 89.8 | % | | 87.1 | % | | 88.7 | % | | 83.2 | % |
Effect of current year catastrophe losses on CR | | 3.9 | % | | 3.9 | % | | 4.1 | % | | 2.0 | % |
Effect of prior year development from lines in run-off on CR | | — | % | | 0.1 | % | | 1.0 | % | | 0.1 | % |
Effect of prior year (favorable) development on CR | | 3.9 | % | | (5.2 | )% | | 3.0 | % | | (3.1 | )% |
Underlying combined ratio4 | | 82.0 | % | | 88.3 | % | | 80.6 | % | | 84.2 | % |
1 Loss ratio, net is losses and loss adjustment expenses 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.
4 Underlying combined ratio, a measure that is not based on accounting principles generally accepted in the United States of America (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 the "Definitions of Non-GAAP Measures" section of this document.
UNITED INSURANCE HOLDINGS CORP.
Book value per share increased from $5.70 at December 31, 2012, to $5.98 at June 30, 2013. The increase in the Company's book value per share was reduced by the change in accumulated other comprehensive income as shown in the table below.
|
| | | | | | | | |
($ in thousands, except for per share data) | | June 30, | | December 31, |
| | 2013 | | 2012 |
Book Value per Common Share | | | | |
Numerator: | | | | |
Common shareholders' equity | | $ | 96,932 |
| | $ | 87,986 |
|
Denominator: | | | | |
Total Shares Outstanding | | 16,202,739 |
| | 15,448,839 |
|
Book Value Per Common Share | | $ | 5.98 |
| | $ | 5.70 |
|
Book Value per Common Share, Excluding the Impact of Accumulated Other Comprehensive Income | | | | |
Numerator: | | | | |
Common shareholders' equity | | $ | 96,932 |
| | $ | 87,986 |
|
Accumulated other comprehensive income | | 24 |
| | 2,613 |
|
Shareholders' Equity, excluding AOCI | | $ | 96,908 |
| | $ | 85,373 |
|
Denominator: | | | | |
Total Shares Outstanding | | 16,202,739 |
| | 15,448,839 |
|
Underlying Book Value Per Common Share* | | $ | 5.98 |
| | $ | 5.53 |
|
* Underlying book value per common share is a non-GAAP financial measure and is reconciled above to book value per common share, the most directly comparable GAAP measure. Additional information regarding non-GAAP financial measures presented in this press release is in the "Definitions of Non-GAAP Measures" section of this document.
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 development from lines in run-off and prior year development (underlying combined ratio) is a non-GAAP ratio, which is computed as the difference between four GAAP operating ratios: the combined ratio, the effect of current year catastrophe losses on the combined ratio, the effect of development from lines in run-off and prior year development on 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 and prior year development. 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 from lines in run-off is caused by unexpected development from our commercial auto product that is no longer offered by the Company. Prior year development is unexpected loss development on historical reserves. 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, prior year development on lines in run-off and reserve development (underlying Loss and LAE) is a non-GAAP measure which is computed as the difference between loss and LAE, current year catastrophe losses and prior year reserve development. 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 three items can have a significant impact on our loss trend in a given period. 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 losses and LAE and does not reflect the overall profitability of our business.
UNITED INSURANCE HOLDINGS CORP.
Book value per common share, excluding the impact of accumulated other comprehensive income, is a ratio that uses a non-GAAP measure. It is calculated by dividing common shareholders' equity after excluding accumulated other comprehensive income by total common shares outstanding plus dilutive potential common shares outstanding. We use the trend in book value per common share, excluding the impact of accumulated other comprehensive income, in conjunction with book value per common share to identify and analyze the change in net worth attributable to management efforts between periods. We believe the non-GAAP ratio is useful to investors because it eliminates the effect of interest rates that can fluctuate significantly from period to period and are generally driven by economic developments, primarily capital market conditions, the magnitude and timing of which are generally not influenced by management, and we believe it enhances understanding and comparability of performance by highlighting underlying business activity and profitability drivers. We note that book value per common share, excluding the impact of accumulated other comprehensive income, is a measure commonly used by insurance investors as a valuation technique. Book value per common share is the most directly comparable GAAP measure. Book value per common share, excluding the impact of accumulated other comprehensive income, should not be considered a substitute for book value per common share, and does not reflect the recorded net worth of our business.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
When we prepare our consolidated financial statements and accompanying notes in conformity with U.S. generally accepted accounting principles (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 and six months ended June 30, 2013, we reassessed our critical accounting policies and estimates as disclosed within our 2012 Form 10-K; we have made no material changes or additions with regard to such policies and estimates.
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.
ANALYSIS OF FINANCIAL CONDITION - JUNE 30, 2013 COMPARED TO DECEMBER 31, 2012
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 included within our 2012 Form 10-K.
Investments
With respect to our investments, we primarily attempt 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. We must comply with applicable state insurance regulations that prescribe the type, quality and concentrations of investments our insurance affiliate 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.
An outside asset management company, which has authority and discretion to buy and sell securities for us, manages our investments subject to (i) the guidelines established by our Board of Directors, and (ii) the direction of management. We direct our asset manager to make changes and to hold, buy or sell securities in our portfolio.
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 $292,778,000 at June 30, 2013.
UNITED INSURANCE HOLDINGS CORP.
The following table summarizes our investments, by type:
|
| | | | | | | | | | | | | |
| June 30, 2013 | | December 31, 2012 |
| Estimated Fair Value | | Percent of Total | | Estimated Fair Value | | Percent of Total |
U.S. government and agency securities | $ | 65,930 |
| | 27.3 | % | | $ | 95,208 |
| | 62.6 | % |
States, municipalities and political subdivisions | 46,565 |
| | 19.2 | % | | 19,035 |
| | 12.5 | % |
Corporate securities | 118,998 |
| | 49.2 | % | | 34,654 |
| | 22.8 | % |
Redeemable preferred stocks | — |
| | — | % | | 260 |
| | 0.2 | % |
Total fixed maturities | 231,493 |
| | 95.7 | % | | 149,157 |
| | 98.1 | % |
Common stocks | 9,910 |
| | 4.1 | % | | 2,465 |
| | 1.6 | % |
Nonredeemable preferred stocks | 260 |
| | 0.1 | % | | 258 |
| | 0.2 | % |
Total equity securities | 10,170 |
| | 4.2 | % | | 2,723 |
| | 1.8 | % |
Other long-term investments | 300 |
| | 0.1 | % | | 300 |
| | 0.1 | % |
Total investments | $ | 241,963 |
| | 100.0 | % | | $ | 152,180 |
| | 100.0 | % |
We classify all of our investments as available-for-sale. Our investments at June 30, 2013, and December 31, 2012, consisted mainly of U.S. government and agency securities and securities of investment-grade corporate issuers. Our equity holdings consisted mainly of securities issued by companies in the energy, consumer products, healthcare, technology and telecommunications industries. Most of the corporate bonds we held reflected a similar diversification. At June 30, 2013, approximately 84% of our fixed maturities were U.S. Treasuries or corporate bonds rated “A” or better, and 16% were corporate bonds rated “BBB”.
At June 30, 2013, gross unrealized losses, on securities that were in a gross unrealized losses position of less than twelve months, increased approximately $2,381,000 relative to December 31, 2012. This increase in gross unrealized losses can mainly be attributed to an increasing interest rate environment during the period, which impacted the fair value of our fixed maturity securities. We had two equity securities that were in a loss position for a period of twelve months or longer that reflected unrealized losses of $12,000. We currently have no plans to sell these two equity securities, and we expect to fully recover our cost basis. We had no fixed maturities that were in an unrealized loss position for twelve months or longer. We reviewed all of our securities and determined that we did not need to record any impairment charges at June 30, 2013.
Reinsurance Payable
On June 1, 2013, we placed our reinsurance program for the 2013 hurricane season. The contracts reinsure for personal lines property excess catastrophe losses caused by multiple perils including hurricanes, tropical storms, and tornadoes. The agreements are effective June 1, 2013, for a one-year term and incorporate the mandatory coverage required by and placed with the Florida Hurricane Catastrophe Fund (FHCF). The FHCF is a Florida State-sponsored trust fund that provides reimbursement to Florida property insurers for covered hurricane losses. For UPC Insurance, the FHCF coverage includes an estimated maximum provisional limit of 90% of $490,600,000 or $441,540,000, in excess of our retention and private reinsurance of $360,060,000, and also includes reimbursement of eligible loss adjustment expenses of 5%. The limit and retention of the FHCF coverage are subject to re-measurement based on June 30th exposure data. In addition, the FHCF's retention is subject to adjustment upward or downward to an actual retention based on submitted exposures to the FHCF by all participants.
In addition to FHCF coverage, we purchase private reinsurance below, alongside, and above the FHCF layer. The contracts comprising our program are described below:
| |
• | Below FHCF - provides coverage on $167,200,000 of losses in excess of $20,000,000 and is |