Edgar Filing: UNITED INSURANCE HOLDINGS CORP.

10-Q Document 30JUN15

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

_______________________

FORM 10-Q

_______________________

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2015

Commission File Number 001-35761

_____________________

United Insurance Holdings Corp.

(Exact name of Registrant as specified in its charter)

_______________________



	Delaware		75-3241967
	(State of Incorporation)		(IRS Employer Identification Number)

360 Central Avenue, Suite 900

St. Petersburg, Florida 33701

(Address, including zip code, of principal executive offices)

727-895-7737

(Registrant's telephone number, including area code)

_______________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes R No £

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes R No £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	£	Accelerated filer	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

As of August 6, 2015; 21,528,973 shares of common stock, par value $0.0001 per share, were outstanding.

UNITED INSURANCE HOLDINGS CORP.



PART I. FINANCIAL INFORMATION
	Item 1. Financial Statements	4
	Consolidated Balance Sheets	4
	Unaudited Consolidated Statements of Comprehensive Income	5
	Unaudited Consolidated Statements of Cash Flows	6
	Notes to Unaudited Consolidated Financial Statements	7
	Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	26
	Item 3. Quantitative and Qualitative Disclosures About Market Risk	40
	Item 4. Controls and Procedures	40
PART II. OTHER INFORMATION
	Item 1. Legal Proceedings	41
	Item 1A. Risk Factors	41
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	41
	Item 3. Defaults Upon Senior Securities	42
	Item 4. Mine Safety Disclosures	42
	Item 5. Other Information	42
	Item 6. Exhibits	43
Signatures		44

Throughout this Form 10-Q, we present amounts in all tables in thousands, except for share amounts, per share amounts, policy counts or where more specific language or context indicates a different presentation. In the narrative sections of this Quarterly Report, we show full values rounded to the nearest thousand.

UNITED INSURANCE HOLDINGS CORP.

FORWARD-LOOKING STATEMENTS

Statements in this Quarterly Report on Form 10-Q as of June 30, 2015, and for the three and six months ended June 30, 2015 (Form 10-Q) or in documents incorporated by reference that are not historical fact are “forward-looking statements” within the meaning of the Private Securities Litigation Reform 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, and our ability to meet our investment objectives and to manage and mitigate market risk with respect to our investments. 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 and availability of reinsurance;


•	assessments charged by various governmental agencies;


•	pricing competition and other initiatives by competitors;


•	our ability to attract and retain the services of senior management;


•	the outcome of litigation pending against us, including the terms of any settlements;


•	dependence on investment income and the composition of our investment portfolio and related market risks;


•	our exposure to catastrophic events and severe weather conditions;


•	downgrades in our financial strength ratings; and


•	other risks and uncertainties described in the section entitled "Risk Factors" in Part I, Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2014 and in Part II, Item 1A of this Form 10-Q.

We caution you not to place reliance on these forward-looking statements, which are valid only as of the date they were made. We undertake no obligation to update or revise any forward-looking statements to reflect new information or the occurrence of unanticipated events or otherwise. In addition, we prepare our financial statements in accordance with U.S. generally accepted accounting principles (GAAP), which prescribes when we may reserve for particular risks, including litigation exposures. Accordingly, our results for a given reporting period could be significantly affected if and when we establish a reserve for a major contingency. Therefore, the results we report in certain accounting periods may appear to be volatile.

These forward-looking statements are subject to numerous risks, uncertainties and assumptions about us described in our filings with the SEC. The forward-looking events that we discuss in our Form 10-Q are valid only as of the date of our Form 10-Q and may not occur in light of the risks, uncertainties and assumptions that we describe from time to time in our filings with the SEC. A detailed discussion of these and other risks and uncertainties that could cause actual results and events to differ materially from our forward-looking statements is included in the section entitled “RISK FACTORS” in Part I, Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2014 and in Part II, Item 1A of this Form 10-Q. Except as required by applicable law, we undertake no obligation and disclaim any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

UNITED INSURANCE HOLDINGS CORP.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets



	June 30, 2015			December 31, 2014
ASSETS	(Unaudited)
Investments available for sale, at fair value:
Fixed maturities (amortized cost of $367,348 and $350,063, respectively)	$	368,258		$	352,630
Equity securities (adjusted cost of $24,917 and $22,278, respectively)	27,901			25,987
Other investments (amortized cost of $2,840 and $2,749, respectively)	3,131			3,010
Total investments	$	399,290		$	381,627
Cash and cash equivalents	105,752			61,391
Accrued investment income	2,584			2,239
Property and equipment, net	12,276			8,022
Premiums receivable, net	45,223			31,369
Reinsurance recoverable on paid and unpaid losses	8,558			2,068
Prepaid reinsurance premiums	161,057			63,827
Goodwill	4,196			—
Deferred policy acquisition costs	43,163			31,925
Other assets	7,602			1,701
Total Assets	$	789,701		$	584,169
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Unpaid losses and loss adjustment expenses	$	67,638		$	54,436
Unearned premiums	272,167			229,486
Reinsurance payable	164,970			45,254
Other liabilities	52,528			37,701
Notes payable	12,941			13,529
Total Liabilities	$	570,244		$	380,406
Commitments and contingencies (Note 9)
Stockholders' Equity:
Preferred stock, $0.0001 par value; 1,000,000 shares authorized; none issued or outstanding	—			—
Common stock, $0.0001 par value; 50,000,000 shares authorized; 21,741,056 and 21,116,497 issued; 21,528,973 and 20,904,414 outstanding for 2015 and 2014, respectively	2			2
Additional paid-in capital	96,194			82,380
Treasury shares, at cost; 212,083 shares	(431		)	(431		)
Accumulated other comprehensive income	2,568			4,011
Retained earnings	121,124			117,801
Total Stockholders' Equity	$	219,457		$	203,763
Total Liabilities and Stockholders' Equity	$	789,701		$	584,169

See accompanying Notes to Unaudited Consolidated Financial Statements.

UNITED INSURANCE HOLDINGS CORP.

Consolidated Statements of Comprehensive Income

(Unaudited)



	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2015			2014			2015			2014
REVENUE:
Gross premiums written	$	162,582		$	128,920		$	269,198		$	217,921
Increase in gross unearned premiums	(41,600		)	(31,697		)	(33,034		)	(25,687		)
Gross premiums earned	120,982			97,223			236,164			192,234
Ceded premiums earned	(40,530		)	(33,039		)	(77,664		)	(64,016		)
Net premiums earned	80,452			64,184			158,500			128,218
Investment income	2,239			1,617			4,312			3,084
Net realized gains (losses)	(133		)	31			(11		)	45
Other revenue	2,782			1,872			4,935			3,864
Total revenue	85,340			67,704			167,736			135,211
EXPENSES:
Losses and loss adjustment expenses	44,627			28,792			96,598			56,465
Policy acquisition costs	21,198			16,197			40,384			31,377
Operating expenses	4,809			2,858			8,350			5,367
General and administrative expenses	6,512			4,335			13,913			8,685
Interest expense	68			112			151			227
Total expenses	77,214			52,294			159,396			102,121
Income before other income	8,126			15,410			8,340			33,090
Other income	61			—			185			16
Income before income taxes	8,187			15,410			8,525			33,106
Provision for income taxes	2,912			5,820			3,052			12,127
Net income	$	5,275		$	9,590		$	5,473		$	20,979
OTHER COMPREHENSIVE INCOME:
Change in net unrealized gains (losses) on investments	(4,892		)	3,323			(2,363		)	5,650
Reclassification adjustment for net realized investment (gains) losses	133			(31		)	11			(45		)
Income tax benefit (expense) related to items of other comprehensive income	1,839			(1,272		)	909			(2,166		)
Total comprehensive income	$	2,355		$	11,610		$	4,030		$	24,418

Weighted average shares outstanding
Basic	21,255,496			20,735,135			21,145,624			19,105,666
Diluted	21,508,511			20,845,694			21,376,540			19,203,805

Earnings per share
Basic	$	0.25		$	0.46		$	0.26		$	1.10
Diluted	$	0.25		$	0.46		$	0.26		$	1.09

Dividends declared per share	$	0.05		$	0.04		$	0.10		$	0.08

See accompanying Notes to Unaudited Consolidated Financial Statements.

UNITED INSURANCE HOLDINGS CORP.

Consolidated Statements of Cash Flows

(Unaudited)



	Six Months Ended June 30,
	2015			2014
OPERATING ACTIVITIES
Net income	$	5,473		$	20,979
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	1,254			327
Bond amortization and accretion	(832		)	726
Net realized gains	11			(45		)
Provision for uncollectible premiums/over and short	212			48
Deferred income taxes, net	3,902			263
Stock based compensation	985			121
Changes in operating assets and liabilities:
Accrued investment income	(345		)	(73		)
Premiums receivable	(12,570		)	(8,498		)
Reinsurance recoverable on paid and unpaid losses	(6,490		)	(580		)
Prepaid reinsurance premiums	(97,230		)	(76,628		)
Deferred policy acquisition costs, net	(11,238		)	(8,395		)
Other assets	(4,958		)	356
Unpaid losses and loss adjustment expenses	10,812			3,497
Unearned premiums	33,034			25,687
Reinsurance payable	118,718			93,830
Other liabilities	12,616			(3,596		)
Net cash provided by operating activities	$	53,354		$	48,019
INVESTING ACTIVITIES
Proceeds from sales and maturities of investments available for sale	65,751			89,956
Purchases of investments available for sale	(79,357		)	(143,507		)
Cash from acquisition	14,467			—
Cost of property, equipment and capitalized software acquired	(4,705		)	(1,295		)
Net cash used in investing activities	$	(3,844	)	$	(54,846	)
FINANCING ACTIVITIES
Tax withholding payment related to net settlement of equity awards	(165		)	(110		)
Repayments of borrowings	(2,834		)	(588		)
Dividends	(2,150		)	(1,666		)
Proceeds from issuance of common stock	—			54,041
Net cash provided by (used in) financing activities	$	(5,149	)	$	51,677
Increase in cash	44,361			44,850
Cash and cash equivalents at beginning of period	61,391			34,888
Cash and cash equivalents at end of period	$	105,752		$	79,738

Supplemental Cash Flows Information
Interest paid	$	153		$	209
Income taxes paid	$	4,491		$	19,221

See accompanying Notes to Unaudited Consolidated Financial Statements.

UNITED INSURANCE HOLDINGS CORP.

Notes to Unaudited Consolidated Financial Statements

June 30, 2015

1) ORGANIZATION, CONSOLIDATION AND PRESENTATION

(a)Business

United Insurance Holdings Corp. (referred to in this document as we, our, us, the Company or UPC Insurance) is a property and casualty insurance holding company that sources, writes, and services residential and commercial property and casualty insurance policies using a network of agents and two wholly-owned insurance subsidiaries. Our primary insurance subsidiary is United Property & Casualty Insurance Company, which was formed in Florida in 1999 and has operated continuously since that time. Our other subsidiaries include United Insurance Management, L.C., the managing general agent that manages substantially all aspects of United Property & Casualty Insurance Company's business; Skyway Claims Services, LLC (our claims adjusting affiliate) that provides services to our insurance affiliates; and UPC Re (our reinsurance affiliate) that provides a portion of the reinsurance protection purchased by our insurance affiliates. On February 3, 2015, we acquired Family Security Holdings, LLC (FSH) and its two wholly-owned subsidiaries, Family Security Insurance Company, Inc. and Family Security Underwriters, LLC, via merger. See Note 4 for information regarding this acquisition.

Our primary product is homeowners' insurance, which we currently offer in Florida, Georgia, Louisiana, Massachusetts, New Jersey, North Carolina, Rhode Island, South Carolina and Texas, and we are licensed to write in Alabama, Connecticut, Delaware, Hawaii, Maryland, Mississippi, New Hampshire, New York and Virginia.

We conduct our operations under one business segment.

(b)Consolidation and Presentation

We prepare our financial statements in conformity with U.S. generally accepted accounting principles (GAAP). While preparing our financial statements, we make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, as well as reported amounts of revenues and expenses during the reporting period. Accordingly, actual results could differ from those estimates. Reported amounts that require us to make extensive use of estimates include our reserves for unpaid losses and loss adjustment expenses, reinsurance recoverable, deferred policy acquisition costs, and investments. Except for the captions on our Unaudited Consolidated Balance Sheets and Unaudited Consolidated Statements of Comprehensive Income, we generally use the term loss(es) to collectively refer to both loss and loss adjustment expenses.

We include all of our subsidiaries in our unaudited consolidated financial statements, eliminating all significant intercompany balances and transactions during consolidation.

We prepared the accompanying Unaudited Consolidated Balance Sheet as of June 30, 2015, with the Audited Consolidated Balance Sheet amounts as of December 31, 2014, presented for comparative purposes, and the related Unaudited Consolidated Statements of Comprehensive Income and Statements of Cash Flows in accordance with the instructions for Form 10-Q and Article 10-01 of Regulation S-X. In compliance with those instructions, we have omitted certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with GAAP, though management believes the disclosures made herein are sufficient to ensure that the information presented is not misleading.

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

We reclassified certain amounts in the 2014 financial statements to conform to the 2015 presentation. These reclassifications had no impact on our results of operations, cash flows or stockholders' equity as previously reported.

UNITED INSURANCE HOLDINGS CORP.

Notes to Unaudited Consolidated Financial Statements

June 30, 2015

Management believes our unaudited consolidated interim financial statements include all the normal recurring adjustments necessary to fairly present our Unaudited Consolidated Balance Sheet as of June 30, 2015, our Unaudited Consolidated Statements of Comprehensive Income and our Unaudited Consolidated Statements of Cash Flows for all periods presented. Our unaudited consolidated interim financial statements and footnotes should be read in conjunction with our consolidated financial statements and footnotes included within our Annual Report filed on Form 10-K for the year ended December 31, 2014 (2014 Form 10-K).

2) SIGNIFICANT ACCOUNTING POLICIES

(a) Changes to significant accounting policies

We have made no material changes to our significant accounting policies as reported in our 2014 Form 10-K.

(b) Fair value assumptions

The carrying amounts for the following financial instrument categories approximate their fair values at June 30, 2015 and December 31, 2014, because of their short-term nature: cash and cash equivalents, accrued investment income, premiums receivable, reinsurance recoverable, reinsurance payable, accounts payable and accrued expenses. The carrying amount of notes payable approximates fair value as the interest rate is variable.

We have evaluated pending accounting pronouncements and do not believe they would have an impact on the operations or financial reporting of our Company.

UNITED INSURANCE HOLDINGS CORP.

Notes to Unaudited Consolidated Financial Statements

June 30, 2015

3) INVESTMENTS

The following table details the difference between cost or adjusted/amortized cost and estimated fair value, by major investment category, at June 30, 2015 and December 31, 2014:



	Cost or Adjusted/Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
June 30, 2015
U.S. government and agency securities	$	99,831	$	388	$	302	$	99,917
Foreign government	3,268		80		—		3,348
States, municipalities and political subdivisions	123,514		1,463		1,349		123,628
Public utilities	8,027		198		36		8,189
Corporate securities	130,748		1,375		868		131,255
Redeemable preferred stocks	1,960		6		45		1,921
Total fixed maturities	367,348		3,510		2,600		368,258
Public utilities	1,632		35		43		1,624
Other common stocks	20,764		3,688		670		23,782
Non-redeemable preferred stocks	2,521		12		38		2,495
Total equity securities	24,917		3,735		751		27,901
Other long-term investments	2,840		291		—		3,131
Total investments	$	395,105	$	7,536	$	3,351	$	399,290

December 31, 2014
U.S. government and agency securities	$	134,601	$	423	$	590	$	134,434
Foreign government	3,275		79		—		3,354
States, municipalities and political subdivisions	90,262		1,866		217		91,911
Public utilities	9,044		217		39		9,222
Corporate securities	111,787		1,409		580		112,616
Redeemable preferred stocks	1,094		9		10		1,093
Total fixed maturities	350,063		4,003		1,436		352,630
Public utilities	1,222		211		—		1,433
Other common stocks	19,560		3,738		250		23,048
Non-redeemable preferred stocks	1,496		17		7		1,506
Total equity securities	22,278		3,966		257		25,987
Other long-term investments	2,749		261		—		3,010
Total investments	$	375,090	$	8,230	$	1,693	$	381,627

UNITED INSURANCE HOLDINGS CORP.

Notes to Unaudited Consolidated Financial Statements

June 30, 2015

When we sell investments, we calculate the gain or loss realized on the sale by comparing the sales price (fair value) to the cost or adjusted/amortized cost of the security sold. We determine the cost or adjusted/amortized cost of the security sold using the specific-identification method. The following table details our realized gains (losses) by major investment category for the three and six month periods ended June 30, 2015 and 2014:



	2015					2014
	Gains (Losses)			Fair Value at Sale		Gains (Losses)			Fair Value at Sale
Three Months Ended June 30,
Fixed maturities	$	—		$	261	$	—		$	—
Equity securities	36			734		70			66,246
Total realized gains	36			995		70			66,246
Fixed maturities	(163		)	7,494		(39		)	1,363
Equity securities	(6		)	125		—			23
Total realized losses	(169		)	7,619		(39		)	1,386
Net realized investment gains (losses)	$	(133	)	$	8,614	$	31		$	67,632

Six Months Ended June 30,
Fixed maturities	$	227		$	21,224	$	21		$	1,120
Equity securities	39			972		172			67,051
Total realized gains	266			22,196		193			68,171
Fixed maturities	(269		)	18,028		(77		)	2,553
Equity securities	(8		)	158		(71		)	1,013
Total realized losses	(277		)	18,186		(148		)	3,566
Net realized investment gains (losses)	$	(11	)	$	40,382	$	45		$	71,737

The table below summarizes our fixed maturities at June 30, 2015 by contractual maturity periods. Actual results may differ as issuers may have the right to call or prepay obligations, with or without penalties, prior to the contractual maturity of those obligations.



	June 30, 2015
	Cost or Amortized Cost		Percent of Total		Fair Value		Percent of Total
Due in one year or less	$	25,913	7.1	%	$	25,948	7.0	%
Due after one year through five years	172,553		47.0		173,260		47.0
Due after five years through ten years	122,524		33.4		122,484		33.3
Due after ten years	46,358		12.5		46,566		12.7
Total	$	367,348	100.0	%	$	368,258	100.0	%

UNITED INSURANCE HOLDINGS CORP.

Notes to Unaudited Consolidated Financial Statements

June 30, 2015

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



	Three Months Ended June 30,						Six Months Ended June 30,
	2015			2014			2015			2014
Fixed maturities	$	1,979		$	1,349		$	3,801		$	2,626
Equity securities	231			240			434			366
Cash, cash equivalents and short-term investments	2			4			5			5
Other investments	24			24			66			87
Other assets	3			—			6			—
Investment income	2,239			1,617			4,312			3,084
Investment expenses	(2		)	(79		)	(89		)	(148		)
Net investment income	$	2,237		$	1,538		$	4,223		$	2,936

Portfolio monitoring

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

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

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

For equity securities, we consider various factors, including whether we have the intent and ability to hold the equity security for a period of time sufficient to recover its cost basis. If we lack the intent and ability to hold to recovery, or if we believe the recovery period is extended, the equity security's decline in fair value is considered other-than-temporary and is recorded in earnings.

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

UNITED INSURANCE HOLDINGS CORP.

Notes to Unaudited Consolidated Financial Statements

June 30, 2015

The following table presents an aging of our unrealized investment losses by investment class:



	Less Than Twelve Months					Twelve Months or More
	Number of Securities*	Gross Unrealized Losses		Fair Value		Number of Securities*	Gross Unrealized Losses		Fair Value
June 30, 2015
U.S. government and agency securities	31	$	118	$	47,959	20	$	184	$	13,040
States, municipalities and political subdivisions	63	1,310		66,142		7	39		8,785
Public utilities	1	1		1,274		1	35		1,013
Corporate securities	74	633		50,588		8	235		9,112
Redeemable preferred stocks	15	45		1,366		—	—		—
Total fixed maturities	184	2,107		167,329		36	493		31,950
Public utilities	14	43		955		—	—		—
Other common stocks	87	664		7,343		1	6		95
Non-redeemable preferred stocks	22	38		1,486		—	—		—
Total equity securities	123	745		9,784		1	6		95
Total	307	$	2,852	$	177,113	37	$	499	$	32,045

December 31, 2014
U.S. government and agency securities	32	$	285	$	36,081	20	$	305	$	16,947
States, municipalities and political subdivisions	24	100		22,272		11	117		14,310
Public utilities	1	1		1,274		1	38		1,014
Corporate securities	23	271		23,738		16	309		20,215
Redeemable preferred stocks	4	10		408		—	—		—
Total fixed maturities	84	667		83,773		48	769		52,486
Other common stocks	54	247		3,992		1	3		31
Non-redeemable preferred stocks	4	7		378		—	—		—
Total equity securities	58	254		4,370		1	3		31
Total	142	$	921	$	88,143	49	$	772	$	52,517

* This amount represents the actual number of discrete securities, not the number of shares of those securities. The numbers are not presented in thousands.

During our quarterly evaluations of our securities for impairment, we determined that none of our investments in debt and equity securities that reflected an unrealized loss position were other-than-temporarily impaired. The issuers of our debt securities continue to make interest payments on a timely basis. We do not intend to sell nor is it likely that we would be required to sell the debt securities before we recover our amortized cost basis. All the issuers of the equity securities we own had near-term prospects that indicated we could recover our cost basis, and we also do not intend to sell these securities until their value equals or exceeds their cost.

During the three and six months ended June 30, 2015 and 2014, we recorded no other-than-temporary impairment charges.

UNITED INSURANCE HOLDINGS CORP.

Notes to Unaudited Consolidated Financial Statements

June 30, 2015

Fair value measurement

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

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

Level 2: Assets and liabilities whose values are based on the following:

(a) Quoted prices for similar assets or liabilities in active markets;

(b) Quoted prices for identical or similar assets or liabilities in markets that are not active; or

(c) Valuation models whose inputs are observable, directly or indirectly, for substantially the full term of the asset or liability.

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

We estimate the fair value of our investments using the closing prices on the last business day of the reporting period, obtained from active markets such as the NYSE, NASDAQ, and NYSE MKT. For securities for which quoted prices in active markets are unavailable, we use a third-party pricing service that utilizes quoted prices in active markets for similar instruments, benchmark interest rates, broker quotes and other relevant inputs to estimate the fair value of those securities for which quoted prices are unavailable. Our estimates of fair value reflect the interest rate environment that existed as of the close of business on June 30, 2015 and 2014. Changes in interest rates subsequent to June 30, 2015 may affect the fair value of our investments.

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.

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

UNITED INSURANCE HOLDINGS CORP.

Notes to Unaudited Consolidated Financial Statements

June 30, 2015

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 Unaudited Consolidated Balance Sheet as of June 30, 2015.

The following table presents the fair value of our financial instruments measured on a recurring basis by level at June 30, 2015 and December 31, 2014:



	Total		Level 1		Level 2		Level 3
June 30, 2015
U.S. government and agency securities	$	99,917	$	—	$	99,917	$	—
Foreign government	3,348		—		3,348		—
States, municipalities and political subdivisions	123,628		—		123,628		—
Public utilities	8,189		—		8,189		—
Corporate securities	131,255		—		131,255		—
Redeemable preferred stocks	1,921		1,921		—		—
Total fixed maturities	368,258		1,921		366,337		—
Public utilities	1,624		1,624		—		—
Other common stocks	23,782		23,782		—		—
Non-redeemable preferred stocks	2,495		2,495		—		—
Total equity securities	27,901		27,901		—		—
Other long-term investments	3,131		300		831		2,000
Total investments	$	399,290	$	30,122	$	367,168	$	2,000

December 31, 2014
U.S. government and agency securities	$	134,434	$	—	$	134,434	$	—
Foreign government	3,354		—		3,354		—
States, municipalities and political subdivisions	91,911		—		91,911		—
Public utilities	9,222		—		9,222		—
Corporate securities	112,616		—		112,616		—
Redeemable preferred stocks	1,093		1,093		—		—
Total fixed maturities	352,630		1,093		351,537		—
Public utilities	1,433		1,433		—		—
Other common stocks	23,048		23,048		—		—
Non-redeemable preferred stocks	1,506		1,506		—		—
Total equity securities	25,987		25,987		—		—
Other long-term investments	3,010		300		739		1,971
Total investments	$	381,627	$	27,380	$	352,276	$	1,971

UNITED INSURANCE HOLDINGS CORP.

Notes to Unaudited Consolidated Financial Statements

June 30, 2015

The table below presents the rollforward of our Level 3 investments held at fair value during the six months ended June 30, 2015:



	Other Investments
December 31, 2014	$	1,971
Transfers in	—
Partnership income	43
Return of capital	(44		)
Unrealized gains in accumulated other comprehensive income	30
June 30, 2015	$	2,000

We are responsible for the determination of fair value and the supporting assumptions and methodologies. We gain assurance on the overall reasonableness and consistent application of valuation methodologies and inputs and compliance with accounting standards through the execution of various processes and controls designed to provide assurance that our assets and liabilities are appropriately valued. For fair values received from third parties, our processes are designed to provide assurance that the valuation methodologies and inputs are appropriate and consistently applied, the assumptions are reasonable and consistent with the objective of determining fair value, and the fair values are accurately recorded.

At the end of each quarter, we determine whether we need to transfer the fair values of any securities between levels of the fair value hierarchy and, if so, we report the transfer as of the end of the quarter. During the first half of 2015, we transferred no investments between levels. We used unobservable inputs to derive our estimated fair value for Level 3 investments and the unobservable inputs are significant to the overall fair value measurement.

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

UNITED INSURANCE HOLDINGS CORP.

Notes to Unaudited Consolidated Financial Statements

June 30, 2015

Other investments

We acquired investments in limited partnerships, recorded in the other investments line of our Unaudited Consolidated Balance Sheets, that are currently being accounted for at fair value utilizing a discounted cash flow methodology. The estimated fair value of our investments in the limited partnership interests was $2,831,000. We have fully funded our investments in DCR and RCH, but we are still obligated to fund an additional $1,169,000 for our investment in Kayne. The information presented in the table below is as of June 30, 2015.



	Initial Investment		Book Value		Unrealized Gain		Fair Value
DCR Mortgage Partners VI, L.P.	$	750	$	749	$	215	$	964
RCH Mortgage Fund VI Investors, LP	1,000		960		76		1,036
Kayne Senior Credit Fund II, L.P.	831		831		—		831
Total limited partnerships	$	2,581	$	2,540	$	291	$	2,831
Other short-term investments	300		300		—		300
Total other investments	$	2,881	$	2,840	$	291	$	3,131

The following table summarizes the quantitative impact that the significant unobservable inputs used to estimate the fair value of our Level 3 investments has on the estimated fair value on our investments shown in the tables above. The DCR and RCH investments were valued using a duration of 60 months for both periods presented below.



	Fair Value			Valuation		Rate
	Impact			Technique	Unobservable Input	Adjustment
June 30, 2015
DCR	$	(105	)	Discounted cash flow	Discount rate based on D&B paydex scale	2.35%
RCH	$	(292	)	Discounted cash flow	Discount rate based on D&B paydex scale	6.10%

December 31, 2014
DCR	$	(107	)	Discounted cash flow	Discount rate based on D&B paydex scale	2.35%
RCH	$	(292	)	Discounted cash flow	Discount rate based on D&B paydex scale	6.10%


4)	ACQUISITION

On February 3, 2015, we successfully completed the acquisition of Family Security Holdings, LLC and its two wholly-owned subsidiaries. The purchase price for FSH and its subsidiaries consisted of an initial purchase price of $12,994,000 in common stock and contingent consideration based on a percentage of gross premiums written on the renewal of FSH policies during the one year period following the closing date, which we estimate to be $540,000 as of June 30, 2015. The contingent consideration will be paid in shares of our common stock one year after the closing of the merger.

The business combination has been accounted for using the acquisition method of accounting, which requires, among other things, that most assets acquired, liabilities assumed and earn-out consideration be recognized at their fair values as of the acquisition date.

UNITED INSURANCE HOLDINGS CORP.

Notes to Unaudited Consolidated Financial Statements

June 30, 2015

The purchase price consisted of the following amounts:



Fair market value of common stock issued	$	12,994
Estimate of potential contingent consideration⁽¹⁾	540
Total purchase price	$	13,534

⁽¹⁾

The amount of the contingent consideration reflected in the table above reflects our estimate, as of June 30, 2015, of the amount of contingent consideration that we will be required to pay to the former shareholders of FSH pursuant to the purchase agreement to acquire FSH and it subsidiaries. The contingent consideration will be paid out in additional shares of our stock based on the 180 day average of the closing price of our stock in the 180 days immediately prior to the one year anniversary of the closing of the acquisition. The contingent consideration will be measured at each reporting date with changes in its fair value recognized in our Unaudited Consolidated Statements of Comprehensive Income.

The operations of FSH and its subsidiaries are included in our Unaudited Consolidated Statements of Comprehensive Income effective February 3, 2015. We have one year from the acquisition date to finalize the allocation of the purchase price of FSH and its subsidiaries. The initial purchase price allocation is as follows:



Cash	$	14,467
Investments	5,588
Premium and Agents' Receivable	1,496
Intangible assets	6,312
Goodwill	4,196
Other assets	609
Loss reserves	(2,390		)
Unearned premiums	(9,646		)
Reinsurance payable	(998		)
Loans payable	(2,246		)
Deferred taxes	(2,182		)
Other liabilities	(1,672		)
Total purchase price	$	13,534

The unaudited pro forma information has been prepared as if the FSH acquisition had taken place on January 1, 2015. The unaudited pro forma information is not necessarily indicative of the results that we would have achieved had the transaction taken place on January 1, 2015, and the unaudited pro forma information does not purport to be indicative of future financial operating results.



	For the Six Months Ended June 30, 2015
			Pro Forma
	As Reported		Adjustments		Pro Forma
Revenues	$	167,736	$	1,127	$	168,863

Net income	$	5,473	$	77	$	5,550

Diluted earnings per share	$	0.26	$	—	$	0.26

UNITED INSURANCE HOLDINGS CORP.

Notes to Unaudited Consolidated Financial Statements

June 30, 2015

5) EARNINGS PER SHARE

Basic earnings per share (EPS) is based on the weighted average number of common shares outstanding for the period, excluding any dilutive common share equivalents. Diluted EPS reflects the potential dilution resulting from vesting of restricted stock awards. The following table shows the computation of basic and diluted EPS for the three and six month periods ended June 30, 2015 and June 30, 2014, respectively:



	Three Months Ended June 30,				Six Months Ended June 30,
	2015		2014		2015		2014
Numerator:
Net income attributable to common stockholders	$	5,275	$	9,590	$	5,473	$	20,979

Denominator:
Weighted-average shares outstanding	21,255,496		20,735,135		21,145,624		19,105,666
Effect of dilutive securities	253,015		110,559		230,916		98,139
Weighted-average diluted shares	21,508,511		20,845,694		21,376,540		19,203,805

Basic earnings per share	$	0.25	$	0.46	$	0.26	$	1.10
Diluted earnings per share	$	0.25	$	0.46	$	0.26	$	1.09

See Note 14 for additional information on the stock grants related to dilutive securities.

6) PROPERTY AND EQUIPMENT, NET

On September 5, 2014, we entered into a purchase and sale agreement to acquire approximately 40,000 square feet of commercial office space and associated property in St. Petersburg, Florida. At acquisition, the real estate consisted of approximately 2.3 acres of land and an office building, plus an additional 1.5 acres of leased parking space. We are depreciating the building over its expected useful life of 39 years.

Property and equipment, net consists of the following:



	June 30, 2015			December 31, 2014
Land	$	2,114		$	2,114
Building	1,469			1,469
Computer hardware and software	10,686			6,001
Office furniture and equipment	1,337			1,319
Leasehold improvements	141			141
Total, at cost	15,747			11,044
Less: accumulated depreciation and amortization	(3,471		)	(3,022		)
Property and equipment, net	$	12,276		$	8,022

Depreciation and amortization expense under property and equipment was $112,000 and $161,000 for the three months ended June 30, 2015 and 2014, respectively and $451,000 and $327,000 for the six months ended June 30, 2015 and 2014, respectively.

UNITED INSURANCE HOLDINGS CORP.

Notes to Unaudited Consolidated Financial Statements

June 30, 2015

7) REINSURANCE

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

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

During the second quarter of 2015, we placed our reinsurance program for the 2015 treaty year beginning June 1, 2015 and ending on May 31, 2016. The agreements 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 in Florida against storms that the National Hurricane Center designates as hurricanes. The private agreements provide coverage against severe weather events such as hurricanes, tropical storms and tornadoes.

For the treaty year beginning June 1, 2015 and ending on May 31, 2016, UPC Insurance has obtained reinsurance protection of $1,243,122,000 excess $25,000,000, providing sufficient protection for approximately a 1-in-100 year hurricane event and a second 1-in-50 year hurricane event as calculated using a blended model result predominately based on our licensed modeling software, AIR model version 15, using long-term event rates including demand surge. For a single first event hurricane or tropical storm, UPC Insurance will pay, or “retain”, 100% of losses up to $25,000,000 in a Florida event and 100% of losses up to $5,000,000 in an event outside of Florida. The catastrophe excess of loss reinsurance program provides 100% coverage for all losses in excess of $25,000,000 up to $1,173,122,000 for a first event and $1,243,122,000 for any number of subsequent events until all limit is exhausted.

For the 2015 contract year, UPC Insurance has elected a 45% participation rate with the FHCF and purchased FHCF replacement coverage from private reinsurers for the remaining 45%. Of the $1,243,122,000 in excess of $25,000,000, we estimate the mandatory FHCF layer will provide approximately $284,061,000 (45% of $631,247,000) of aggregate coverage for losses in excess of $230,356,000. The private market FHCF replacement coverage provides another $284,061,000 in excess of $230,356,000 layer for Florida only on a fully collateralized basis that also inures to the benefit of all other private reinsurance coverage.

In addition to the FHCF and FHCF replacement coverage, $585,000,000 of aggregate catastrophe reinsurance coverage in excess of $25,000,000 was acquired from 35 unaffiliated private reinsurers who either carry A.M. Best financial strength ratings of A- or higher, or have fully collateralized their maximum potential obligations in dedicated trusts for the benefit of UPC. Our 2015 agreements with these private reinsurers structure coverage into 6 layers, with a cascading feature such that all layers attach at $25,000,000. If the aggregate limit of the preceding layer is exhausted, the next layer drops down (cascades) in its place. Additionally, any unused layer protection drops down for subsequent events until exhausted ensuring there are no potential gaps in coverage up to the $1,173,122,000 first event program exhaustion point. The Company also secured up to $95,000,000 of limit that can be utilized at our option for 2^nd and subsequent events at an additional cost, but the Company is under no obligation to activate this layer.

UPC also purchased a $20,000,000 per occurrence, excess of $5,000,000, underlying layer with $40,000,000 of aggregate contract year limit. This coverage reduces our retention for named windstorms to $5,000,000 subject to an overall annual aggregate limit of $40,000,000. For losses in Florida, this contract stipulates an annual aggregate deductible of $25,000,000, which effectively reduces our 2^nd event retention in Florida to $10,000,000 and 3^rd and subsequent event retentions in Florida to $5,000,000 subject to the overall $40,000,000 of aggregate limit.

The total cost of the 2015-16 catastrophe reinsurance program is estimated to be $161,400,000.

UNITED INSURANCE HOLDINGS CORP.

Notes to Unaudited Consolidated Financial Statements

June 30, 2015

We amortize our prepaid reinsurance premiums over the annual agreement period, and we record that amortization in ceded premiums earned on our Unaudited Consolidated Statements of Comprehensive Income. The table below summarizes the amounts of our ceded premiums written under the various types of agreements, as well as the amortization of prepaid reinsurance premiums:



	Three Months Ended June 30,						Six Months Ended June 30,
	2015			2014			2015			2014
Excess-of-loss	$	(162,993	)	$	(131,213	)	$	(165,119	)	$	(131,274	)
Equipment & identity theft	(1,604		)	(1,156		)	(2,798		)	(1,917		)
Flood	(4,109		)	(4,423		)	(6,956		)	(7,452		)
Ceded premiums written	$	(168,706	)	$	(136,792	)	$	(174,873	)	$	(140,643	)
Decrease in ceded unearned premiums	128,176			103,753			97,209			76,627
Ceded premiums earned	$	(40,530	)	$	(33,039	)	$	(77,664	)	$	(64,016	)

Current year catastrophe losses by the event magnitude are shown in the following table for the three and six months ended June 30, 2015 and 2014.



	2015					2014
	Number of Events	Incurred Loss and LAE ⁽¹⁾		Combined Ratio Impact		Number of Events	Incurred Loss and LAE ⁽¹⁾		Combined Ratio Impact
Three Months Ended June 30,
Current period catastrophe losses incurred
$ 1 million to $5 million ⁽²⁾	7	$	4,696	5.8	%	—	$	—	—	%
Less than $1 million ⁽³⁾	5	1,821		2.3	%	1	260		0.4	%
Total	12	$	6,517	8.1	%	1	$	260	0.4	%

Six Months Ended June 30,
Current period catastrophe losses incurred
$ 1 million to $5 million ⁽²⁾	7	$	19,956	12.6	%	—	$	—	—	%
Less than $1 million ⁽³⁾	5	1,821		1.1	%	1	260		0.2	%
Total	12	$	21,777	13.7	%	1	$	260	0.2	%


⁽¹⁾	Incurred loss and LAE is equal to losses and LAE paid plus the change in case and incurred but not reported reserves.


⁽²⁾	Reflects losses from winter storms and hail storms in 2015.


⁽³⁾	Reflects losses from hail storms, Texas flooding and Tropical Storm Bill in 2015 and losses from the Richland hail storm in June 2014.

We collected cash recoveries under our reinsurance agreements totaling $116,000 and $664,000 for the three month periods ended June 30, 2015 and 2014, respectively, and $927,000 and $1,081,000 for the six month periods ended June 30, 2015 and 2014, respectively.

Effective January 1, 2015, we entered into two new reinsurance agreements, which will expire on December 31, 2015. The first reinsurance agreement provides excess-of-loss coverage for losses arising out of property business up to $3,000,000 in excess of $1,000,000 per risk. Should a loss recovery, or series of loss recoveries, exhaust the coverage provided under the agreement for losses arising out of property-only business, excluding named windstorms, two reinstatements of coverage are included at no additional premium, with a third reinstatement subject to additional premium. We also entered into a second

UNITED INSURANCE HOLDINGS CORP.

Notes to Unaudited Consolidated Financial Statements

June 30, 2015

property catastrophe excess-of-loss reinsurance agreement that provides coverage up to $25,000,000 in excess of $3,000,000. This agreement provides coverage for events during any period of 168 consecutive hours that are not named hurricanes or tropical storms. Should losses for one event exceed $25,000,000, our catastrophe reinsurance agreements would provide reinsurance for the remaining losses. Reinstatements of the second property catastrophe agreement are subject to an additional premium.

We write flood insurance under an agreement with the National Flood Insurance Program. We cede 100% of the premiums written and the related risk of loss to the federal government. We earn commissions for the issuance of flood policies based upon a fixed percentage of net written premiums and the processing of flood claims based upon a fixed percentage of incurred losses, and we can earn additional commissions by meeting certain growth targets for the number of in-force policies. We recognized commission revenue from our flood program of $241,000 and $162,000 for the three month periods ended June 30, 2015 and 2014, respectively, and $482,000 and $580,000 for the six month periods ended June 30, 2015 and 2014, respectively.

8) LONG-TERM DEBT

Our long-term debt at June 30, 2015 consisted of a note payable to the Florida State Board of Administration. At June 30, 2015 and December 31, 2014, we owed $12,941,000 and $13,529,000, respectively, on the note and the interest rate was 1.96% and 2.50%, respectively. All other terms and conditions of the note remain as described in our 2014 Form 10-K.

The $12,941,000 note payable to the Florida State Board of Administration (SBA note) requires United Property & Casualty Insurance Company to maintain surplus as regards policyholders at or above a calculated level, which was $30,354,000 at June 30, 2015. Each quarter, we monitor the surplus as regards policyholders for both of our insurance affiliates and, for various reasons, we occasionally provide additional capital to our insurance affiliates. During the three and six month periods ended June 30, 2015 and 2014, we contributed no capital to our insurance affiliates. We currently do not foresee a need for any material contributions of capital to our insurance affiliates; however, any future contributions of capital will depend on circumstances at the time.

Our SBA note requires that United Property & Casualty Insurance Company maintain either a 2:1 ratio of net written premium to surplus, or net writing ratio, or a 6:1 ratio of gross written premium to surplus, or gross writing ratio, to avoid additional interest penalties. The SBA note agreement defines surplus for the purpose of calculating the required ratios as the $20,000,000 of capital contributed to United Property & Casualty Insurance Company under the agreement plus the outstanding balance of the note. At June 30, 2015, United Property & Casualty Insurance Company's net written premium to surplus ratio was 6.7:1, which is well above the 2:1 required ratio. United Property & Casualty Insurance Company's gross written premium to surplus ratio was 9.7:1, which exceeds the required ratio of 6:1. Should United Property & Casualty Insurance Company fail to exceed either a net writing ratio of 1.5:1 or a gross writing ratio of 4.5:1, United Property & Casualty Insurance Company's interest rate will increase by 450 basis points above the 10-year Constant Maturity Treasury rate which was 2.35% at the end of June 2015. Any other writing ratio deficiencies result in an interest rate penalty of 25 basis points above the stated rate of the note, which is 1.96% at the end of June 2015. Our SBA note further provides that the SBA may, among other things, declare its loan immediately due and payable for all defaults existing under the SBA note; however, any payment is subject to approval by the insurance regulatory authority. At June 30, 2015, we were in compliance with the covenants of the SBA note.

9) COMMITMENTS AND CONTINGENCIES

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

UNITED INSURANCE HOLDINGS CORP.

Notes to Unaudited Consolidated Financial Statements

June 30, 2015

See Note 8 for information regarding commitments related to long-term debt, and Note 10 for commitments related to regulatory actions.

10) STATUTORY ACCOUNTING AND REGULATION

The insurance industry is heavily regulated. State laws and regulations, as well as national regulatory agency requirements, govern the operations of all insurers such as our insurance affiliates. The various laws and regulations require that insurers maintain minimum amounts of statutory surplus and risk-based capital, they restrict insurers' ability to pay dividends, they specify allowable investment types and investment mixes, and they subject insurers to assessments. At June 30, 2015, and during the three and six months then ended, our insurance affiliates met all regulatory requirements of the states in which they operate, and they did not incur any material assessments.

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

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

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

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


•	Statutory accounting requires that we exclude certain assets, called non-admitted assets, from the balance sheet.


•	Statutory accounting requires us to expense policy acquisition costs when incurred, while GAAP allows us to defer to the extent realizable, and amortize policy acquisition costs over the estimated life of the policies.


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


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


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

UNITED INSURANCE HOLDINGS CORP.

Notes to Unaudited Consolidated Financial Statements

June 30, 2015


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

•

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


•	Statutory accounting requires an additional admissibility test outlined in Statements on Statutory Accounting Principles, No. 101 and the change in deferred income tax is reported directly in capital and surplus, rather than being reported as a component of income tax expense under GAAP.

Our insurance affiliates must file with the various insurance regulatory authorities an “Annual Statement” which reports, among other items, net income (loss) and surplus as regards policyholders, which is called stockholder’s equity under GAAP. For the three month periods ended June 30, 2015 and 2014, United Property & Casualty Insurance Company recorded a statutory net loss of $(345,000) and statutory net income of $3,827,000, and recorded a statutory net loss of $(2,711,000) and statutory net income of $11,261,000 for the six month periods ended June 30, 2015 and 2014, respectively. Family Security Insurance Company recorded a statutory net loss of $(49,000) and statutory net income of $66,000 for the three and six months ended June 30, 2015, respectively.

Our insurance affiliates must maintain capital and surplus ratios or balances as determined by the regulatory authority of the states in which they are domiciled. United Property & Casualty Insurance Company is required to maintain capital and surplus equal to the greater of 10% of its total liabilities or $5,000,000. At June 30, 2015 and December 31, 2014, United Property & Casualty Insurance Company's surplus as regards policyholders was $124,314,000 and $126,249,000, respectively. Family Security Insurance Company is required to maintain capital and surplus of $3,250,000. At June 30, 2015 and March 31, 2015, Family Security Insurance Company's surplus as regards policyholders was $8,013,000 and $8,124,000, respectively. Our reinsurance affiliate is required to maintain a minimum surplus of $200,000. At June 30, 2015 and December 31, 2014, our reinsurance affiliate's surplus as regards policyholders was $19,165,000 and $19,048,000, respectively.

11) RELATED PARTY TRANSACTIONS

One of our executive officers, Ms. Salmon, is a former partner at the law firm of Groelle & Salmon, PA, where her spouse remains partner and co-owner. Groelle & Salmon, PA provides legal representation to us related to our claims litigation, and also provided representation to us for several years prior to Ms. Salmon joining UPC Insurance. During the three months ended June 30, 2015 and 2014, Groelle & Salmon, PA billed us approximately $344,000 and $208,000, respectively, and $524,000 and $300,000 for the six months ended June 30, 2015 and 2014, respectively. Ms. Salmon's spouse has a 50% interest in these billings, or approximately $172,000 and $104,000, for the three months ended June 30, 2015 and 2014, respectively, and $262,000 and $150,000 for the six months ended June 30, 2015 and 2014, respectively.

12) ACCUMULATED OTHER COMPREHENSIVE INCOME

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

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

UNITED INSURANCE HOLDINGS CORP.

Notes to Unaudited Consolidated Financial Statements

June 30, 2015



	Pre-Tax Amount			Tax (Expense)Benefit			Net-of-Tax Amount
December 31, 2014	$	6,537		$	(2,526	)	$	4,011
Changes in net unrealized gains on investments	(2,363		)	913			(1,450		)
Reclassification adjustment for realized losses	11			(4		)	7
June 30, 2015	$	4,185		$	(1,617	)	$	2,568

13) STOCKHOLDERS' EQUITY

Our Board declared dividends on our outstanding shares of common stock to shareholders of record as follows for the periods presented:



	Six Months Ended June 30,
	2015				2014
	Per Share Amount		Aggregate Amount		Per Share Amount		Aggregate Amount
First Quarter	$	0.05	$	1,073	$	0.04	$	832
Second Quarter	0.05		1,077		0.04		834

On February 3, 2015, we completed the acquisition of FSH and its subsidiaries by issuing 503,857 shares of our common stock as payment of the initial purchase price. See Note 4 for additional information on this acquisition.

On March 5, 2014, we closed an underwritten public offering of 4,600,000 shares of our common stock. Our total net proceeds from the offering were approximately $54,041,000.

We are authorized to issue 875,000 shares of "blank check" preferred stock, which may be issued from time to time in one or more series upon authorization by our Board of Directors (Board). Our Board, without further approval of the stockholders, is authorized to fix the designations, powers, including voting powers, preferences and the relative, participating optional or other special rights of the shares of each series and any qualifications, limitations and restrictions thereof. As of June 30, 2015, we had not issued any shares of preferred stock.

14) STOCK-BASED COMPENSATION

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

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

We granted 65,000 and 130,442, respectively, shares of restricted common stock during the three and six month periods ended June 30, 2015, which had weighted-average grant date fair values of $16.14 and $20.38 per share, respectively. We granted 38,156 shares of restricted stock during the three and six month periods ended June 30, 2014, which had weighted-average grant date fair values of $15.24.

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

UNITED INSURANCE HOLDINGS CORP.

Notes to Unaudited Consolidated Financial Statements

June 30, 2015



	Number of Restricted Shares	Weighted Average Grant Date Fair Value
Outstanding as of December 31, 2014	153,383	$	10.91
Granted	130,442	20.38
Forfeited	9,740	9.19
Vested	86,503	12.33
Outstanding as of June 30, 2015	187,582	$	16.93

We had approximately $1,881,000 and $768,000 of unrecognized stock compensation expense on June 30, 2015 and 2014, respectively, related to non-vested stock-based compensation granted, that we expect to recognize over the next three years. We recognized $223,000 and $76,000 of stock-based compensation expense during the three months ended June 30, 2015 and 2014, respectively, and $349,000 and $121,000 of stock-based compensation expense during the six months ended June 30, 2015 and 2014, respectively.

We had approximately $891,000 of unrecognized director stock-based compensation expense at June 30, 2015, related to non-vested director stock-based compensation granted, that we expect to recognize ratably until the 2016 Annual Meeting of Stockholders. We recognized $295,000 and $636,000 of director stock-based compensation expense during the three and six months ended June 30, 2015, respectively. We did not recognize any director stock-based compensation expense during the same periods last year.

15) SUBSEQUENT EVENTS

We evaluate all subsequent events and transactions for potential recognition or disclosure in our financial statements.

On August 5, 2015, our Board of Directors declared a $0.05 per share quarterly cash dividend payable on August 28, 2015, to stockholders of record on August 21, 2015.

No additional events required disclosure.

UNITED INSURANCE HOLDINGS CORP.

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Unaudited Consolidated Financial Statements and related notes appearing elsewhere in this Form 10-Q.

OUR BUSINESS

United Insurance Holdings Corp. serves as the holding company for United Property & Casualty Insurance Company and its affiliated companies. Our business is conducted principally through six wholly-owned subsidiaries: United Property & Casualty Insurance Company, United Insurance Management, L.C., Family Security Insurance Company, Inc., Family Security Underwriters, LLC, Skyway Claims Services, LLC (our claims adjusting affiliate) and UPC Re (our reinsurance affiliate). 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, Georgia, Louisiana, Massachusetts, New Jersey, North Carolina, Rhode Island, South Carolina and Texas, and we are licensed to write in Alabama, Connecticut, Delaware, Hawaii, Maryland, Mississippi, New Hampshire, New York and Virginia. 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.