10-K Document 31DEC13

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549  
___________________________________
   
FORM 10-K
___________________________________
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2013
Commission File Number 000-52833  
United Insurance Holdings Corp.
 
Delaware
 
75-3241967
 
 
(State of Incorporation)
 
(IRS Employer Identification Number)
 
360 Central Avenue, Suite 900
St. Petersburg, Florida 33701
727-895-7737
Securities registered pursuant to Section 12(b) of the Act:
 
COMMON STOCK, $0.0001 PAR VALUE PER SHARE
 
NASDAQ Stock Market LLC
 
Securities registered pursuant to Section 12(g) of the Act:
 
PREFERRED SHARE PURCHASE RIGHTS
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  £    No  R
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  £    No  R
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   £
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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
£
 
Accelerated filer
þ
Non-accelerated filer
£
 
Smaller reporting company
£
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  £    No  R
Non-affiliates held common stock issued by the registrant with an aggregate market value of $85,694,143 as of June 28, 2013, calculated using the closing sales price reported for such date on the NASDAQ Stock Market. For purposes of this disclosure, shares of common stock held by persons who hold more than 10% of the outstanding shares of common stock and shares held by executive officers and directors of the registrant have been excluded because such persons may be deemed to be affiliates. This determination of executive officer or affiliate status is not necessarily a conclusive determination for other purposes.
As of February 24, 2014, 16,209,315 shares of common stock, par value $0.0001 per share, were outstanding.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Part III of this Form 10-K incorporates by reference certain information from the Proxy Statement for the 2014 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days after the end of our fiscal year ended December 31, 2013.
 


UNITED INSURANCE HOLDINGS CORP.



Forward-Looking Statements
 
 
Item 1. Business
 
Item 1A. Risk Factors
 
Item 1B. Unresolved Staff Comments
 
Item 2. Properties
 
Item 3. Legal Proceedings
 
Item 4. Mine Safety Disclosures
Part II.
 
 
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Item 6. Selected Financial Data
 
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
 
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
 
Item 8. Financial Statements and Supplementary Data
 
 
Auditor's Report
 
Consolidated Balance Sheets
 
Consolidated Statements of Comprehensive Income
 
Consolidated Statements of Stockholders' Equity
 
Consolidated Statements of Cash Flows
 
Notes to Consolidated Financial Statements
 
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 
Item 9A. Controls and Procedures
 
Item 9B. Other Information
Part III.
 
 
Item 10. Directors, Executive Officers and Corporate Governance
 
Item 11. Executive Compensation
 
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
Item 13. Certain Relationships and Related Transactions, and Director Independence
 
Item 14. Principal Accounting Fees and Services
Part IV.
 
 
Item 15. Exhibits, Financial Statement Schedules
Exhibit Index
Signatures
 
Throughout this Form 10-K, 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 Annual Report, we show full values rounded to the nearest thousand.

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UNITED INSURANCE HOLDINGS CORP.


FORWARD-LOOKING STATEMENTS
Statements in this Form 10-K for the year ended December 31, 2013 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 under "Risk Factors" below.

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 this Form 10-K are valid only as of the date of this Form 10-K 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 of this Form 10-K. 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.


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UNITED INSURANCE HOLDINGS CORP.


PART I

Item 1. Business

INTRODUCTION

Company Overview

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 the four wholly-owned subsidiaries shown below. 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, Massachusetts, New Jersey, North Carolina, Rhode Island, South Carolina, and Texas, and we are licensed to write in Georgia and New Hampshire. 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 hurricanes, tropical storms, and other weather related 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.

We conduct our operations under one business segment.

To achieve its goals in 2014, UPC Insurance seeks to:

Grow premium base in existing states until target market share is obtained;
Begin writing policies in several new states in support of our growth and diversification strategy;
Improve the efficiency of our catastrophe reinsurance program; and
Improve the cost-effectiveness of our operations.

4

UNITED INSURANCE HOLDINGS CORP.


Corporate Information
    
In 1999, we formed our original holding company, United Insurance Holdings, L.C., a Florida limited liability company, our insurance affiliate and our management affiliate and conducted operations under that structure until 2004. In 2004, we added our claims adjusting affiliate and continued operations under the new structure until we completed a merger with Fund Management Group (FMG) Acquisition Corp.

In May 2007, FMG Acquisition Corp, a blank-check company, was incorporated under the laws of Delaware. In September 2008, in a cash and stock transaction, we completed a reverse merger whereby United Subsidiary Corp., a wholly-owned subsidiary of FMG Acquisition Corp., merged with and into United Insurance Holdings, L.C., a Florida limited liability company, with United Insurance Holdings, L.C. remaining as the surviving entity. In connection with that merger, FMG Acquisition Corp. changed its name to United Insurance Holdings Corp. and became a public operating company trading in the over-the-counter market under the ticker symbol "UIHC". In April 2011, we founded our reinsurance affiliate, UPC Re. In August 2011, we merged United Insurance Holdings, L.C. into its parent corporation, United Insurance Holdings Corp. In December 2012, in connection with an underwritten public offering of 5,000,000 shares of our common stock, we applied to list our common stock on The Nasdaq Capital Market. Our application was approved, and our common stock began trading on The Nasdaq Capital Market on December 11, 2012.

Our principal executive offices are located at 360 Central Avenue, Suite 900, St. Petersburg, FL 33701 and our telephone number at that location is (727) 895-7737.


Recent Events
    
On February 24, 2014, our Board of Directors declared a $0.04 per share quarterly cash dividend payable on March 21, 2014, to stockholders of record on March 14, 2014.

On February 12, 2014, our insurance affiliate filed for a 4.3% average rate increase on all new and renewal homeowner business written in Florida, which is currently pending approval by the state regulatory authority.

On February 4, 2014, our insurance affiliate filed for a 17.0% average rate increase on all new and renewal homeowner business written in Rhode Island, currently pending approval by the state regulatory authority.

On November 5, 2013, our Board declared a $0.03 per share cash dividend, which was paid on December 13, 2013, to stockholders of record on November 29, 2013.

Also on November 5, 2013, we assumed more than 18,000 policies from Citizens Property Insurance Corporation representing approximately $63,047,000 of annualized premiums. The total amount of assumed premium may be reduced by additional opt outs and cancellations by policyholders.


PRODUCTS AND DISTRIBUTION

Homeowners policies and related coverage account for essentially all of the business that we write. In 2013, homeowners policies (by which we mean both standard homeowners and dwelling fire policies) produced written premium of $365,249,000 and accounted for 96% of our total written premium. In addition to homeowners policies, we write flood policies, which accounted for the majority of the remaining 4% of our 2013 written premium. On our flood policies, we earn a commission while retaining no risk of loss, since all such risk is ceded to the federal government via the National Flood Insurance Program. Policies we issue under our homeowners programs in the various states where we do business provide both structure and content coverage. We offer standardized policies for a broad range of exposures, and our policies include coverage options for standard single-family homeowners, tenants (renters), and condominium unit owners.

We currently market and distribute our policies to consumers through nearly 2,500 independent agencies. Our insurance affiliate has been focused on the independent agency distribution channel since its inception, and we believe we have built significant credibility and loyalty with the independent agent community in the states in which we operate. In 2011, we became a Trusted Choice partner company. Trusted Choice is a group of unaffiliated independent agents around the country that seek to maintain the highest levels of service quality and product offerings to consumers. Our insurance affiliate is one of 70 insurance companies nationwide that have qualified to be Trusted Choice partner companies. We recruit, train and appoint the full-service insurance agencies that distribute our products. Typically, a full service agency is small to medium in size and

5

UNITED INSURANCE HOLDINGS CORP.


represents several insurance companies for both personal and commercial product lines. We depend heavily upon our independent agents to produce new business for us. We compensate our independent agents primarily with fixed-rate commissions that are consistent with market practices. In addition to our relationships with individual agencies, we have important relationships with aggregators of underlying agency demand. The two most significant of these relationships are with Allstate in Florida, which, through its Ivantage program, refers homeowners to our insurance affiliate and other partner companies, and with the Florida Association of Insurance Agents (FAIA), which serves as a conduit between our insurance affiliate and many smaller agencies in Florida with whom we do not have direct appointments.

Our marketing representatives monitor and support our agents and also have the principal responsibility for recruiting and training our new agents. We manage our independent agents through periodic business reviews using established benchmarks/goals for premium volume and profitability.


COMPETITION

The market for homeowners insurance is highly competitive. In our primary market, Florida, there are over 170 licensed insurance companies that write homeowners' policies. The table below shows year-to-date in-force premium volume and market share for the top 20 companies in Florida as of September 30, 2013, which is the most recent date that the information is publicly available. We compete to varying degrees with all of these companies and others, including large national carriers, the state-sponsored homeowners insurance entity, and single state or regional carriers. Similar competitive groups exist in our other geographic markets.

Florida Property Insurance Market - Personal Residential and Commercial Residential - Ranked by DWP*
Company Name
 
Policies in-Force
 
Exposure
 
Direct Written Premium in-Force
 
Percentage Distribution
Citizens Property Insurance Corporation
 
1,200,524

 
$
352,313,493,978

 
$
2,610,686,875

 
23.5
%
Universal Property & Casualty Insurance Company
 
511,386

 
110,409,347,259

 
761,743,132

 
6.9
%
State Farm Florida Insurance Company
 
396,828

 
156,287,354,623

 
678,340,819

 
6.1
%
Homeowners Choice Property & Casualty Insurance Company, Inc.
 
135,263

 
37,102,064,672

 
324,398,004

 
2.9
%
Florida Peninsula Insurance Company
 
136,307

 
47,545,598,538

 
313,984,080

 
2.8
%
American Coastal Insurance Company
 
4,023

 
43,238,192,761

 
295,327,333

 
2.7
%
United Services Automobile Association
 
129,805

 
54,540,260,088

 
290,277,593

 
2.6
%
St. Johns Insurance Company, Inc.
 
171,957

 
63,000,936,058

 
279,490,211

 
2.5
%
United Property & Casualty Insurance Company
 
146,459

 
58,149,867,986

 
271,574,577

 
2.5
%
Security First Insurance Company
 
177,070

 
48,173,189,535

 
230,281,590

 
2.1
%
American Integrity Insurance Company of Florida
 
163,971

 
47,803,075,185

 
196,797,511

 
1.8
%
Tower Hill Prime Insurance Company
 
119,365

 
48,130,932,038

 
195,461,316

 
1.8
%
Federated National Insurance Company
 
100,268

 
42,278,681,786

 
181,943,601

 
1.6
%
Federal Insurance Company
 
31,264

 
46,007,973,686

 
167,542,444

 
1.5
%
People's Trust Insurance Company
 
72,799

 
21,837,383,315

 
159,483,890

 
1.4
%
USAA Casualty Insurance Company
 
55,498

 
21,469,831,690

 
151,019,655

 
1.4
%
Tower Hill Signature Insurance Company
 
86,966

 
27,519,887,292

 
142,864,077

 
1.3
%
Castle Key Insurance Company
 
100,568

 
23,813,302,005

 
140,802,980

 
1.3
%
Heritage Property & Casualty Insurance Company
 
85,627

 
24,227,056,655

 
137,804,147

 
1.2
%
Tower Hill Preferred Insurance Company
 
64,865

 
27,646,846,863

 
134,798,558

 
1.2
%
Total - Top 20 Insurers
 
3,890,813

 
1,301,495,276,013

 
7,664,622,393

 
69.1
%
Total - All Insurers
 
6,100,328

 
$
2,010,169,835,063

 
$
11,104,579,184

 
100.0
%
*The information displayed in the table above is compiled and published by the Florida Office of Insurance Regulation based on information filings submitted quarterly by all Florida licensed insurance companies. The information above is presented for each individual company and is not consolidated or aggregated.


6

UNITED INSURANCE HOLDINGS CORP.


We compete primarily on the basis of product features, the strength of our distribution network, high-quality service to our agents and policyholders, and our reputation for long-term stability and commitment. In addition, our long and successful track record writing homeowners insurance in catastrophe-exposed areas has enabled us to develop sophisticated pricing techniques that endeavor to accurately reflect the risk of loss while allowing us to be competitive in our target markets.

We price our product at levels that we project will generate an acceptable underwriting profit. We try to be extremely granular in our approach, so that our price can accurately reflect the risk and profitability of each potential customer. In our pricing algorithm, we take into account historical loss costs (both attritional and catastrophic) for the rating territory in which the customer resides, as well as projected incremental reinsurance costs based on the specific geographic and structural characteristics of the home. In addition to the specific characteristics of the policy being priced, we also evaluate the effect of each incremental policy on our portfolio as a whole. In this regard, we seek to optimize our portfolio by diversifying our geographic exposure in order to limit our probable maximum loss, total insured value and average annual loss. We use the output from third-party modeling software to analyze our risk exposures, including wind exposures, by zip code or street address as part of the optimization process. We establish underwriting guidelines to provide a uniform approach to our risk selection and to achieve underwriting profitability. After we bind a new risk, with few exceptions, we physically inspect the property. Our underwriters review the property inspection report during their risk evaluation and if the policy does not meet our underwriting criteria, we have the right to cancel the policy within 90 days in Florida and within 60 days in other states.

We intend to compete by and commit ourselves to providing the highest possible level of service to our insurance agents and our policyholders. Our customized web-based policy processing interface affords our agents the ability to prepare and process new policies and policy changes online and deliver policy declarations quickly. We use Computer Science Corporation (CSC) to manage our policy-related information systems and to perform some of the administrative duties of processing a policy. CSC is a global IT services company, and one of the leading providers of outsourcing and technology solutions to the insurance industry. Using CSC allows us to obtain up-to-date technology at a reasonable cost and to achieve economies of scale without incurring significant fixed-overhead expenses. CSC provides us with integrated policy underwriting, billing, collection and reporting, and employs Internet-based systems for the on-line submission of applications, the underwriting of policies and the automated issuance of policies. We believe that the use of CSC in conjunction with our internal resources delivers a consistently high-quality user experience for our agents and policyholders.


GEOGRAPHIC MARKETS

Our insurance affiliate began operations in Florida in 1999, and has operated continuously there since. In 2010, we began to expand to other states, beginning with South Carolina in 2010, Massachusetts in 2011 and Rhode Island in 2012. In 2013, we began writing business in North Carolina, New Jersey and Texas. We are also licensed to write business in Georgia and New Hampshire, though we have not yet begun to write policies there. It is a fundamental part of our strategy to diversify our operations outside of Florida and to write in multiple states where the perceived threat of natural catastrophes has caused large national insurance companies to reduce their concentration. In pursuit of this strategy, we have submitted applications for licensure in New York, Connecticut, and Louisiana.

The charts below show the geographic distribution of our 202,454 policies in-force as of December 31, 2013, and 135,297 policies in-force as of December 31, 2012.


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UNITED INSURANCE HOLDINGS CORP.


RESERVE FOR UNPAID LOSSES

We generally use the term loss(es) to collectively refer to both loss and loss adjusting expenses. 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. 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 cost of our insured claims incurred and unpaid. 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 are necessary.

Reserves for unpaid losses fall into two categories: case reserves and reserves for claims incurred but not reported. See our APPLICATION OF CRITICAL ACCOUNTING ESTIMATES section under Item 7 of this Form 10-K for a discussion of these two categories of reserves for unpaid losses and for a discussion of the methods we use to estimate those reserves.

On an annual basis, our consulting actuary issues a statement of actuarial opinion that documents the actuary’s evaluation of the adequacy of our unpaid loss obligations under the terms of our policies. We review the analysis underlying the actuary's opinion and compare the projected ultimate losses per the actuary's analysis to our own projection of ultimate losses to ensure that our reserve for unpaid losses recorded at each annual balance sheet date is based upon our analysis of all internal and external factors related to known and unknown claims against us and to ensure our reserve is within guidelines promulgated by the National Association of Insurance Commissioners (NAIC).

We maintain an in-house claims staff that monitors and directs all aspects of our claims process. We assign the fieldwork to our wholly-owned claims subsidiary, or to third-party claims adjusting companies, none of whom have the authority to settle or pay any claims on our behalf. The claims adjusting companies conduct inspections of the damaged property and prepare initial estimates. We review the inspection reports and initial estimates to determine the amounts to be paid to the policyholder in accordance with the terms and conditions of the policy. We maintain strategic relationships with multiple claims adjusting companies which we can engage should we need additional non-catastrophe claims servicing capacity. As demonstrated during 2004 and 2005, as well as more recent events in 2012 when we had several catastrophic events, we believe all of our relationships provide an adequate level of claims servicing in the event catastrophes affect our policyholders.


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UNITED INSURANCE HOLDINGS CORP.


The table below shows the analysis of our reserve for unpaid losses for each of our last three years on a GAAP basis:
 
 
2013
 
2012
 
2011
Balance at January 1
$
35,692

 
$
33,600

 
$
47,414

Less: reinsurance recoverable on unpaid losses
1,935

 
3,318

 
23,814

Net balance at January 1
$
33,757

 
$
30,282

 
$
23,600

Incurred related to:
 
 
 
 
 
Current year
94,752

 
57,739

 
43,019

Prior years
4,078

 
670

 
(4,158
)
Total incurred
$
98,830

 
$
58,409

 
$
38,861

Paid related to:
 
 
 
 
 
Current year
62,494

 
37,906

 
28,857

Prior years
24,599

 
17,028

 
3,322

Total paid
$
87,093

 
$
54,934

 
$
32,179

 
 
 
 
 
 
Net balance at December 31
$
45,494

 
$
33,757

 
$
30,282

Plus: reinsurance recoverable on unpaid losses
1,957

 
1,935

 
3,318

Balance at December 31
$
47,451

 
$
35,692

 
$
33,600

 
 
 
 
 
 
Composition of reserve for unpaid losses and LAE:
 
 
 
 
 
Case reserves
28,054

 
20,438

 
18,315

IBNR reserves
19,397

 
15,254

 
15,285

Balance at December 31
$
47,451

 
$
35,692

 
$
33,600




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UNITED INSURANCE HOLDINGS CORP.


LOSS RESERVE DEVELOPMENT

The table on the next page displays UPC Insurance's loss reserve development, on a GAAP basis, for business written in each year from 2003 through 2013; it does not distinguish between catastrophe and attritional losses. The following explanations of the main sections of the table should provide a better understanding of the information displayed:

Original net liability. The original net liability represents the original estimated amount of reserves for unpaid losses recorded at the balance sheet date for each of the years indicated in the column headings, net of reinsured losses. We record reserves related to claims arising in the current year and in all prior years that remained unpaid at the balance sheet date for each of the years indicated, including estimated losses that had been incurred but not reported.

Net cumulative paid as of. This section displays the net cumulative payments we have made for losses, as of the balance sheet date of each succeeding year, related to claims incurred prior to the balance sheet date of the year indicated in the column heading.

Net liability re-estimated as of. This section displays the re-estimated amount of the previously recorded liability based on experience as of the end of each succeeding year. An increase or decrease from the original reserve estimate is caused by a combination of factors, including (i) claims being settled for amounts different than originally estimated, (ii) reserves being increased or decreased for claims remaining open as more information becomes available on those individual claims and (iii) more or fewer claims being reported after the year end than estimated.

Cumulative redundancy (deficiency) at December 31, 2013. The cumulative redundancy or deficiency results from the comparison of the net liability re-estimated as of the current balance sheet date to the original net liability, and it indicates an overestimation of the original net liability (a redundancy) or an underestimation of the original net liability (a deficiency).
 

It is important to note that the table presents a run-off of balance sheet liability for the periods indicated rather than accident or policy loss development for those periods. Therefore, each amount in the table includes the cumulative effects of changes in liability for all prior periods. Conditions and trends that have affected liabilities in the past may not necessarily occur in the future.


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UNITED INSURANCE HOLDINGS CORP.


 
2013
 
2012
 
2011
 
2010
 
2009
 
2008
 
2007
 
2006
 
2005
 
2004
 
2003
Original net liability
$
45,494

 
$
33,757

 
$
30,282

 
$
23,600

 
$
20,665

 
$
19,192

 
$
21,559

 
$
23,735

 
$
20,447

 
$
8,449

 
$
3,590

Net cumulative paid as of:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One year later
 
 
24,599

 
17,028

 
3,322

 
12,533

 
8,984

 
9,707

 
9,047

 
12,872

 
10,962

 
4,549

Two years later
 
 
 
 
26,889

 
10,562

 
7,409

 
13,148

 
12,127

 
13,083

 
14,363

 
13,871

 
6,097

Three years later
 
 
 
 
 
 
16,776

 
12,444

 
6,030

 
14,310

 
14,115

 
15,582

 
14,868

 
6,594

Four years later
 
 
 
 
 
 
 
 
16,369

 
10,145

 
6,113

 
15,395

 
16,312

 
15,021

 
6,382

Five years later
 
 
 
 
 
 
 
 
 
 
13,441

 
9,552

 
7,032

 
17,356

 
15,214

 
6,368

Six years later
 
 
 
 
 
 
 
 
 
 
 
 
11,649

 
10,264

 
8,722

 
15,291

 
6,463

Seven years later
 
 
 
 
 
 
 
 
 
 
 
 
 
 
12,219

 
11,787

 
15,322

 
6,664

Eight years later
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
13,605

 
15,353

 
6,668

Nine years later
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
15,361

 
6,667

Ten years later
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
6,667

Net liability re-estimated as of:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
End of year
$
45,494

 
$
33,757

 
$
30,282

 
$
23,600

 
$
20,665

 
$
19,192

 
$
21,559

 
$
23,735

 
$
20,447

 
$
8,449

 
$
3,590

One year later
 
 
37,835

 
30,952

 
19,442

 
21,674

 
16,556

 
16,864

 
17,652

 
18,802

 
12,989

 
6,061

Two years later
 
 
 
 
33,960

 
18,382

 
18,129

 
17,472

 
15,759

 
16,707

 
17,675

 
15,260

 
6,358

Three years later
 
 
 
 
 
 
20,395

 
17,123

 
14,400

 
16,505

 
16,337

 
17,355

 
15,586

 
7,051

Four years later
 
 
 
 
 
 
 
 
18,395

 
13,590

 
13,688

 
16,781

 
17,814

 
15,582

 
6,561

Five years later
 
 
 
 
 
 
 
 
 
 
14,838

 
12,568

 
14,140

 
18,052

 
15,672

 
6,730

Six years later
 
 
 
 
 
 
 
 
 
 
 
 
12,854

 
12,943

 
15,604

 
15,409

 
6,794

Seven years later
 
 
 
 
 
 
 
 
 
 
 
 
 
 
13,171

 
14,303

 
15,376

 
6,680

Eight years later
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
14,525

 
15,420

 
6,668

Nine years later
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
15,364

 
6,667

Ten years later
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
6,667

Cumulative redundancy (deficiency) at December 31, 2013
 
 
(4,078
)
 
(3,678
)
 
3,205

 
2,270

 
4,354

 
8,705

 
10,564

 
5,922

 
(6,915
)
 
(3,077
)
Cumulative redundancy (deficiency) as a % of reserves originally established
 
 
(12.1
)%
 
(12.1
)%
 
13.6
%
 
11.0
%
 
22.7
%
 
40.4
%
 
44.5
%
 
29.0
%
 
(81.8
)%
 
(85.7
)%
Net reserves
$
45,494

 
$
33,757

 
$
30,282

 
$
23,600

 
$
20,665

 
$
19,192

 
$
21,559

 
$
23,735

 
$
20,447

 
$
8,449

 
$
3,590

Ceded reserves
1,957

 
1,935

 
3,318

 
23,814

 
23,447

 
20,907

 
14,445

 
33,440

 
153,768

 
4,100

 

Gross reserves
$
47,451

 
$
35,692

 
$
33,600

 
$
47,414

 
$
44,112

 
$
40,099

 
$
36,004

 
$
57,175

 
$
174,215

 
$
12,549

 
$
3,590

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net re-estimated
 
 
$
37,835

 
$
33,960

 
$
20,395

 
$
18,395

 
$
14,838

 
$
12,854

 
$
13,171

 
$
14,525

 
$
15,364

 
$
6,667

Ceded re-estimated
 
 
2,169

 
3,721

 
20,580

 
20,871

 
16,164

 
8,612

 
18,556

 
109,233

 
7,456

 

Gross re-estimated
 
 
$
40,004

 
$
37,681

 
$
40,975

 
$
39,266

 
$
31,002

 
$
21,466

 
$
31,727

 
$
123,758

 
$
22,820

 
$
6,667

 
Note: The cash we received in relation to the commutation of our 2005 contract with the Florida Hurricane Catastrophe Fund caused the decrease in the net cumulative paid amounts beginning in the 2005 column in the table above.

11

UNITED INSURANCE HOLDINGS CORP.



The NAIC requires all property and casualty insurers to present current and historical loss information in an alternative format known as Schedule P, Part 2.  This summary schedule in our insurance affiliate's statutory filings is designed to measure reserve adequacy by evaluating the inception-to-date loss and defense and cost containment (DCC) expenses incurred by calendar year and accident year and calculating the one and two year development on those expenses reported in prior periods.

The following table includes our insurance affiliate's Schedule P, Part 2 information, but was modified to also include all remaining loss adjustment expenses incurred, known as adjusting and other, as well as backing out loss payments from United Property & Casualty Insurance Company to Skyway Claims Services that are included in Schedule P, Part 2, but are eliminated in our consolidated GAAP results:

 
CALENDAR YEAR
 
 
 
 
 
2003
 
2004
 
2005
 
2006
 
2007
 
2008
 
2009
 
2010
 
2011
 
2012
 
2013
 
1 YR Development
 
2 YR Development
2003 AY*
$
9,161

 
$
10,281

 
$
10,120

 
$
10,357

 
$
10,266

 
$
10,569

 
$
10,637

 
$
10,520

 
$
10,505

 
$
10,504

 
$
10,504

 
$

 
$
1

2004 AY
 
 
39,636

 
43,633

 
45,211

 
46,036

 
45,864

 
45,891

 
45,742

 
45,721

 
45,766

 
45,710

 
56

 
11

2005 AY
 
 
 
 
58,205

 
53,998

 
52,824

 
52,509

 
52,901

 
53,378

 
50,963

 
49,618

 
49,894

 
(276
)
 
1,069

2006 AY
 
 
 
 
 
 
36,386

 
31,195

 
30,570

 
29,728

 
29,946

 
29,753

 
29,857

 
29,864

 
(7
)
 
(111
)
2007 AY
 
 
 
 
 
 
 
 
31,465

 
27,432

 
26,696

 
27,000

 
26,824

 
26,901

 
26,958

 
(57
)
 
(134
)
2008 AY
 
 
 
 
 
 
 
 
 
 
33,039

 
31,157

 
31,338

 
31,083

 
31,394

 
32,356

 
(962
)
 
(1,273
)
2009 AY
 
 
 
 
 
 
 
 
 
 
 
 
43,732

 
43,826

 
43,406

 
43,155

 
43,179

 
(24
)
 
227

2010 AY
 
 
 
 
 
 
 
 
 
 
 
 
 
 
41,525

 
40,862

 
40,858

 
41,596

 
(738
)
 
(734
)
2011 AY
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
43,018

 
44,746

 
45,744

 
(998
)
 
(2,726
)
2012 AY
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
57,746

 
58,818

 
(1,072
)
 

2013 AY
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
94,750

 

 

(unfavorable) favorable
 
 
$
(4,078
)
 
$
(3,670
)
* Accident Year

As indicated above, the one-year development was $4,078,000 unfavorable for 2013, and a reconciliation of these components is as follows:

 
2013
Insurance affiliate schedule P, part 2 (loss and DCC) as filed
$
(4,987
)
Adjusting and other added to table above
228

One year development total including adjusting and other
(4,759
)
Internal payment eliminations for consolidation
681

Consolidated one year development
$
(4,078
)


REGULATION

We are subject to extensive regulation in the markets we serve, primarily at the state level. In general, these regulations are designed to protect the interests of insurance policyholders. These rules have a substantial effect on our business and relate to a wide variety of matters, including insurer solvency, reserve adequacy, insurance company licensing and examination, agent and adjuster licensing, policy forms, rate setting, the nature and amount of investments, claims practices, participation in shared markets and guaranty funds, transactions with affiliates, the payment of dividends, underwriting standards, statutory accounting methods, trade practices, and corporate governance. Some of these matters are discussed in more detail below. From time to time, individual states and/or the NAIC propose new regulations and/or legislation that affect us. We can neither predict whether any of these proposals in the various jurisdictions might be adopted, nor what effect, if any, their adoption may have on our results of operations or financial condition. For a discussion of statutory financial information and regulatory contingencies, see Note 10 to our Notes to Consolidated Financial Statements which is incorporated in this Part I, Item 1 by reference.

12

UNITED INSURANCE HOLDINGS CORP.



Our insurance affiliate provides audited statutory financial statements to the various insurance regulatory authorities. With regard to periodic examinations of an insurance company's affairs, insurance regulatory authorities, in general, defer to the insurance regulatory authority in the state in which an insurer is domiciled; however, insurance regulatory authorities from any state in which we operate may conduct examinations at their discretion. Florida's insurance regulatory authority completed a limited-scope financial examination pertaining to our December 31, 2011 Annual Statement in November 2012. We received the results in September 2012, and there were no material adverse findings reported.

Florida state law requires our insurance affiliate to maintain adequate surplus as to policyholders such that 90% of written premiums divided by surplus does not exceed the ratio of 10:1 for gross written premiums or 4:1 for net written premiums. The ratio of gross and net written premium to surplus as of December 31, 2013, was 4.4:1 and 2.2:1, respectively, and our insurance affiliate’s surplus as regards policyholders of $78,362,000 exceeded the minimum capital of $5,000,000 required by state laws.

We are subject to various assessments imposed by governmental agencies or certain quasi-governmental entities. While we may be able to recover from policyholders some of the assessments imposed upon us, our payment of the assessments and our recoveries through policy surcharges may not offset each other in the same fiscal period in our financial statements. See Note 2(j) and Note 10 in our Notes to Consolidated Financial Statements for additional information regarding the assessments that we are currently collecting.


Limitations on Dividends by Insurance Subsidiaries

As a holding company with no significant business operations of our own, we rely on payments from our insurance affiliate as one of the principal sources of cash to pay dividends and meet our obligations. Our insurance affiliate is regulated as an insurance company in Florida and its ability to pay dividends is restricted by Florida law. For additional information regarding those restrictions, see Part II, Item 5 of this report.


Risk-Based Capital Requirements

To enhance the regulation of insurer solvency, the NAIC published risk-based capital (RBC) guidelines for insurance companies designed to assess capital adequacy and to raise the level of protection statutory surplus provides for policyholders. The guidelines measure three major areas of risk facing property and casualty insurers: (i) underwriting risks, which encompass the risk of adverse loss developments and inadequate pricing; (ii) declines in asset values arising from credit risk; and (iii) other business risks. 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. Insurance regulatory authorities could require our insurance subsidiary to cease operations in the event it fails to maintain the required statutory capital.


13

UNITED INSURANCE HOLDINGS CORP.


The level of required risk-based capital is calculated and reported annually.  There are five outcomes to the RBC calculation set forth by the NAIC which are as follows:

1.
No Action Level - If RBC is greater than 200%, no further action is required.

2.
Company Action Level - If RBC is between 150% -200%, the insurer must prepare a report to the regulator outlining a comprehensive financial plan that identifies conditions that contributed to the insurer's financial condition and proposes corrective actions.

3.
Regulatory Action Level - If RBC is between 100% -150%, the state insurance commissioner is required to perform any examinations or analyses to the insurer's business and operations that he or she deems necessary as well as issuing appropriate corrective orders.

4.
Authorized Control Level - If RBC is between 70% - 100%, this is the first point that the regulator may take control of the insurer even if the insurer is still technically solvent and is in addition to all the remedies available at the higher action levels.

5.
Mandatory Control Level - If RBC is less than 70%, the regulator is required to take steps to place the insurer under its control regardless of the level of capital and surplus.

At December 31, 2013, our insurance affiliate's RBC ratio was 632%.


Insurance Holding Company Regulation

As a holding company of an insurance subsidiary, we are subject to laws governing insurance holding companies in Florida. These laws, among other things, (i) require us to file periodic information with the insurance regulatory authority, including information concerning our capital structure, ownership, financial condition and general business operations, (ii) regulate certain transactions between our affiliates and us, including the amount of dividends and other distributions and the terms of surplus notes and (iii) restrict the ability of any one person to acquire certain levels of our voting securities without prior regulatory approval. Any purchaser of 5% or more of the outstanding shares of our common stock could be presumed to have acquired control of us unless the insurance regulatory authority, upon application, determines otherwise.

Insurance holding company regulations also govern the amount any affiliate of the holding company may charge our insurance affiliate for services (e.g., management fees and commissions). We have a long-term management agreement between our insurance affiliate and our management affiliate, which presently provides for monthly management fees. The Florida insurance regulatory authority must approve any changes to this agreement.


Underwriting and Marketing Restrictions

During the past several years, various regulatory and legislative bodies have adopted or proposed new laws or regulations to address the cyclical nature of the insurance industry, catastrophic events and insurance capacity and pricing. These regulations (i) created “market assistance plans” under which insurers are induced to provide certain coverage; (ii) restrict the ability of insurers to reject insurance coverage applications, to rescind or otherwise cancel certain policies in mid-term, and to terminate agents; (iii) restrict certain policy non-renewals and require advance notice on certain policy non-renewals; and (iv) limit rate increases or decrease rates permitted to be charged.

Most states also have insurance laws requiring that rate schedules and other information be filed with the insurance regulatory authority, either directly or through a rating organization with which the insurer is affiliated. The insurance regulatory authority may disapprove a rate filing if it finds that the rates are inadequate, excessive or unfairly discriminatory. On February 4, 2014, our insurance affiliate filed for a 17.0% average rate increase on all new and renewal homeowner business written in Rhode Island, currently pending approval by the state regulatory authority. On February 12, 2014, our insurance affiliate filed for a 4.3% average rate increase on all new and renewal homeowner business written in Florida, which is currently pending approval by the state regulatory authority.


14

UNITED INSURANCE HOLDINGS CORP.


Most states require licensure or insurance regulatory authority approval prior to the marketing of new insurance products. Typically, licensure review is comprehensive and includes a review of a company’s business plan, solvency, reinsurance, character of its officers and directors, rates, forms and other financial and non-financial aspects of a company. The insurance regulatory authorities may prohibit entry into a new market by not granting a license or by withholding approval.


FINANCIAL STABILITY RATING

Financial stability ratings are important to insurance companies in establishing their competitive position and such ratings may impact an insurance company’s ability to write policies. Demotech maintains a letter-scale financial stability rating system ranging from A** (A double prime) to L (licensed by insurance regulatory authorities); they have assigned our insurance affiliate a financial stability rating of A, which is the third highest of six rating levels. According to Demotech, "Regardless of the severity of a general economic downturn or deterioration in the insurance cycle, insurers earning a Financial Stability Rating of A possess Exceptional financial stability related to maintaining surplus as regards policyholders at an acceptable level.” With a financial stability rating of A, we expect our property insurance policies will be acceptable to the secondary mortgage marketplace and mortgage lenders. This rating is intended to provide an independent opinion of an insurer’s financial strength and is not an evaluation directed at our investors. At least annually, based on year-to-date results as of the third quarter, Demotech reviews our rating and may revise it upward or downward or revoke it at their sole discretion.


EMPLOYEES

As of February 2014, we have one part time employee, and a total of 89 full time employees, which includes our executive officers. We are neither party to any collective bargaining agreements nor have we experienced any work stoppages or strikes as a result of labor disputes. We believe we have good working relationships with our employees.


AVAILABLE INFORMATION

We make available, free of charge through our website, www.upcinsurance.com, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such materials with, or furnish them to, the SEC.

These reports may also be obtained at the SEC’s Public Reference Room at 100 F Street NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room is available by calling the SEC at 1-800-SEC-0330. You may also access this information at the SEC’s website (www.sec.gov). This site contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.


Item 1A. Risk Factors

Many factors affect our business and results of operations, some of which are beyond our control. Additional risks and uncertainties we are unaware of, or we currently deem immaterial, also may become important factors that affect us. If any of the following risks occur, our business, financial conditions or results of operations may be materially and adversely affected. In that event, the trading price of our securities could decline, and our stockholders could lose all or part of their investment in our securities. This discussion contains forward-looking statements. See the section entitled FORWARD-LOOKING STATEMENTS for a discussion of uncertainties, risks and assumptions associated with these statements.


RISKS RELATED TO OUR BUSINESS

As a property and casualty insurer, we may experience significant losses and our financial results may vary from period to period due to our exposure to catastrophic events and severe weather conditions, the incidence and severity of which could be affected by climate change.

Our property and casualty insurance operations expose us to claims arising from catastrophes. Catastrophes can be caused by various natural events, including hurricanes, windstorms, earthquakes, hail, severe winter weather and fires; they can also be

15

UNITED INSURANCE HOLDINGS CORP.


man-made, such as terrorist attacks (including those involving nuclear, biological, chemical or radiological events) or consequences of war or political instability. We may incur catastrophe losses that exceed the amount of:

catastrophe losses that we experienced in prior years;

catastrophe losses that, using third-party catastrophe modeling software, we projected could be incurred;

catastrophe losses that we used to develop prices for our products; or

our current reinsurance coverage (which would cause us to have to pay such excess losses).

The incidence and severity of weather conditions are largely unpredictable, but the frequency and severity of property claims generally increase when severe weather conditions occur. A body of scientific evidence seems to indicate that climate change may be occurring. Climate change, to the extent that it may affect weather patterns, may cause an increase in the frequency and/or the severity of catastrophic events or severe weather conditions which, in addition to the attendant increase in claims-related costs, may also cause an increase in our reinsurance costs and/or negatively impact our ability to provide homeowners insurance to our policyholders in the future. Governmental entities may also respond to climate change by enacting laws and regulations that may adversely affect our cost of providing homeowners insurance in the future.

Catastrophes may cause a material adverse effect on our results of operations during any reporting period; they may also materially harm our financial condition, which in turn may materially harm our liquidity and impair our ability to raise capital on acceptable terms or at all. In addition to catastrophes, the accumulation of losses from smaller weather-related events in any reporting period may cause a material adverse effect on our results of operations and liquidity in that period.


Because we conduct the majority of our business in Florida, our financial results substantially depend on the regulatory, economic and weather conditions present in that state.

Though we began writing policies in South Carolina during 2010, Massachusetts in 2011, Rhode Island in 2012, and North Carolina, New Jersey, and Texas in 2013, we still write approximately 85% of our premium in Florida; therefore, prevailing regulatory, legal, economic, political, demographic, competitive, weather and other conditions in Florida affect our revenues and profitability. Changes in conditions could make doing business in Florida less attractive for us and would have a more pronounced effect on us than it would on other insurance companies that are more geographically diversified.

We are subject to increased exposure to certain catastrophic events such as hurricanes, as well as an increased risk of losses. The occurrence of one or more catastrophic events or other conditions affecting losses in Florida may cause a material adverse effect on our results of operations and financial condition.


We may enter new markets and there can be no assurance that our diversification strategy will be effective.

Although we intend to continue focusing on Florida as a key market for our insurance products, we also may seek to take advantage of prudent opportunities to expand our core business into other states where we believe the independent agent distribution channel is strong. As a result of a number of factors, including the difficulties of finding appropriate expansion opportunities and the challenges of operating in an unfamiliar market, we may not be successful in this diversification. Additionally, in order to carry out any such strategy, we would need to obtain the appropriate licenses from the insurance regulatory authority of any such state.


Because we rely on insurance agents, the loss of these agent relationships or our ability to attract new agents could have an adverse impact on our business.

We currently market our policies to a broad range of prospective policyholders through nearly 2,500 independent agencies. Many of these agents are independent insurance agents that own their customer relationships, and our agency contracts with them limit our ability to directly solicit business from our existing policyholders. Independent agents most commonly represent other insurance companies and we do not control their activities. Historically, we have used marketing relationships with two well-known national insurance companies that do not write new homeowners insurance policies in Florida and two associations of independent insurance agents in Florida to attract and retain agents and agency groups. The loss of these marketing relationships could adversely impact our ability to attract new agents or retain our agency network.

16

UNITED INSURANCE HOLDINGS CORP.


Actual claims incurred may exceed our loss reserves for claims, which could adversely affect our results of operations and financial condition.

Loss reserves represent our estimate of ultimate unpaid losses for claims that have been reported and claims that have been incurred but not yet reported. Loss reserves do not represent an exact calculation of liability, but instead represent our best estimate, generally utilizing actuarial expertise, historical information and projection techniques at a given reporting date.

The process of estimating our loss reserves involves a high degree of judgment and is subject to a number of variables. These variables can be affected by both internal and external events, such as changes in claims handling procedures, economic inflation, legal trends, legislative changes, and varying judgments and viewpoints of the individuals involved in the estimation process, among others.

Because of the inherent uncertainty in estimating loss reserves, including reserves for catastrophes, additional liabilities resulting from one insured event, or an accumulation of insured events, may exceed our existing loss reserves and cause a material adverse effect on our results of operations and our financial condition.


Our financial results may vary from period to period based on the timing of our collection of government-levied assessments from our policyholders.

Our insurance affiliate is subject to assessments levied by various governmental and quasi-governmental entities in the states in which we operate. While we may have the ability to recover these assessments from policyholders through policy surcharges in some states in which we operate, our payment of the assessments and our recoveries may not offset each other in the same reporting period in our financial statements and may cause a material adverse effect on our results of operations in a particular reporting period.


Violation(s) of certain debt covenants related to our note payable to the Florida State Board of Administration could allow the Florida SBA to call the note, which could cause a material adverse effect on our financial condition.

With regard to our note payable to the Florida SBA, we incurred additional interest expense during the first quarter of 2011 because we did not write enough premiums during the fourth quarter of 2010 to exceed the threshold required by the writing ratio covenants. As a remedy for covenant violations related to the note payable, the Florida SBA may make the note due and payable upon demand. Any demand by the Florida SBA for payment related to the note, whether immediate payment of the full balance or some other amount, is subject to approval by the insurance regulatory authority in Florida. Should the insurance regulatory authority grant approval of a demand for immediate full payment, such payment could cause a material adverse effect on our cash flows and financial condition. We were in compliance with the covenants under the note payable during the years ended December 31, 2013 and 2012.


Our failure to implement and maintain adequate internal controls over financial reporting in our business could have a material adverse effect on our business, financial condition, results of operations and stock price.

We have complied with the provisions regarding annual management assessments of the effectiveness of our internal controls over financial reporting as required by Section 404 of the Sarbanes-Oxley Act of 2002 during 2013 and 2012.

If we fail to achieve and maintain the adequacy of our internal controls in accordance with applicable standards as then in effect, and as supplemented or amended from time to time, we may be unable to conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404. Moreover, effective internal controls are necessary for us to produce reliable financial reports. If we cannot produce reliable financial reports or otherwise maintain appropriate internal controls, our business, financial condition and results of operations could be harmed, investors could lose confidence in our reported financial information, and the market price for our stock could decline.



17

UNITED INSURANCE HOLDINGS CORP.


If we experience difficulties with technology, data security and/or outsourcing relationships, our ability to conduct our business could be negatively impacted.

While technology can streamline many business processes and ultimately reduce the cost of operations, technology initiatives present certain risks. Our business is highly dependent upon our contractors' and third-party administrators' ability to perform, in an efficient and uninterrupted fashion, necessary business functions such as the processing of policies and the adjusting of claims. Because our information technology and telecommunications systems interface with and depend on these third-party systems, we could experience service denials if demand for such service exceeds capacity or a third-party system fails or experiences an interruption. If sustained or repeated, such a business interruption, system failure or service denial could result in a deterioration of our ability to write and process new and renewal business, provide customer service, pay claims in a timely manner or perform other necessary business functions. Computer viruses, hackers and other external hazards could expose our data systems to security breaches. These increased risks, and expanding regulatory requirements regarding data security, could expose us to data loss, monetary damages, damage to our reputation and significant increases in compliance costs. As a result, our ability to conduct our business might be adversely affected.


Loss of key vendor relationships or failure of a vendor to protect personal information of our customers, claimants or employees could affect our operations.

We rely on services and products provided by many vendors. These include, for example, vendors of computer hardware and software and vendors of services such as claim adjustment services and human resource benefits management services. In the event that one or more of our vendors suffers a bankruptcy or otherwise becomes unable to continue to provide products or services, or fails to protect personal information of our customers, claimants or employees, we may suffer operational impairments and financial losses.


Our success has been and will continue to be greatly influenced by our ability to attract and retain the services of senior management.

Our senior executive officers play an integral role in the development and management of our business.  We do not maintain any key person life insurance policies on any of our officers or employees.  The loss of the services of any of our senior executive officers could have an adverse effect on our business, financial condition, results of operations, cash flows and/or future prospects.


RISKS RELATED TO THE INSURANCE INDUSTRY

Because we are smaller than many of our competitors, we may lack the resources to increase or maintain our market share.

The property and casualty insurance industry is highly competitive, and we believe it will remain highly competitive for the foreseeable future. The principal competitive factors in our industry are price, service, commission structure and financial condition. We compete with other property and casualty insurers that write coverage in the same territories in which we write coverage; some of those insurers have greater financial resources and have a longer operating history than we do. In addition, our competitors may offer products for alternative forms of risk protection. Competition could limit our ability to retain existing business or to write new business at adequate rates, and such limitation may cause a material adverse effect on our results of operations and financial position.


State regulations limiting rate increases and requiring us to underwrite business in certain areas are beyond our control and may adversely affect our results of operation and financial condition.

States have from time to time passed legislation, and regulators have taken action, that has the effect of limiting the ability of insurers to manage catastrophe risk, such as legislation prohibiting insurers from reducing exposures or withdrawing from catastrophe-prone areas, or mandating that insurers participate in residual markets. In addition, following catastrophes, there are sometimes legislative initiatives and court decisions which seek to expand insurance coverage for catastrophe claims beyond the original intent of the policies. Further, our ability to increase pricing to the extent necessary to offset rising costs of catastrophes requires approval of insurance regulatory authorities.


18

UNITED INSURANCE HOLDINGS CORP.


One example of such legislation occurred following the 2004 and 2005 hurricane seasons, when the Florida legislature required all insurers issuing replacement cost policies to pay the full replacement cost of damaged properties without depreciation whether or not the insureds repaired or replaced the damaged property. Under prior law, insurers would have paid the depreciated amount of the property until insureds commenced repairs or replacement. This law has led to an increase in disagreements regarding the scope of damage. Despite our efforts to adjust claims and promptly pay meritorious amounts, our operating results have been affected by a claims environment in Florida that produces opportunities for fraudulent or overstated claims.

Our ability or willingness to manage our catastrophe exposure by raising prices, modifying underwriting terms or reducing exposure to certain geographies may be limited due to considerations of public policy, the evolving political environment and our ability to penetrate other geographic markets, which may cause a material adverse effect on our results of operations, financial condition and cash flows. We cannot predict whether and to what extent new legislation and regulations that would affect our ability to manage our exposure to catastrophic events will be adopted, the timing of adoption or the effects, if any, they would have on our ability to manage our exposure to catastrophic events.


The insurance industry is heavily regulated and further restrictive regulation may reduce our profitability and limit our growth.

The insurance industry is extensively regulated and supervised. Insurance regulatory authorities generally design insurance rules and regulations to protect the interests of policyholders, and not necessarily the interests of insurers, their stockholders and other investors. Regulatory systems also address authorization for lines of business, capital and surplus requirements, limitations on the types and amounts of certain investments, underwriting limitations, licensing, transactions with affiliates, dividend limitations, changes in control, premium rates and a variety of other financial and non-financial components of an insurer’s business.

In recent years, the state insurance regulatory framework has come under increased federal scrutiny. Although the United States federal government does not directly regulate the insurance business, changes in federal legislation, regulation and/or administrative policies in several areas, including changes in financial services regulation and federal taxation, could negatively affect the insurance industry and us. In addition, Congress and some federal agencies from time to time investigate the current condition of insurance regulation in the United States to determine whether to impose federal or national regulation or to allow an optional federal charter, similar to the option available to most banks. Further, the NAIC and state insurance regulators continually reexamine existing laws and regulations, specifically focusing on modifications to holding company regulations, interpretations of existing laws and the development of new laws and regulations. We cannot predict what effect, if any, proposed or future legislation or NAIC initiatives may have on the manner in which we conduct our business.

As part of ongoing, industry-wide investigations, we may from time to time receive subpoenas and written requests for information from government agencies and authorities at the state or federal level. If we are subpoenaed for information by government agencies and authorities, potential outcomes could include enforcement proceedings or settlements resulting in fines, penalties and/or changes in business practices that could cause a material adverse effect on our results of operations. In addition, these investigations may result in changes to laws and regulations affecting the industry.

Changes to insurance laws or regulations, or new insurance laws and regulations, may be more restrictive than current laws or regulations and could cause material adverse effects on our results of operations and our prospects for future growth. Additionally, our failure to comply with certain provisions of applicable insurance laws and regulations may cause a material adverse effect on our results of operations or financial condition.


Our inability to obtain reinsurance on acceptable terms would increase our loss exposure or limit our ability to underwrite policies.

We use, and we expect to continue to use, reinsurance to help manage our exposure to property and casualty risks. The availability and cost of reinsurance are each subject to prevailing market conditions beyond our control which can affect business volume and profitability. We may be unable to maintain our current reinsurance coverage, to obtain additional reinsurance coverage in the event our current reinsurance coverage is exhausted by a catastrophic event, or to obtain other reinsurance coverage in adequate amounts or at acceptable rates. Similar risks exist whether we are seeking to replace coverage terminated during the applicable coverage period or to renew or replace coverage upon its expiration. We provide no assurance that we can obtain sufficient reinsurance to cover losses resulting from one or more storms in the future, or that we can obtain such reinsurance in a timely or cost-effective manner. If we are unable to renew our expiring coverage or to obtain

19

UNITED INSURANCE HOLDINGS CORP.


new reinsurance coverage, either our net exposure to risk would increase or, if we are unwilling to accept an increase in net risk exposures, we would have to reduce the amount of risk we underwrite. Either increasing our net exposure to risk or reducing the amount of risk we underwrite may cause a material adverse effect on our results of operations and our financial condition.

In each of the past ten years, a portion of our reinsurance protection has been provided by the Florida Hurricane Catastrophe Fund (FHCF), a government sponsored entity that provides a layer of reinsurance protection at a price that is lower than otherwise available in the commercial market. The FHCF provides catastrophe reinsurance on a subsidized-basis as an incentive to make homeowners insurance available in the State of Florida. There is no assurance that FHCF will continue to make such reinsurance available on terms consistent with historical practice. The loss of reinsurance provided by FHCF would have an adverse impact on our results of operations and financial condition.


Our inability to collect from our reinsurers on our reinsurance claims could cause a material adverse affect on our results of operation and financial condition.

Although reinsurers are liable to us to the extent of the reinsurance coverage we purchase, we remain primarily liable as the direct insurer on all risks that we reinsure; therefore, our reinsurance agreements do not eliminate our obligation to pay claims. As a result, we are subject to risk with respect to our ability to recover amounts due from reinsurers. The risk could arise in two situations: (i) our reinsurers may dispute some of our reinsurance claims based on contract terms, and we may
ultimately receive partial or no payment, or (ii) the amount of losses that reinsurers incur related to worldwide catastrophes may materially harm the financial condition of our reinsurers and cause them to default on their obligations.

While we will attempt to manage these risks through underwriting guidelines, collateral requirements and other oversight mechanisms, our efforts may not be successful. As a result, our exposure to credit risk may cause a material adverse effect on our results of operations, financial condition and cash flow.


Our investments are subject to market risks that may result in reduced returns or losses.

We expect investment returns to contribute to our overall profitability. Accordingly, fluctuations in interest rates or in the fixed-maturity, equity or alternative-investment markets may cause a material adverse effect on our results of operations.

Changes in the general interest rate environment will affect our returns on, and the fair value of, our fixed maturities and short-term investments. A decline in interest rates reduces the returns available on new investments, thereby negatively impacting our net investment income. Conversely, rising interest rates reduce the fair value of existing fixed maturities. In addition, defaults under, or impairments of, any of these investments as a result of financial problems with the issuer and, where applicable, its guarantor of the investment could reduce our net investment income and net realized investment gains or result in investment losses.

We may decide to invest an additional portion of our assets in equity securities or other investments, which are subject to greater volatility than fixed maturities. General economic conditions, stock market conditions and many other factors beyond our control can adversely affect the fair value of our equity securities or other investments, and could adversely affect the realization of net investment income. As a result of these factors, we may not realize an adequate return on our investments, we may incur losses on sales of our investments and we may be required to write down the value of our investments, which could reduce our net investment income and net realized investment gains or result in investment losses.
 
The fair value of our investment portfolio is also subject to valuation uncertainties. The valuation of investments is more subjective when the markets are illiquid and may increase the risk that the estimated fair value of our investment portfolio is not reflective of prices at which actual transactions would occur.

Our determination of the amount of other-than-temporary impairment to record varies by investment type and is based upon our periodic evaluation and assessment of known and inherent risks associated with the respective investment type. We revise our evaluations and assessments as conditions change and new information becomes available, and we reflect changes in other-than-temporary impairments in our Consolidated Statements of Comprehensive Income. We base our assessment of whether other-than-temporary impairments have occurred on our case-by-case evaluation of the underlying reasons for the decline in fair value. We can neither provide assurance that we have accurately assessed whether the impairment of one or more of our investments is temporary or other-than-temporary, nor that we have accurately recorded amounts for other-than-temporary impairments in our financial statements. Furthermore, historical trends may not be indicative of future impairments and additional impairments may need to be recorded in the future.

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UNITED INSURANCE HOLDINGS CORP.



Our portfolio may benefit from certain tax laws, including, but not limited to, those governing dividends-received deductions and tax credits. Federal and/or state tax legislation could be enacted that would lessen or eliminate some or all of these tax advantages and could adversely affect the value of our investment portfolio. This result could occur in the context of deficit reduction or various types of fundamental tax reform.


The property and casualty insurance industry is historically cyclical and the pricing and terms for our products may decline, which would adversely affect our profitability.

Historically, the financial performance of the property and casualty insurance industry has been cyclical, characterized by periods of severe price competition and excess underwriting capacity, or soft markets, followed by periods of high premium rates and shortages of underwriting capacity, or hard markets. We cannot predict how long any given hard or soft market will last. Downturns in the property and casualty market may cause a material adverse effect on our results of operations and our financial condition.


The effects of emerging claim and coverage issues are uncertain and may increase our loss exposure under the policies that we underwrite.

As industry practices and legal, judicial, social and other environmental conditions change, unexpected and unintended issues related to claims and coverage may emerge. These issues may adversely affect our business by either extending coverage beyond our underwriting intent or by increasing the number or size of claims. Examples of emerging claims and coverage issues include, but are not limited to:
 
adverse changes in loss cost trends, including inflationary pressures in home repair costs;
 
judicial expansion of policy coverage and the impact of new theories of liability; and
 
plaintiffs targeting property and casualty insurers in purported class-action litigation relating to claims-handling and other practices.
 
In some instances, these emerging issues may not become apparent to us for some time after our issuance of the affected insurance policies. As a result, we may not know the full extent of liability under insurance policies we issue for many years after the policies are issued.

It is very difficult for us to predict the effects of these and other unforeseen emerging claim and coverage issues that may cause a material adverse effect on our results of operations and financial condition.


A downgrade in our financial strength rating could adversely impact our business volume and our ability to access additional debt or equity financing.

Financial strength ratings have become increasingly important to an insurer’s competitive position. Rating agencies review their ratings periodically, and our current ratings may not be maintained in the future. A downgrade in our rating could negatively impact our business volumes, as it is possible demand for our products in certain markets may be reduced or our ratings could fall below minimum levels required to maintain existing business. Additionally, we may find it more difficult to access the capital markets and we may incur higher borrowing costs. If significant losses, such as those resulting from one or more major catastrophes, or significant reserve additions were to cause our capital position to deteriorate significantly, or if one or more rating agencies substantially increase their capital requirements, we may need to raise equity capital in the future to maintain our ratings or limit the extent of a downgrade. For example, a trend of more frequent and severe weather-related catastrophes may lead rating agencies to substantially increase their capital requirements.

We cannot guarantee that our insurance affiliate, United Property & Casualty Insurance Company, will maintain its current A (Exceptional) rating by Demotech. Any downgrade of this rating could impact the acceptability of our products to mortgage lenders that require homeowners to buy insurance, reduce our ability to retain and attract policyholders and agents and damage our ability to compete, which may cause a material adverse effect on our results of operations and financial condition.



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UNITED INSURANCE HOLDINGS CORP.


RISKS RELATED TO AN INVESTMENT IN OUR COMMON STOCK

Trading of our common stock is limited, which may make it difficult for you to sell your shares at times and at prices that you find appropriate.

Trading in our common stock has been limited. The lack of liquidity in our common stock results not only from limited trading, but also from delays in the timing of transactions and a dearth in security analysts' and the media's coverage of UIHC. As a result of the foregoing, it may be difficult to sell your shares of our common stock. You may obtain lower prices for our common stock than you might otherwise obtain in more liquid markets and you may experience a larger spread between the high and low prices for our common stock.
 
Future sales of substantial amounts of our common stock by us or our existing stockholders could cause our stock price to decrease.

We have registered up to $75,000,000 of our securities, which we may sell from time to time in one or more offerings.  Additional equity financings or other share issuances by us could adversely affect the market price of our common stock. Sales by existing stockholders of a large number of shares of our common stock in the public trading market (or in private transactions), or the perception that such additional sales could occur, could cause the market price of our common stock to decrease.


Dividend payments on our common stock in the future is uncertain.

We have paid dividends on our common stock in the past; however, we provide no assurance or guarantee that we will continue to pay dividends in the future. Therefore, investors who purchase our common stock may only realize a return on their investment if the value of our common stock appreciates.

The declaration and payment of dividends will be at the discretion of our Board of Directors and will be dependent upon our profits, financial requirements and other factors, including legal and regulatory restrictions on the payment of dividends from our subsidiaries, general business conditions and such other factors as our Board of Directors deems relevant.


The substantial ownership of our common stock by our officers and directors allows them to exert significant control over us.

Our officers and directors beneficially owned approximately 25% of UPC Insurance at December 31, 2013. Our officers' and directors' interests may conflict with the interests of other holders of our common stock and our officers and directors may take action affecting us with which other stockholders may disagree. Our officers and directors, acting together, have the ability to exert significant influence over the following:
 
the nomination, election and removal of our Board of Directors;
 
the adoption of amendments to our charter documents;

management and policies; and
 
the outcome of any corporate transaction or other matter submitted to our stockholders for approval, including mergers, consolidations and the sale of all or substantially all of our assets.


Provisions in our charter documents and the shareholder rights plan that we adopted may make it harder for others to obtain control of us even though some stockholders might consider such a development to be favorable.

Our charter and bylaws contain provisions that may discourage unsolicited takeover proposals our stockholders may consider to be in their best interests. Our Board of Directors is divided into two classes, each of which will generally serve for a term of two years with only one class of directors being elected in each year. At a given annual meeting, only a portion of our Board of Directors may be considered for election. Since our “staggered board” may prevent our stockholders from replacing a majority of our Board of Directors at certain annual meetings, it may entrench our management and discourage unsolicited

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UNITED INSURANCE HOLDINGS CORP.


stockholder proposals that may be in the best interests of our stockholders. Moreover, our Board of Directors has the ability to designate the terms of and issue a new series of preferred stock.

We have also adopted a shareholder rights plan that could make it more difficult for a third party to acquire, or could discourage a third party from acquiring, our Company or a large block of our common stock. A third party that acquires 20% or more of our common stock could suffer substantial dilution of its ownership interest under the terms of the shareholder rights plan through the issuance of common stock to all stockholders other than the acquiring person. In certain circumstances the foregoing threshold may be reduced to 15%.

Together these provisions may make the removal of our management more difficult and may discourage transactions that otherwise could involve payment of a premium over prevailing market prices for our securities.


Item 1B. Unresolved Staff Comments

None.


Item 2. Properties

We currently lease approximately 23,000 square feet of office space at 360 Central Avenue, St. Petersburg, Florida 33701, in Suites 900 and 600. Our rental payments for the 9th and 6th floors, respectively, were $22.00 and $21.50 per square foot, and will increase each year through the final year, in which we will pay rent of $25.50 and $24.92 per square foot for the 9th and 6th floors respectively, plus our percentage increase in the common area maintenance charge. Our lease agreement expires in November 2017; however, we have two options to terminate the lease with 180 days of advance notice after completing twenty-four or thirty-six months of tenancy. We consider our current office facility suitable for our business as it is presently conducted. We do not own any real estate or other physical properties. Our facility is in good condition.


Item 3. Legal Proceedings

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.

At December 31, 2013, we were not involved in any non claims-related legal actions.


Item 4. Mine Safety Disclosures

Not applicable.

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UNITED INSURANCE HOLDINGS CORP.


PART II

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities


MARKET INFORMATION

Our common stock commenced trading on the Over-the-Counter Bulletin Board on November 7, 2007, and continued trading on the Over-the-Counter Bulletin Board until December 11, 2012, when it commenced trading on the Nasdaq Capital Market under the symbol "UIHC".

The table below sets forth, for the calendar quarter indicated, the high and low sales prices of our common stock as reported on the Over-the-Counter Bulletin Board or NASDAQ (as applicable). The over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily reflect actual transactions.
 
 
Sales Prices
 
High
 
Low
2013
 
 
 
Fourth Quarter
$
14.48

 
$
8.33

Third Quarter
8.99

 
6.82

Second Quarter
7.10

 
5.53

First Quarter
6.26

 
4.77

2012
 
 
 
Fourth Quarter
6.13

 
5.15

Third Quarter
6.10

 
4.75

Second Quarter
5.95

 
4.60

First Quarter
6.00

 
4.05



HOLDERS OF COMMON EQUITY

As of February 24, 2014, we had 2,878 holders of record of our common stock.


DIVIDENDS

During the twelve month period ended December 31, 2013, we declared and paid dividends of $0.03 per share, each quarter, for total dividends paid of $1,944,000. During 2012, we paid a $0.03 per share dividend in the fourth quarter and a $0.05 per share dividend in April, for total dividends paid of $982,000. In conjunction with the fourth quarter 2012 dividend, our Board indicated its intention to consistently pay a quarterly dividend. However, any future dividend payments will be at the discretion of our Board of Directors and will depend upon our profits, financial requirements and other factors, including legal and regulatory restrictions on the payment of dividends, general business conditions and such other factors as our Board of Directors deems relevant.


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UNITED INSURANCE HOLDINGS CORP.


Under Florida law, a Florida-domiciled insurer like our insurance affiliate may not pay any dividend or distribute cash or other property to its stockholders except out of its available and accumulated surplus funds which is derived from realized net operating profits on its business and net realized capital gains. Additionally, Florida-domiciled insurers may not make dividend payments or distributions to stockholders without the prior approval of the insurance regulatory authority if the dividend or distribution would exceed the larger of:

1.
the lesser of:

a.
ten percent of our insurance affiliate's capital surplus, or

b.
net income, not including realized capital gains, plus a two-year carryforward

2.
ten percent of capital surplus with dividends payable constrained to unassigned funds minus 25% of unrealized capital gains, or

3.
the lesser of:

a.
ten percent of capital surplus, or

b.
net investment income plus a three-year carryforward with dividends payable constrained to unassigned funds minus 25% of unrealized capital gains.

Alternatively, our insurance affiliate may pay a dividend or distribution without the prior written approval of the insurance regulatory authority when:

1.
the dividend is equal to or less than the greater of:

a.
ten percent of our insurance affiliate's surplus as to policyholders derived from realized net operating profits on its business and net realized capital gains, or

b.
our insurance affiliate's entire net operating profits and realized net capital gains derived during the immediately preceding calendar year, and:

2.
our insurance affiliate will have surplus as to policyholders equal to or exceeding 115% of the minimum required statutory surplus as to policyholders after the dividend or distribution is made, and

3.
our insurance affiliate files a notice of the dividend or distribution with the insurance regulatory authority at least ten business days prior to the dividend payment or distribution, and

4.
the notice includes a certification by an officer of our insurance affiliate attesting that, after the payment of the dividend or distribution, our insurance affiliate will have at least 115% of required statutory surplus as to policyholders.

Except as provided above, a Florida-domiciled insurer may only pay a dividend or make a distribution (i) subject to prior approval by the insurance regulatory authority, or (ii) 30 days after the insurance regulatory authority has received notice of intent to pay such dividend or distribution and has not disapproved it within such time.

See Note 10 to our Notes to Consolidated Financial Statements for further discussion of restrictions on future payments of dividends by our insurance affiliate.


SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

On June 14, 2012, John Forney began serving as our Chief Executive Officer. We awarded him 86,990 shares of restricted common stock in connection with his employment with our company. On June 14, 2013, 17,398 shares of Mr. Forney's restricted stock vested. The remaining restricted shares vest in twenty percent increments on each of the four anniversaries of June 14, 2013, provided that Mr. Forney is continuously employed by our company from June 14, 2012 through the applicable vesting dates. However, if Mr. Forney's employment with our company terminates due to either (a) our termination of Mr. Forney's employment without cause (as defined in the Employment Agreement, included as Exhibit 10.19 to this annual report

25

UNITED INSURANCE HOLDINGS CORP.


on Form 10-K), or (b) Mr. Forney's termination of his employment for good reason (as defined in the Employment Agreement), so long as (in either case) proper notice of such termination is timely provided in accordance with the Employment Agreement, the restricted shares that would vest on the vesting date that occurs during the year in which the termination occurs shall, if not already vested, automatically and immediately vest as of the later of (i) the date of the termination of Mr. Forney's employment with our company or (ii) the date on which a release of claims against our company (as described in Section 4.10 of the Employment Agreement) becomes effective. If Mr. Forney's employment with our company terminates for any other reason before the date that restricted shares have vested, the shares that have not yet vested as of the date of such termination will immediately be forfeited as of the date of such termination.
 
On October 1, 2012, B. Bradford Martz began serving as our Chief Financial Officer. In conjunction with his employment, we awarded him 3,900 shares of common stock that will vest on April 1, 2014.

Throughout 2013, we awarded shares of restricted common stock to Andrew Swenson, Deepak Menon and Jay Williams in connection with their employment agreements. The 2,167 and 2,110 shares of restricted common stock awarded to Messrs. Swenson and Menon, respectively, will vest on September 13, 2014, and Mr. Williams' 2,299 shares of restricted common stock will vest on October 1, 2014.

The shares of restricted stock for Messrs. Forney, Martz, Swenson and Menon were issued to newly appointed executive officers, who were not previously employed by or directors of our Company, as an inducement for entering into employment with our Company.  The issuance of these shares of restricted stock was approved by our compensation committee.

The following table sets forth information as of December 31, 2013 regarding our 2013 Omnibus Incentive Plan. The 2,299 shares described in the following table were issued under out 2013 Omnibus Incentive Plan during the year ended December 31, 2013.

Plan Category
 
Number of securities to
be issued
upon
exercise of
outstanding
options, warrants and rights
 
Weighted-
average
exercise
price of
outstanding
options, warrants and rights
 
Number of
securities
remaining available
for future issuance
under equity
compensation plans
Equity compensation plans approved by security holders
 
2,299

 
8.70

 
997,701

Equity compensation plans not approved by security holders
 
77,769

 
5.47

 

Total
 
80,068

 
5.56

 
997,701



RECENT SALES OF UNREGISTERED SECURITIES

During 2013, we did not have any unregistered sales of our equity securities.


REPURCHASES OF EQUITY SECURITIES

During 2013, we did not repurchase any of our equity securities.
 

Item 6. Selected Financial Data

Pursuant to Regulation S-K, we are not required to make disclosures under this Item until we file our Form 10-Q for the first quarter of 2014.



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UNITED INSURANCE HOLDINGS CORP.


Item 7. 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-K. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. The actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those which are not within our control.


OVERVIEW

The following discussion highlights significant factors influencing the consolidated financial position and results of operations of United Insurance Holdings Corp. and its subsidiaries (referred to in this document as we, our, us, the Company and UPC Insurance). This discussion should be read in conjunction with the consolidated financial statements and related notes found under Part II. Item 8 contained herein.

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 losses, 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.

2013 HIGHLIGHTS

Consolidated net income was $20,342,000 in 2013 compared to $9,705,000 in 2012. Net income per diluted share was $1.26 in 2013 compared to $0.91 in 2012.
Our combined ratio (calculated as operating expenses plus other income (expenses) less interest expense relative to net premiums earned) was 88% in 2013 compared to 95% in 2012.
Total revenues were $208,080,000 in 2013 compared to $131,234,000 in 2012.
Investment and cash holdings were $323,814,000 at December 31, 2013, compared to $223,385,000 at December 31, 2012.
Investment income was $3,871,000 in 2013 compared to $3,083,000 in 2012.
Realized losses were $(129,000) in 2013 compared to realized gains of $2,160,000 in 2012.
Book value per diluted share (ratio of stockholders' equity to total shares outstanding and dilutive potential shares outstanding) was $6.64 at December 31, 2013, a 16% increase from $5.70 at December 31, 2012.
Return on average equity for the twelve months ended December 31, 2013 was 21%, compared to 16% for the twelve months ended December 31, 2012.
Policies in-force were 202,454 at December 31, 2013, a 50% increase from 135,297 policies in-force at December 31, 2012.





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UNITED INSURANCE HOLDINGS CORP.


CONSOLIDATED NET INCOME

($ in thousands)
 
Year Ended December 31,
 
 
2013
 
2012
 
2011
REVENUE:
 
 
 
 
 
 
Gross premiums written
 
$
381,352

 
$
254,909

 
$
203,806

Increase in gross unearned premiums
 
(64,644
)
 
(28,655
)
 
(22,969
)
Gross premiums earned
 
316,708

 
226,254

 
180,837

Ceded premiums earned
 
(119,330
)
 
(104,286
)
 
(90,757
)
Net premiums earned
 
197,378

 
121,968

 
90,080

Net investment income
 
3,871

 
3,083

 
2,823

Net realized gains (losses)
 
(129
)
 
2,160

 
158

Other-than-temporary impairments
 

 

 
(31
)
Other revenue
 
6,960

 
4,023

 
3,388

Total revenue
 
208,080

 
131,234

 
96,418

EXPENSES:
 
 
 
 
 
 
Losses and loss adjustment expenses
 
98,830

 
58,409

 
38,861

Policy acquisition costs
 
50,623

 
36,877

 
29,054

Operating expenses
 
9,222

 
8,630

 
5,090

General and administrative expenses
 
14,552

 
11,734

 
9,674

Interest expense
 
367

 
355

 
548

Total expenses
 
173,594

 
116,005

 
83,227

Income before other income (expenses)
 
34,486

 
15,229

 
13,191

Other income (expenses)
 
1

 
485

 
(175
)
Income before income taxes
 
34,487

 
15,714

 
13,016

Provision for income taxes
 
14,145

 
6,009

 
4,928

Net income
 
$
20,342

 
$
9,705

 
$
8,088

Net income per diluted share
 
$
1.26

 
$
0.91

 
$
0.77

Book value per share
 
$
6.64

 
$
5.70

 
$
5.31

Return on average equity
 
20.8
%
 
16.1
%
 
16.1
 %
Loss ratio, net1
 
50.0
%
 
47.9
%
 
43.1
 %
Expense ratio2
 
37.7
%
 
46.9
%
 
48.6
 %
Combined ratio (CR)3
 
87.7
%
 
94.8
%
 
91.7
 %
Effect of current year catastrophe losses on CR
 
1.8
%
 
3.0
%
 
 %
Effect of prior year development on CR
 
2.1
%
 
0.6
%
 
(4.8
)%
Underlying combined ratio4
 
83.8
%
 
91.2
%
 
96.5
 %
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.
 

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.



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UNITED INSURANCE HOLDINGS CORP.


Combined ratio excluding the effects of current year catastrophe losses, reserve development and FIGA assessment (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 prior year development on the combined ratio and the effect of the FIGA assessment 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, prior year development and assessments. 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. FIGA assessments primarily relate to amounts paid to the Florida Insurance Guaranty Association to cover claims paid by the association to policyholders from insolvent insurance companies. 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 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 two 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 figure should not be considered a substitute for net losses and LAE and does not reflect the overall profitability of our business.

Consolidated net loss ratio excluding the effects of current year catastrophe losses, reserve development (underlying loss ratio) is a non-GAAP ratio, which is computed as the difference between three GAAP operating ratios: the consolidated net loss ratio, the effect of current year catastrophe losses on the loss ratio, and the effect of prior year development on the loss ratio. We believe that this ratio is useful to investors and it is used by management to reveal the trends in our consolidated net loss ratio that may be obscured by current year catastrophe losses and prior year development. As discussed previously, these two items can have a significant impact on our consolidated net loss ratio in a given period. The most direct comparable GAAP ratio is our net consolidated Loss and LAE ratio. The underlying loss ratio should not be considered as a substitute for net consolidated loss ratio and does not reflect the overall profitability of our business.


RECENT ACCOUNTING STANDARDS

Please refer to Note 2(o) in our Notes to Consolidated Financial Statements for a discussion of recent accounting standards that may affect us.


APPLICATION OF CRITICAL ACCOUNTING ESTIMATES

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to adopt accounting policies and make estimates and assumptions that affect amounts reported in the consolidated financial statements. The most critical estimates include those used in determining:

reserves for unpaid losses,

fair value of investments, and

investment portfolio impairments.

In making these determinations, management makes subjective and complex judgments that frequently require estimates about matters that are inherently uncertain. Many of these policies, estimates and related judgments are common in the insurance industry. It is reasonably likely that changes in these estimates could occur from time to time and result in a material impact on our consolidated financial statements.



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UNITED INSURANCE HOLDINGS CORP.


Reserves for Unpaid Losses

General Discussion of Loss Reserving Process

Reserves for unpaid losses represent the most significant accounting estimate inherent in the preparation of our financial statements. These reserves represent management’s best estimate of the amount we will ultimately pay for losses and we base the amount upon the application of various actuarial reserve estimation techniques as well as considering other material facts and circumstances known at the balance sheet date.

We establish two categories of loss reserves as follows:
 
Case reserves – When a claim is reported, we establish an automatic minimum case reserve for that claim type that represents our initial estimate of the losses that will ultimately be paid on the reported claim. Our initial estimate for each claim is based upon averages of loss payments for our prior closed claims made for that claim type. Then, our claims personnel perform an evaluation of the type of claim involved, the circumstances surrounding each claim and the policy provisions relating to the loss and adjust the reserve as necessary. As claims mature, we increase or decrease the reserve estimates as deemed necessary by our claims department based upon additional information we receive regarding the loss, the results of on-site reviews and any other information we gather while reviewing the claims.
 
Reserves for loss incurred but not reported (IBNR reserves) – Our IBNR reserves include true IBNR reserves plus "bulk" reserves. Bulk reserves represent additional amounts that cannot be allocated to particular claims, but which are necessary to estimate ultimate losses on known claims. We estimate our IBNR reserves by projecting the ultimate losses using the methods discussed below and then deducting actual loss payments and case reserves from the projected ultimate losses. We review and adjust our IBNR reserves on a quarterly basis based on information available to us at the balance sheet date.

When we establish our reserves, we analyze various factors such as our historical loss experience and that of the insurance industry, claims frequency and severity, our business mix, our claims processing procedures, legislative enactments, judicial decisions and legal developments in imposition of damages, and general economic conditions, including inflation. A change in any of these factors from the assumptions implicit in our estimates will cause our ultimate loss experience to be better or worse than indicated by our reserves, and the difference could be material. Due to the interaction of the aforementioned factors, there is no precise method for evaluating the impact of any one specific factor in isolation, and an element of judgment is ultimately required. Due to the uncertain nature of any projection of the future, the ultimate amount we will pay for losses will be different from the reserves we record.

We determine our ultimate losses by using multiple actuarial methods to determine an actuarial estimate within a relevant range of indications that we calculate using generally accepted actuarial techniques. Our selection of the actuarial estimate is influenced by the analysis of our paid losses and incurred losses since inception. For each accident year, we estimate the ultimate incurred losses for both known and unknown claims. In establishing this estimate, we reviewed the results of various actuarial methods discussed below.


Estimation of the Reserves for Unpaid Losses

We calculate our estimate of ultimate losses by using the following actuarial methods. We separately calculate the methods using paid loss data and incurred loss data. In the versions of these methods based on incurred loss data, the incurred losses are defined as paid losses plus case reserves. For this discussion of our loss reserving process, the word "segment" refers to a subgrouping of our claims data, such as by geographic area and/or by particular line of business; it does not refer to operating segments.
 


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UNITED INSURANCE HOLDINGS CORP.


Loss Development Method – This method estimates ultimate losses based on the historical development patterns of losses by accident year. Data known as loss development factors drive the loss-development-based methods. We calculate loss development factors by age period (i.e., 12-24 months, 24-36 months, etc.) by taking the total incurred or paid losses for each accident year as of the current period's balance sheet date and dividing by the total incurred or paid losses for each accident year as of the prior period's balance sheet date. We then calculate averages of the resulting loss development factors in each age period, such as the three-year average, five-year average, cumulative average, and cumulative average excluding the high and low. Finally, we evaluate the calculated loss development factors and their resulting averages and use judgment to select a particular loss development factor per age period, which we then use to project expected ultimate losses by accident year.

Expected Loss Cost Method – This method relies on exposures and an estimate of the expected loss cost, and is used primarily for determining an estimate of the recent years' ultimate loss. We calculate loss costs for each prior accident year based on the ratio of ultimate loss to earned house years and perform a regression analysis to develop an annual fitted loss trend. An estimate of the expected current year loss cost is based on various trended averages to apply to the actual earned house years in the current year to arrive at estimated losses.
 
Bornhuetter-Ferguson Method – This method estimates ultimate losses based on earned exposures, expected loss costs and the historical development patterns of losses. We use earned exposures as a proxy for the number of risks insured, and we calculate loss costs as described above. This method combines the results of the loss development method with an estimate of ultimate losses based on an expected loss cost. The Bornhuetter-Ferguson method assumes that the unreported losses are a function of the expected losses at a given point of development. The key assumptions are (1) the expected payment (incurred) pattern, and (2) the expected loss cost. An estimate of the individual accident year's initial ultimate losses is determined by multiplying the earned exposures by the expected loss cost. Each year's expected ultimate loss liability is then separated into expected paid (incurred) and expected unpaid components using development factors derived in the paid (incurred) loss development method. The expected paid (incurred) losses are replaced with actual paid (incurred) losses to calculate estimated ultimate losses.

Paid-to-Paid Method - In addition to the aforementioned methods, we also rely upon the paid-to-paid development method to project estimates of ultimate allocated loss adjustment expense (ALAE). Triangles of paid ALAE to paid loss ratios are compiled and loss development factors are selected to project an ultimate paid-to-paid ratio. The ultimate paid-to-paid ratio is multiplied by the selected ultimate losses to calculate estimated ultimate ALAE. This puts the ALAE in context, and generally results in a more stability in the ALAE projections.

The loss-development-based methods are easy to use and comparable to industry benchmarks, but potential volatility in the calculated factors, as well as an element of subjectivity in the selected factors, slightly weakens the effectiveness of the method. The volatility arises from a number of factors such as inflation, changes in reserving practices, changes in underwriting criteria and geographic concentration.

The expected loss cost method is generally more stable than the loss-development-based methods, but this relative strength comes at the cost of less responsiveness to actual changes in loss experience.

The Bornhuetter-Ferguson method is a blend of the loss development and expected loss cost methods.


Reliance and Selection of Methods

The various methods we use have strengths and weaknesses that depend upon the circumstances of the segment and the age of the claims experience we analyze. The nature of our book of business allows us to place substantial, but not exclusive, reliance on the loss-development-based methods. Ultimately, this means the main assumptions of the loss-development-based methods, the selected loss development factors, represent the most critical aspect of our loss reserving process. We use the same set of loss development factors in the methods during our loss reserving process that we also use to calculate the premium necessary to pay expected ultimate losses.


Reasonably-Likely Changes in Variables

As previously noted, we evaluate several factors when exercising our judgment in the selection of the loss development factors that ultimately drive the determination of our loss reserves. The process of establishing our reserves is complex and necessarily imprecise, as it involves using judgment that is affected by many variables. We believe a reasonably-likely change

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UNITED INSURANCE HOLDINGS CORP.


in almost any of these aforementioned factors could have an impact on our reported results, financial condition and liquidity. However, we do not believe any reasonably likely changes in the frequency or severity of claims would have a material impact on us.


Fair Value of Investments

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. We are responsible for the determination of fair value of financial assets and the supporting assumptions and methodologies. We use quoted prices from active markets and we use an independent third-party valuation service to assist us in determining fair value. We obtain only one single quote or price for each financial instrument.

As discussed in Note 2(c) in our Notes to Consolidated Financial Statements, we value our investments at fair value using quoted prices from active markets, to the extent available. For securities for which quoted prices in active markets are unavailable, we use observable inputs such as quoted prices in inactive markets, quoted prices in active markets for similar instruments, benchmark interest rates, broker quotes and other relevant inputs. We do not have any investments in our available for sale portfolio or in any other assets which require us to use unobservable inputs.

As discussed above, the fair value for 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.

Any change in the estimated fair value of our 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 Consolidated Balance Sheets.


Investment Portfolio Impairments

For investments classified as available for sale, the difference between fair value and cost or amortized cost for fixed income securities and cost for equity securities is reported as a component of accumulated other comprehensive income on our Consolidated Balance Sheet and is not reflected in our net income of any period until reclassified to net income upon the consummation of a transaction with an unrelated third party or when a write-down is recorded due to an other-than-temporary decline in fair value. We have a 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 assess whether management with the appropriate authority has made the decision to sell or whether it is more likely than not we will be required to sell the security before recovery of the amortized cost basis for reasons such as liquidity, contractual or regulatory purposes. If a security meets either of these criteria, 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 not more likely than not we will be required to sell the fixed income security before recovery of its amortized cost basis, we evaluate whether we expect to receive cash flows sufficient to recover the entire amortized cost basis of the security. We use our best estimate of future cash flows expected to be collected from the fixed income security, discounted at the security's original or current effective rate, as appropriate, to calculate a recovery value and determine whether a credit loss exists. The determination of cash flow estimates is inherently subjective and methodologies may vary depending on facts and circumstances specific to the security. All reasonably available information relevant to the collectability of the security, including past events, current conditions, and reasonable and

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UNITED INSURANCE HOLDINGS CORP.


supportable assumptions and forecasts, are considered when developing the estimate of cash flows expected to be collected. That information generally includes, but is not limited to, the remaining payment terms of the security, prepayment speeds, the financial condition and future earnings potential of the issue or issuer, expected defaults, expected recoveries, the value of underlying collateral, vintage, geographic concentration, available reserves or escrows, current subordination levels, third party guarantees and other credit enhancements. Other information, such as industry analyst reports and forecasts, sector credit ratings, financial condition of the bond insurer for insured fixed income securities, and other market data relevant to the realizability of contractual cash flows, may also be considered. The estimated fair value of collateral will be used to estimate recovery value if we determine that the security is dependent on the liquidation of collateral for ultimate settlement. If the estimated recovery value is less than the amortized cost of the security, a credit loss exists and an other-than-temporary impairment for the difference between the estimated recovery value and amortized cost is recorded in earnings. The portion of the unrealized loss related to factors other than credit remains classified in accumulated other comprehensive income. If we determine that the fixed income security does not have sufficient cash flow or other information to estimate a recovery value for the security, we may conclude that the entire decline in fair value is deemed to be credit related and the loss is recorded in earnings.

There are a number of assumptions and estimates inherent in evaluating impairments of equity securities and determining if they are other than temporary, including: (1) our ability and intent to hold the investment for a period of time sufficient to allow for an anticipated recovery in value; (2) the length of time and extent to which the fair value has been less than cost; (3) 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; and (4) the specific reasons that a security is in an unrealized loss position, including overall market conditions which could affect liquidity.

Once assumptions and estimates are made, any number of changes in facts and circumstances could cause us to subsequently determine that a fixed income or equity security is other-than-temporarily impaired, including: (1) general economic conditions that are worse than previously forecasted or that have a greater adverse effect on a particular issuer or industry sector than originally estimated; (2) changes in the facts and circumstances related to a particular issue or issuer's ability to meet all of its contractual obligations; and (3) changes in facts and circumstances that result in changes to management's intent to sell or result in our assessment that it is more likely than not we will be required to sell before recovery of the amortized cost basis of a fixed income security or causes a change in our ability or intent to hold an equity security until it recovers in value. Changes in assumptions, facts and circumstances could result in additional charges to earnings in future periods to the extent that losses are realized. The charge to earnings, while potentially significant to net income, would not have a significant effect on stockholders' equity, since our securities are designated as available for sale and carried at fair value and as a result, any related unrealized loss, net of taxes would already be reflected as a component of accumulated other comprehensive income in stockholders' equity.

The determination of the amount of other-than-temporary impairment is an inherently subjective process based on periodic evaluations of the factors described above. Such evaluations and assessments are revised as conditions change and new information becomes available. We update our evaluations regularly and reflect changes in other-than-temporary impairments in results of operations as such evaluations are revised. The use of different methodologies and assumptions in the determination of the amount of other-than-temporary impairments may have a material effect on the amounts presented within the consolidated financial statements

See Note 2(b) in our Notes to Consolidated Financial Statements for further information regarding our impairment testing.



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UNITED INSURANCE HOLDINGS CORP.


ANALYSIS OF FINANCIAL CONDITION - DECEMBER 31, 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 consolidated financial statements and related notes.


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 $323,814,000 at December 31, 2013.

The following table summarizes our investments, by type:

 
December 31, 2013
 
December 31, 2012
 
Estimated Fair Value
 
Percent of Total
 
Estimated Fair Value
 
Percent of Total
U.S. government and agency securities
$
97,480

 
30.1
%
 
$
95,208

 
42.6
%
Foreign governments
3,227

 
1.0
%
 

 
%
States, municipalities and political subdivisions
45,777

 
14.1
%
 
19,035

 
8.5
%
Corporate securities
126,540

 
39.1
%
 
34,654

 
15.5
%
Redeemable preferred stocks

 
%
 
260

 
0.1
%
Total fixed maturities
273,024

 
84.3
%
 
149,157

 
66.7
%
Common stocks
15,353

 
4.7
%
 
2,465

 
1.1
%
Nonredeemable preferred stocks
249

 
0.1
%
 
258

 
0.1
%
Total equity securities
15,602

 
4.8
%
 
2,723

 
1.2
%
Other long-term investments
300

 
0.1
%
 
300

 
0.2
%
Total investments
$
288,926

 
89.2
%
 
$
152,180

 
68.1
%
Cash and cash equivalents
$
34,888

 
10.8
%
 
$
71,205

 
31.9
%
Total cash, cash equivalents and investments
$
323,814

 
100.0
%
 
$
223,385

 
100.0
%

We classify all of our investments as available-for-sale. Our investments at December 31, 2013 and 2012 consisted mainly of U.S. government and agency securities and securities of high-quality corporate issuers. Our equity holdings consist mainly of securities issued by companies in the energy, consumer products, healthcare, technology and telecommunications industries. Most of the corporate bonds we hold reflect a similar diversification. At December 31, 2013, approximately 85% of our fixed maturities were U.S. Treasuries, states, municipalities and political subdivisions, or corporate bonds rated “A” or better, and 15% were corporate bonds rated “BBB”.

At December 31, 2013, securities in an unrealized loss position for a period of twelve months or longer reflected unrealized losses of $336,000; approximately $319,000 of the total related to seven fixed maturities, while one equity security reflected an unrealized loss of $17,000. We currently have no plans to sell these eight securities, and we expect to fully recover our cost basis. We reviewed these securities and determined that we did not need to record impairment charges at December 31, 2013. Similarly, we did not record impairment charges at December 31, 2012.



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UNITED INSURANCE HOLDINGS CORP.


Reinsurance Payable

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 liable for the entire insured loss.

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. UPC Insurance's total 2013-2014 catastrophe reinsurance coverage included $441,540,000 of coverage from the FHCF and $360,060,000 of coverage from private reinsurers. The contracts include provisions which are designed to protect us from losses sustained in a single event as well as losses from multiple events in a single hurricane season.

In addition to FHCF coverage, we purchased 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 of losses in excess of $187,200,000 with no reinstatement of limits.

Excess - provides coverage on $172,860,000 of losses in excess of the private and FHCF reinsurance coverage and is 100% placed.

See Note 6 in our Notes to Consolidated Financial Statements for additional information regarding our reinsurance program.



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UNITED INSURANCE HOLDINGS CORP.


RESULTS OF OPERATIONS - 2013 COMPARED TO 2012

Revenues

Revenues for the year ended December 31, 2013 increased $76,846,000, or 59%, to $208,080,000, from $131,234,000 for the twelve-months ended December 31, 2012, primarily due to a $75,410,000, or 62%, increase in net premiums earned. In 2013, our gross written premiums increased $126,443,000, or 50%, to $381,352,000, from $254,909,000 in 2012 because we wrote approximately 54,800 more new and renewal policies in 2013 compared to 2012 as we expanded our business in Florida and in other states. In addition to our organic growth, gross written premiums increased because we assumed over 33,000 policies, representing approximately $51,578,000 of assumed premiums from Citizens Property Insurance Corporation during 2013. Our year-over-year growth in written premiums and new and renewal policies by state are shown below:

States
2013 GWP
 
2012 GWP
 
YOY Growth
 
% YOY Growth
Florida
$
325,048

 
$
228,280

 
$
96,768

 
77
%
South Carolina
24,666

 
16,678

 
7,988

 
6
%
Massachusetts
16,156

 
6,334

 
9,822

 
8
%
Rhode Island
11,381

 
3,617

 
7,764

 
6
%
North Carolina
3,386

 

 
3,386

 
3
%
New Jersey
565

 

 
565

 
%
Texas
150

 

 
150

 
%
Total
$
381,352

 
$
254,909

 
$
126,443

 
100
%

States
2013 Policies*
 
2012 Policies*
 
YOY Growth
 
% YOY Growth
Florida
163,314

 
117,233

 
46,081

 
68
%
South Carolina
15,186

 
10,569

 
4,617

 
7
%
Massachusetts
10,900

 
4,247

 
6,653

 
10
%
Rhode Island
9,990

 
3,248

 
6,742

 
10
%
North Carolina
2,533

 

 
2,533

 
4
%
New Jersey
429

 

 
429

 
1
%
Texas
102

 

 
102

 
%
Total
202,454

 
135,297

 
67,157

 
100
%
* Includes homeowner and dwelling fire policies in-force only

We expect our gross written premium growth to continue as we increase our policies in-force in the states in which we currently write, as we commence operations in Georgia and New Hampshire in the current year and as we expand into the other states discussed previously.

Realized gains decreased $2,289,000 in 2013 because we sold fixed maturities in an unrealized gain position during the fourth quarter of 2012 to reposition our portfolio, whereas in 2013 our realized losses were driven by sales of our short-term investments.



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UNITED INSURANCE HOLDINGS CORP.


Expenses
    
Expenses for the twelve months ended December 31, 2013 increased $57,589,000, or 50%, primarily due to increased losses, policy acquisition costs and general and administrative expenses. Our GAAP net combined ratio improved 7.1 points for the year compared to the same period in 2012. Our underlying net combined ratio, which excludes losses from catastrophes and reserve development, also improved 7.4 points for the year signaling a significant improvement in our core operating results over the same period in 2012. Both the combined and underlying combined ratios decreased primarily due to strong premium growth and a lower ceded reinsurance premium percentage for the year compared to the prior year. As a result of these factors, net premiums earned increased $75,410,000, or 62%, to $197,378,000 for the year ended December 31, 2013, compared to $121,968,000 for the year ended December 31, 2012 as we continued to generate new policies in Florida and in other states and assumed policies from Citizens. The increase in net premiums earned was partially offset by the increase in our underlying loss costs, which increased approximately $40,421,000 during 2013 compared to the same period in 2012. The increase in underlying loss costs for the year ended December 31, 2013, was driven primarily by the growth of policies in-force and increased frequency and severity of water-related losses throughout Florida as shown below:

 
Year Ended December 31,
2013
 
2012
 
Change
Net Loss and LAE
$
98,830

 
$
58,409

 
$
40,421

% of Gross earned premiums
31.2
%
 
25.8
%
 
5.4 pts

% of Net earned premiums
50.0
%
 
47.9
%
 
2.1 pts

Less:
 
 
 
 
 
Current year catastrophe losses
$
3,602

 
$
3,666

 
$
(64
)
Prior year reserve development
4,078

 
670

 
3,408

Underlying loss and LAE*
$
91,150

 
$
54,073

 
$
37,077

% of Gross earned premiums
28.8
%
 
23.9
%
 
4.9 pts

% of Net earned premiums
46.1
%
 
44.3
%
 
1.8 pts

 
 
 
 
 
 
Policy acquisition costs
$
50,623

 
$
36,877

 
$
13,746

Operating and underwriting
9,222

 
8,630

 
592

General and administrative
14,552

 
11,734

 
2,818

Total Operating Expenses
$
74,397

 
$
57,241

 
$
17,156

% of Gross earned premiums
23.5
%
 
25.3
%
 
-1.8 pts

% of Net earned premiums
37.7
%
 
46.9
%
 
-9.2 pts

 
 
 
 
 
 
Combined Ratio - as % of gross earned premiums
54.7
%
 
51.1
%
 
3.6 pts

Underlying Combined Ratio - as % of gross earned premiums
52.3
%
 
49.2
%
 
3.1 pts

 
 
 
 
 
 
Combined Ratio - as % of net earned premiums
87.7
%
 
94.8
%
 
-7.1 pts

Underlying Combined Ratio - as % of net earned premiums
83.8
%
 
91.2
%
 
-7.4 pts


* 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.


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UNITED INSURANCE HOLDINGS CORP.


Our gross underlying loss ratio increased to 28.8% for the year ended December 31, 2013, which was up 4.9 points from 23.9% for the year ended December 31, 2012. The increase in our gross underlying loss ratio was primarily due to an approximate 12% increase in the frequency of water related losses over the same period in 2012.

Losses and loss adjustment expenses increased to $98,830,000 for the year ended December 31, 2013, from $58,409,000 for the same period in 2012. Prior year adverse development for the year ended December 31, 2013, was $4,078,000 compared to $670,000 for the same period in 2012. Our net loss and loss adjustment expense ratio history along with the impact of reserve development and catastrophe losses is as follows:

 
Historical Reserve Development
($ in thousands, except ratios)
2008
 
2009
 
2010
 
2011
 
2012
 
2013
Reserve development (unfavorable)
$
4,977

 
$
2,976

 
$
(1,006
)
 
$
4,158

 
$
(670
)
 
$
(4,078
)
Development as a % of earnings before interest and taxes
12.0
 %
 
47.4
 %
 
71.0
 %
 
32.3
%
 
4.3
 %
 
11.7
 %
Consolidated net loss ratio (LR)
34.6
 %
 
52.1
 %
 
63.6
 %
 
43.1
%
 
47.9
 %
 
50.0
 %
Reserve (unfavorable) favorable development on LR
6.2
 %
 
3.8
 %
 
(1.5
)%
 
3.9
%
 
(0.6
)%
 
(2.1
)%
Current year catastrophe losses on LR
(4.0
)%
 
(0.2
)%
 
 %
 
%
 
(3.0
)%
 
(1.8
)%
Underlying net loss ratio*
36.8
 %
 
55.7
 %
 
62.1
 %
 
47.0
%
 
44.3
 %
 
46.1
 %
* Underlying Net Loss Ratio is a non-GAAP measure and is reconciled above to the Consolidated Net Loss 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.