Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________
FORM 10-Q
_______________________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2018
Commission File Number 001-35761
_____________________
United Insurance Holdings Corp.
(Exact name of Registrant as specified in its charter)
_______________________
|
| | | | |
| Delaware | | 75-3241967 | |
| (State of Incorporation) | | (IRS Employer Identification Number) | |
800 2nd Avenue S
St. Petersburg, Florida 33701
(Address, including zip code, of principal executive offices)
727-895-7737
(Registrant's telephone number, including area code)
_______________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes R No £
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes R No £
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
|
| | | | |
Large accelerated filer | £ | | Accelerated filer | þ |
Non-accelerated filer | £ | | Smaller reporting company | £ |
| | | Emerging growth company | £ |
If an emerging growth company, indicate by check mark if the registrant has elected to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. £
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes £ No R
As of May 4, 2018, 42,745,937 shares of common stock, par value $0.0001 per share, were outstanding.
UNITED INSURANCE HOLDINGS CORP.
|
| | |
PART I. FINANCIAL INFORMATION | |
| Item 1. Financial Statements | |
| Consolidated Balance Sheets | |
| Unaudited Consolidated Statements of Comprehensive Income | |
| Unaudited Consolidated Statements of Cash Flows | |
| Notes to Unaudited Consolidated Financial Statements | |
| Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations | |
| Item 3. Quantitative and Qualitative Disclosures About Market Risk | |
| Item 4. Controls and Procedures | |
PART II. OTHER INFORMATION | |
| Item 1. Legal Proceedings | |
| Item 1A. Risk Factors | |
| Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | |
| Item 3. Defaults Upon Senior Securities | |
| Item 4. Mine Safety Disclosures | |
| Item 5. Other Information | |
| Item 6. Exhibits | |
Signatures | |
Throughout this Quarterly Report on Form 10-Q (Form 10-Q), we present amounts in all tables in thousands, except for share amounts, per share amounts, policy counts or where more specific language or context indicates a different presentation. In the narrative sections of this Form 10-Q, we show full values rounded to the nearest thousand.
UNITED INSURANCE HOLDINGS CORP.
FORWARD-LOOKING STATEMENTS
Statements in this Form 10-Q contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements about anticipated growth in revenues, gross written premium growth expectations, earnings per share, estimated unpaid losses on insurance policies, investment returns, diversification and expectations about our liquidity, and our ability to meet our investment objectives and to manage and mitigate market risk with respect to our investments. Without limiting the generality of the foregoing, words such as “may,” “will,” “expect,” “endeavor,” “project,” “believe,” "plan," “anticipate,” “intend,” “could,” “would,” “estimate,” or “continue” or the negative variations there of or comparable terminology are intended to identify forward-looking statements. These statements are based on current expectations, estimates and projections about the industry and market in which we operate, and management's beliefs and assumptions. Forward-looking statements are not guarantees of future performance and involve certain known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. The risks and uncertainties include, without limitation:
| |
• | our exposure to catastrophic events and severe weather conditions; |
| |
• | the regulatory, economic and weather conditions present in Florida, the state in which we are most concentrated; |
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• | the effectiveness of our diversification strategy; |
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• | our ability to cultivate and maintain agent relationships, particularly our relationship with AmRisc, LLC; |
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• | the possibility that actual claims incurred may exceed our loss reserves for claims; |
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• | assessments charged by various governmental agencies; |
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• | our ability to implement and maintain adequate internal controls over financial reporting; |
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• | our ability to maintain adequate technology, data security, and outsourcing relationships; |
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• | our reliance on key vendor relationships, and the ability of our vendors to protect the personal information of our customers; |
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• | our ability to attract and retain the services of senior management; |
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• | risks and uncertainties relating to our acquisitions, including our ability to successfully integrate the acquired companies: |
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• | our ability to increase or maintain our market share; |
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• | changes in the regulatory environment present in the states in which we operate; |
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• | the impact of new federal or state regulations that affect the property and casualty insurance market; |
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• | the cost, variability and availability of reinsurance; |
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• | our ability to collect from our reinsurers on our reinsurance claims; |
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• | dependence on investment income and the composition of our investment portfolio and related market risks; |
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• | the possibility of the pricing and terms for our products to decline due to the historically cyclical nature of the property and casualty insurance and reinsurance industry; |
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• | the outcome of litigation pending against us, including the terms of any settlements; |
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• | downgrades in our financial strength ratings; |
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• | the impact of future sales of substantial amounts of our common stock by us to our existing stockholders on our stock price; |
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• | our ability to pay dividends in the future; |
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• | the ability of R. Daniel Peed and his affiliates to exert significant control over us due to substantial ownership of our common stock, subject to certain restrictive covenants that may restrict our ability to pursue certain opportunities; |
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• | the ability of others to obtain control of us due to provisions in our charter documents; and |
| |
• | other risks and uncertainties described in the section entitled "Risk Factors" in Part I, Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2017. |
We caution you not to place reliance on these forward-looking statements, which are valid only as of the date they were made. Except as may be required by applicable law, we undertake no obligation to update or revise any forward-looking statements to reflect new information, the occurrence of unanticipated events or otherwise.
UNITED INSURANCE HOLDINGS CORP.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
|
| | | | | | | | |
|
| March 31, 2018 |
| December 31, 2017 |
ASSETS |
| (Unaudited) |
| |
Investments, at fair value: |
| |
| |
Fixed maturities, available-for-sale (amortized cost of $799,077 and $763,434, respectively) |
| $ | 787,145 |
|
| $ | 762,855 |
|
Equity securities (adjusted cost of $67,300 and $50,996, respectively) |
| 77,155 |
|
| 63,295 |
|
Other investments (amortized cost of $7,763 and $8,057, respectively) |
| 8,144 |
|
| 8,381 |
|
Portfolio loans | | 20,000 |
| | 20,000 |
|
Total investments |
| $ | 892,444 |
|
| $ | 854,531 |
|
Cash and cash equivalents |
| 216,703 |
|
| 276,275 |
|
Accrued investment income |
| 5,488 |
|
| 5,577 |
|
Property and equipment, net | | 17,557 |
| | 17,291 |
|
Premiums receivable, net |
| 79,296 |
|
| 75,275 |
|
Reinsurance recoverable on paid and unpaid losses |
| 496,619 |
|
| 395,774 |
|
Prepaid reinsurance premiums |
| 127,888 |
|
| 201,904 |
|
Goodwill | | 73,045 |
| | 73,045 |
|
Deferred policy acquisition costs |
| 108,093 |
|
| 103,882 |
|
Intangible assets | | 35,446 |
| | 45,271 |
|
Other assets |
| 13,814 |
|
| 11,096 |
|
Total Assets |
| $ | 2,066,393 |
|
| $ | 2,059,921 |
|
LIABILITIES AND STOCKHOLDERS' EQUITY |
|
|
|
|
Liabilities: |
|
|
|
|
Unpaid losses and loss adjustment expenses |
| $ | 544,249 |
|
| $ | 482,232 |
|
Unearned premiums |
| 556,540 |
|
| 555,873 |
|
Reinsurance payable |
| 86,079 |
|
| 149,117 |
|
Payments outstanding | | 55,119 |
| | 41,786 |
|
Accounts payable and accrued expenses | | 51,404 |
| | 46,594 |
|
Other liabilities |
| 76,913 |
|
| 85,830 |
|
Notes payable |
| 161,009 |
| | 161,364 |
|
Total Liabilities |
| $ | 1,531,313 |
|
| $ | 1,522,796 |
|
Commitments and contingencies (Note 11) |
|
|
|
|
|
|
Stockholders' Equity: |
|
|
|
|
Preferred stock, $0.0001 par value; 1,000,000 shares authorized; none issued or outstanding |
| — |
|
| — |
|
Common stock, $0.0001 par value; 50,000,000 shares authorized; 42,958,020 and 42,965,137 issued, respectively; 42,745,937 and 42,753,054 outstanding, respectively |
| 4 |
|
| 4 |
|
Additional paid-in capital |
| 387,631 |
|
| 387,145 |
|
Treasury shares, at cost: 212,083 shares |
| (431 | ) |
| (431 | ) |
Accumulated other comprehensive income (loss) |
| (8,451 | ) |
| 9,221 |
|
Retained earnings |
| 156,327 |
|
| 141,186 |
|
Total Stockholders' Equity |
| $ | 535,080 |
|
| $ | 537,125 |
|
Total Liabilities and Stockholders' Equity |
| $ | 2,066,393 |
|
| $ | 2,059,921 |
|
See accompanying Notes to Unaudited Consolidated Financial Statements.
UNITED INSURANCE HOLDINGS CORP.
Consolidated Statements of Comprehensive Income
(Unaudited)
|
| | | | | | | | |
|
| Three Months Ended |
| | March 31, |
|
| 2018 |
| 2017 |
REVENUE: |
|
|
|
|
Gross premiums written |
| $ | 279,617 |
| | $ | 168,842 |
|
Change in gross unearned premiums |
| (667 | ) | | 13,223 |
|
Gross premiums earned |
| 278,950 |
| | 182,065 |
|
Ceded premiums earned |
| (116,275 | ) | | (74,882 | ) |
Net premiums earned |
| 162,675 |
| | 107,183 |
|
Investment income |
| 5,686 |
| | 2,951 |
|
Net realized investment gains (losses) |
| 211 |
| | (351 | ) |
Net unrealized losses on equity securities |
| (2,444 | ) | | — |
|
Other revenue |
| 13,999 |
| | 12,850 |
|
Total revenue |
| 180,127 |
| | 122,633 |
|
EXPENSES: |
|
|
|
|
Losses and loss adjustment expenses |
| 77,246 |
| | 63,333 |
|
Policy acquisition costs |
| 57,135 |
| | 35,436 |
|
Operating expenses |
| 8,318 |
| | 5,872 |
|
General and administrative expenses |
| 23,325 |
| | 11,333 |
|
Interest expense |
| 2,458 |
| | 759 |
|
Total expenses |
| 168,482 |
| | 116,733 |
|
Income before other income |
| 11,645 |
| | 5,900 |
|
Other income |
| 71 |
| | 38 |
|
Income before income taxes |
| 11,716 |
| | 5,938 |
|
Provision for income taxes |
| 3,347 |
| | 2,039 |
|
Net income |
| $ | 8,369 |
| | $ | 3,899 |
|
OTHER COMPREHENSIVE INCOME: |
|
|
|
|
Change in net unrealized gains (losses) on investments |
| (23,384 | ) | | 3,731 |
|
Reclassification adjustment for net realized investment losses (gains) |
| (211 | ) | | 351 |
|
Income tax benefit (expense) related to items of other comprehensive income |
| 5,923 |
| | (1,542 | ) |
Total comprehensive income (loss) |
| $ | (9,303 | ) | | $ | 6,439 |
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
|
|
Basic |
| 42,581,939 |
| | 21,471,185 |
|
Diluted | | 42,748,627 |
| | 21,688,733 |
|
|
|
|
|
|
Earnings per share |
|
|
|
|
Basic |
| $ | 0.20 |
| | $ | 0.18 |
|
Diluted | | $ | 0.20 |
| | $ | 0.18 |
|
|
| | | |
Dividends declared per share |
| $ | 0.06 |
| | $ | 0.06 |
|
See accompanying Notes to Unaudited Consolidated Financial Statements.
UNITED INSURANCE HOLDINGS CORP.
Consolidated Statements of Cash Flows
(Unaudited)
|
| | | | | | | | |
| | Three Months Ended March 31, |
| | 2018 | | 2017 |
OPERATING ACTIVITIES | | | | |
Net income | | $ | 8,369 |
| | $ | 3,899 |
|
Adjustments to reconcile net income to net cash used by operating activities: | | | | |
Depreciation and amortization | | 10,658 |
| | 1,997 |
|
Bond amortization and accretion | | 1,396 |
| | 1,042 |
|
Net realized losses (gains) on investments | | (211 | ) | | 351 |
|
Net unrealized losses (gains) on equity securities | | 2,444 |
| | — |
|
Provision for uncollectable premiums | | (199 | ) | | 80 |
|
Deferred income taxes, net | | (4,031 | ) | | (2,703 | ) |
Stock based compensation | | 487 |
| | 642 |
|
Changes in operating assets and liabilities: | | | | |
Accrued investment income | | 89 |
| | 90 |
|
Premiums receivable | | (3,822 | ) | | 1,129 |
|
Reinsurance recoverable on paid and unpaid losses | | (100,845 | ) | | (11,760 | ) |
Prepaid reinsurance premiums | | 74,016 |
| | 39,819 |
|
Deferred policy acquisition costs, net | | (4,211 | ) | | 1,667 |
|
Other assets | | (2,718 | ) | | 3,166 |
|
Unpaid losses and loss adjustment expenses | | 62,017 |
| | 247 |
|
Unearned premiums | | 667 |
| | (13,223 | ) |
Reinsurance payable | | (63,038 | ) | | (42,931 | ) |
Payments outstanding | | 280 |
| | (8 | ) |
Accounts payable and accrued expenses | | 4,810 |
| | (1,956 | ) |
Other liabilities | | (1,926 | ) | | 13,521 |
|
Net cash used in operating activities | | $ | (15,768 | ) | | $ | (4,931 | ) |
INVESTING ACTIVITIES | | | | |
Proceeds from sales and maturities of investments | | 43,144 |
| | 40,710 |
|
Purchases of investments | | (95,982 | ) | | (50,480 | ) |
Cost of property, equipment and capitalized software acquired | | (1,010 | ) | | (208 | ) |
Net cash used in investing activities | | $ | (53,848 | ) | | $ | (9,978 | ) |
FINANCING ACTIVITIES | | | | |
Repayments of borrowings | | (444 | ) | | (381 | ) |
Dividends | | (2,565 | ) | | (1,301 | ) |
Outstanding checks in excess of funds on deposit | | 13,053 |
| | (9,878 | ) |
Net cash provided by (used in) financing activities | | $ | 10,044 |
| | $ | (11,560 | ) |
Decrease in cash | | (59,572 | ) | | (26,469 | ) |
Cash and cash equivalents at beginning of period | | 276,275 |
| | 150,688 |
|
Cash and cash equivalents at end of period | | $ | 216,703 |
| | $ | 124,219 |
|
Supplemental Cash Flows Information | | | | |
Interest paid | | $ | 99 |
| | $ | 743 |
|
Income taxes paid | | $ | 1,551 |
| | $ | 814 |
|
See accompanying Notes to Unaudited Consolidated Financial Statements.
UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
March 31, 2018
1) ORGANIZATION, CONSOLIDATION AND PRESENTATION
(a)Business
United Insurance Holdings Corp. (referred to in this document as we, our, us, the Company or UPC Insurance) is a property and casualty insurance holding company that sources, writes and services residential and commercial property and casualty insurance policies using a network of agents and four wholly-owned insurance subsidiaries. Our largest insurance subsidiary is United Property & Casualty Insurance Company (UPC), which was formed in Florida in 1999 and has operated continuously since that time. Our three other insurance subsidiaries are Family Security Insurance Company, Inc. (FSIC), acquired via merger on February 3, 2015, Interboro Insurance Company (IIC), acquired via merger on April 29, 2016, and American Coastal Insurance Company (ACIC), acquired via merger on April 3, 2017. See Note 4 in our Notes to Unaudited Consolidated Financial Statements for additional information regarding acquisitions.
Our other subsidiaries include United Insurance Management L.C. (UIM), a managing general agent that manages
substantially all aspects of UPC, FSIC and IIC's business; Skyway Claims Services, LLC that provides services to UPC, FSIC and IIC; AmCo Holding Company (AmCo) and Family Security Holdings (FSH) (holding company subsidiaries) that consolidate their respective insurance companies; BlueLine Cayman Holdings that reinsures portfolios of excess and surplus policies; UPC Re that is not currently, but can provide a portion of the reinsurance protection purchased by our insurance subsidiaries when needed; and Skyway Reinsurance Services that provides reinsurance brokerage services for our insurance companies.
Our primary product is homeowners' insurance, which we currently offer in 12 states, under authorization from the insurance regulatory authorities in each state. In addition, we write commercial residential insurance in the state of Florida. We are also licensed to write property and casualty insurance in six states; however, we have not commenced writing in these states.
We conduct our operations under one business segment.
(b)Consolidation and Presentation
We prepare our unaudited consolidated interim financial statements in conformity with U.S. generally accepted accounting principles (GAAP). We have condensed or omitted certain information and footnote disclosures normally included in annual consolidated financial statements presented in accordance with GAAP. In management's opinion, the accompanying unaudited consolidated financial statements reflect all adjustments, including normal recurring items, considered necessary for a fair presentation of interim periods. All significant intercompany balances and transactions have been eliminated. Our unaudited consolidated interim financial statements and footnotes should be read in conjunction with our consolidated financial statements and footnotes in our Annual Report on Form 10-K for the year ended December 31, 2017.
While preparing our unaudited consolidated financial statements, we make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the unaudited consolidated financial statements, as well as reported amounts of revenues and expenses during the reporting period. Accordingly, actual results could differ from those estimates. Reported amounts that require us to make extensive use of estimates include our reserves for unpaid losses and loss adjustment expenses, investments, and goodwill. Except for the captions on our Unaudited Consolidated Balance Sheets and Unaudited Consolidated Statements of Comprehensive Income, we generally use the term loss(es) to collectively refer to both loss and loss adjustment expenses.
We reclassified certain amounts in the 2017 financial statements to conform to the 2018 presentation. These reclassifications had no impact on our results of operations of stockholders' equity, as previously reported.
Our results of operations and our cash flows as of the end of the interim periods reported herein do not necessarily indicate our results for the remainder of the year or for any other future period.
UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
March 31, 2018
2) SIGNIFICANT ACCOUNTING POLICIES
(a) Changes to significant accounting policies
We have made no changes to our significant accounting policies as reported in our Annual Report on Form 10-K for the year ended December 31, 2017, except as noted below.
(b) Income Taxes
As of March 31, 2018, we have not fully completed our accounting for the tax effects of the enactment of the legislation commonly known as the Tax Cuts and Jobs Act of 2017 with regard to the deductibility of compensation expense for certain covered executives due to uncertainty surrounding the appropriate tax treatment of outstanding performance-based awards, and uncertainty surrounding the discount factors to be applied for loss reserve discounting. We are waiting for the Internal Revenue Service to publish additional guidance or information for both items.
(c) Fair value assumptions
The carrying amounts for the following financial instrument categories approximate their fair values at March 31, 2018 and December 31, 2017, because of their short-term nature: cash and cash equivalents, accrued investment income, premiums receivable, reinsurance recoverable, reinsurance payable, other assets, and other liabilities. The carrying amount of the notes payable to the Florida State Board of Administration, the Branch Banking & Trust Corporation (BB&T) and our senior notes approximate fair value as the interest rates and terms are variable.
(d) Recently Adopted Accounting Pronouncements
In January 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01). This update substantially revises standards for the recognition, measurement and presentation of financial instruments. This standard revised our accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. It also amended certain disclosure requirements associated with the fair value of financial instruments. ASU 2016-01 is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods, with early adoption permitted for certain requirements. We adopted this standard as of January 1, 2018, which resulted in a reclassification of a $9,338,000 gain, net of tax, on equity securities from accumulated other comprehensive income to retained earnings on our consolidated financial statements. Refer to Note 14 for a reconciliation. Additionally, as a result of the adoption of ASU 2016-01, we also recognized a $2,444,000 loss based on the change in fair value of equity securities in the Unaudited Consolidated Statements of Income for the three months ended March 31, 2018.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09). Insurance contracts are excluded from the scope of this standard. This standard provides guidance on revenue recognition for entities that enter into contracts with customers to transfer goods or services or enter into contracts for the transfer of nonfinancial assets. The transaction price is attributed to underlying performance obligations in the contract and revenue is recognized as the entity satisfies the performance obligation and transfers control of the good or service to the customer. We adopted this standard on January 1, 2018. We note that the standard is not applicable to our insurance contracts or other revenue streams, and therefore the adoption of this new accounting standard did not have a material impact on our consolidated financial statements and related disclosures.
In May 2017, the FASB issued ASU No. 2017-09, Compensation-Stock Compensation (Topic 718)-Scope of Modification Accounting (ASU 2017-09). This standard provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. ASU 2017-09 is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods, with early adoption permitted for certain requirements. We did not early adopt and the new guidance did not impact the way in which we account for share-based payment transactions. Therefore, the adoption as of January 1, 2018 had no impact on our results of operations.
UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
March 31, 2018
(d) Pending Accounting Pronouncements
We have evaluated recent accounting pronouncements that have had or may have a significant effect on our financial statements or on our disclosures.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (ASU 2017-04). This update simplifies the manner in which an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. ASU 2017-07 is effective for annual periods beginning after December 15, 2019, including interim periods within those annual periods, with early adoption permitted for certain requirements. We do not intend to early adopt and are assessing the impact of adopting this new accounting standard on our consolidated financial statements and related disclosures.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (ASU 2016-02). This update is intended to replace existing lease guidance by requiring a lessee to recognize substantially all leases (whether operating or finance leases) on the balance sheet as a right-of-use asset and an associated lease liability. Short-term leases of 12 months or less are excluded from this amendment. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. We do not intend to early adopt and are assessing the impact of adopting this new accounting standard on our consolidated financial statements and related disclosures.
UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
March 31, 2018
3) INVESTMENTS
The following table details fixed maturity available-for-sale and equity securities, by major investment category, at March 31, 2018 and December 31, 2017:
|
| | | | | | | | | | | | | | | |
| Cost or Adjusted/Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
March 31, 2018 | | | | | | | |
U.S. government and agency securities | $ | 247,505 |
| | $ | 71 |
| | $ | 5,317 |
| | $ | 242,259 |
|
Foreign government | 2,020 |
| | — |
| | 8 |
| | 2,012 |
|
States, municipalities and political subdivisions | 187,419 |
| | 657 |
| | 2,208 |
| | 185,868 |
|
Public utilities | 24,587 |
| | 26 |
| | 444 |
| | 24,169 |
|
Corporate securities | 291,843 |
| | 422 |
| | 5,018 |
| | 287,247 |
|
Asset backed securities | 44,943 |
| | 17 |
| | 57 |
| | 44,903 |
|
Redeemable preferred stocks | 760 |
| | 12 |
| | 85 |
| | 687 |
|
Total fixed maturities | $ | 799,077 |
| | $ | 1,205 |
| | $ | 13,137 |
| | $ | 787,145 |
|
| | | | | | | |
Mutual funds | $ | 44,272 |
| | $ | 2,418 |
| | $ | 454 |
| | $ | 46,236 |
|
Public utilities | 1,343 |
| | 294 |
| | 34 |
| | 1,603 |
|
Other common stocks | 19,967 |
| | 7,841 |
| | 231 |
| | 27,577 |
|
Non-redeemable preferred stocks | 1,718 |
| | 38 |
| | 17 |
| | 1,739 |
|
Total equity securities | $ | 67,300 |
| | $ | 10,591 |
| | $ | 736 |
| | $ | 77,155 |
|
| | | | | | | |
December 31, 2017 | | | | | | | |
U.S. government and agency securities | $ | 237,809 |
| | $ | 275 |
| | $ | 2,193 |
| | $ | 235,891 |
|
Foreign government | 2,022 |
| | 14 |
| | — |
| | 2,036 |
|
States, municipalities and political subdivisions | 200,706 |
| | 1,929 |
| | 1,123 |
| | 201,512 |
|
Public utilities | 20,215 |
| | 127 |
| | 85 |
| | 20,257 |
|
Corporate securities | 287,025 |
| | 1,746 |
| | 1,209 |
| | 287,562 |
|
Asset-backed securities | 14,902 |
| | 23 |
| | 20 |
| | 14,905 |
|
Redeemable preferred stocks | 755 |
| | 11 |
| | 74 |
| | 692 |
|
Total fixed maturities | $ | 763,434 |
| | $ | 4,125 |
| | $ | 4,704 |
| | $ | 762,855 |
|
| | | | | | | |
Mutual fund | $ | 29,079 |
| | $ | 2,845 |
| | $ | — |
| | $ | 31,924 |
|
Public utilities | 1,343 |
| | 359 |
| | — |
| | 1,702 |
|
Other common stocks | 18,856 |
| | 9,093 |
| | 47 |
| | 27,902 |
|
Non-redeemable preferred stocks | 1,718 |
| | 53 |
| | 4 |
| | 1,767 |
|
Total equity securities | $ | 50,996 |
| | $ | 12,350 |
| | $ | 51 |
| | $ | 63,295 |
|
UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
March 31, 2018
When we sell investments, we calculate the gain or loss realized on the sale by comparing the sales price (fair value) to the cost or adjusted/amortized cost of the security sold. We determine the cost or adjusted/amortized cost of the security sold using the specific-identification method. The following table details our realized gains (losses) by major investment category for the three months ended March 31, 2018 and 2017:
|
| | | | | | | | | | | | | | | |
| 2018 | | 2017 |
| Gains (Losses) | | Fair Value at Sale | | Gains (Losses) | | Fair Value at Sale |
Three Months Ended March 31, | | | | | | | |
Fixed maturities | $ | 42 |
| | $ | 3,445 |
| | $ | 99 |
| | $ | 12,586 |
|
Equity securities | 450 |
| | 1,408 |
| | — |
| | — |
|
Total realized gains | 492 |
| | 4,853 |
| | 99 |
| | 12,586 |
|
Fixed maturities | (281 | ) | | 32,228 |
| | (450 | ) | | 23,548 |
|
Equity securities | — |
| | — |
| | — |
| | — |
|
Total realized losses | (281 | ) | | 32,228 |
| | (450 | ) | | 23,548 |
|
Net realized investment gains (losses) | $ | 211 |
| | $ | 37,081 |
| | $ | (351 | ) | | $ | 36,134 |
|
The table below summarizes our fixed maturities at March 31, 2018 by contractual maturity periods. Actual results may differ as issuers may have the right to call or prepay obligations, with or without penalties, prior to the contractual maturities of those obligations.
|
| | | | | | | | | | | | | |
| March 31, 2018 |
| Cost or Amortized Cost | | Percent of Total | | Fair Value | | Percent of Total |
Due in one year or less | $ | 61,999 |
| | 7.8 | % | | $ | 61,715 |
| | 7.8 | % |
Due after one year through five years | 325,696 |
| | 40.8 | % | | 321,403 |
| | 40.8 | % |
Due after five years through ten years | 185,127 |
| | 23.2 | % | | 181,628 |
| | 23.1 | % |
Due after ten years | 15,800 |
| | 2.0 | % | | 15,459 |
| | 2.0 | % |
Asset and mortgage backed securities | 210,455 |
| | 26.2 | % | | 206,940 |
| | 26.3 | % |
Total | $ | 799,077 |
| | 100.0 | % | | $ | 787,145 |
| | 100.0 | % |
UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
March 31, 2018
The following table summarizes our net investment income by major investment category:
|
| | | | | | | |
| Three Months Ended March 31, |
| 2018 | | 2017 |
Fixed maturities | $ | 4,812 |
| | $ | 2,498 |
|
Equity securities | 463 |
| | 220 |
|
Cash and cash equivalents | 222 |
| | 70 |
|
Other investments | 182 |
| | 152 |
|
Other assets | 7 |
| | 11 |
|
Investment income | 5,686 |
| | 2,951 |
|
Investment expenses | (243 | ) | | (250 | ) |
Net investment income | $ | 5,443 |
| | $ | 2,701 |
|
Portfolio monitoring
We have a comprehensive portfolio monitoring process to identify and evaluate each fixed income and equity security whose carrying value may be other-than-temporarily impaired.
For each fixed income security in an unrealized loss position, we determine if the loss is temporary or other-than-temporary. If our management decides to sell the security or determines that it is more likely than not that we will be required to sell the security before recovery of the cost or amortized cost basis for reasons such as liquidity needs, contractual or regulatory requirements, then the security's decline in fair value is considered other-than-temporary and is recorded in earnings.
If we have not made the decision to sell the fixed income security and it is more likely than not that we will be required to sell the fixed income security before recovery of its amortized cost basis, we evaluate whether we expect the security to receive cash flows sufficient to recover the entire cost or amortized cost basis of the security. We calculate the estimated recovery value by discounting the best estimate of future cash flows at the security's original or current effective rate, as appropriate, and compare this to the cost or amortized cost of the security. If we do not expect to receive cash flows sufficient to recover the entire cost or amortized cost basis of the fixed income security, the credit loss component of the impairment is recorded in earnings, with the remaining amount of the unrealized loss related to other factors recognized in other comprehensive income.
Our portfolio monitoring process includes a quarterly review of all fixed-income securities to identify instances where the fair value of a security compared to its cost or amortized cost (for fixed income securities) is below established thresholds. The process also includes the monitoring of other impairment indicators such as ratings, ratings downgrades and payment defaults. The securities identified, in addition to other securities for which we may have a concern, are evaluated for potential other-than-temporary impairment using information relevant to the collectability or recovery of the security that is reasonably available. Inherent in our evaluation of other-than-temporary impairment for these fixed income and equity securities are assumptions and estimates about the financial condition and future earnings potential of the issue or issuer. Some of the factors that may be considered in evaluating whether a decline in fair value is other-than-temporary are: (1) the financial condition, near-term and long-term prospects of the issue or issuer, including relevant industry specific market conditions and trends, geographic location and implications of rating agency actions and offering prices; (2) the specific reasons that a security is in an unrealized loss position, including overall market conditions which could affect liquidity; and (3) the length of time and extent to which the fair value has been less than amortized cost or cost.
UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
March 31, 2018
The following table presents an aging of our unrealized investment losses by investment class:
|
| | | | | | | | | | | | | | | | | | | | | |
| Less Than Twelve Months | | Twelve Months or More |
| Number of Securities(1) | | Gross Unrealized Losses | | Fair Value | | Number of Securities(1) | | Gross Unrealized Losses | | Fair Value |
March 31, 2018 | | | | | | | | | | | |
U.S. government and agency securities | 177 |
| | $ | 3,252 |
| | $ | 163,624 |
| | 120 |
| | $ | 2,065 |
| | $ | 69,114 |
|
Foreign governments | 2 |
| | 8 |
| | 2,012 |
| | — |
| | — |
| | — |
|
States, municipalities and political subdivisions | 159 |
| | 1,773 |
| | 133,508 |
| | 24 |
| | 435 |
| | 16,616 |
|
Public utilities | 39 |
| | 381 |
| | 21,114 |
| | 5 |
| | 63 |
| | 994 |
|
Corporate securities | 500 |
| | 4,406 |
| | 240,811 |
| | 52 |
| | 612 |
| | 17,182 |
|
Asset backed securities | 31 |
| | 57 |
| | 31,532 |
| | — |
| | — |
| | — |
|
Redeemable preferred stocks | 1 |
| | 4 |
| | 121 |
| | 3 |
| | 81 |
| | 302 |
|
Total fixed maturities | 909 |
| | 9,881 |
| | 592,722 |
| | 204 |
| | 3,256 |
| | 104,208 |
|
Mutual Fund | 2 |
| | 454 |
| | 14,743 |
| | — |
| | — |
| | — |
|
Public utilities | 2 |
| | 34 |
| | 416 |
| | — |
| | — |
| | — |
|
Other common stocks | 23 |
| | 202 |
| | 3,236 |
| | 1 |
| | 29 |
| | 97 |
|
Non-redeemable preferred stocks | 13 |
| | 17 |
| | 604 |
| | — |
| | — |
| | — |
|
Total equity securities | 40 |
| | 707 |
| | 18,999 |
| | 1 |
| | 29 |
| | 97 |
|
Total | 949 |
| | $ | 10,588 |
| | $ | 611,721 |
| | 205 |
| | $ | 3,285 |
| | $ | 104,305 |
|
| | | | | | | | | | | |
December 31, 2017 | | | | | | | | | | | |
U.S. government and agency securities | 129 |
| | $ | 641 |
| | $ | 103,328 |
| | 123 |
| | $ | 1,552 |
| | $ | 74,190 |
|
States, municipalities and political subdivisions | 106 |
| | 734 |
| | 91,245 |
| | 31 |
| | 389 |
| | 19,718 |
|
Public utilities | 16 |
| | 44 |
| | 7,052 |
| | 5 |
| | 41 |
| | 1,016 |
|
Corporate securities | 263 |
| | 871 |
| | 134,755 |
| | 52 |
| | 338 |
| | 16,476 |
|
Asset-backed securities | 18 |
| | 20 |
| | 11,682 |
| | — |
| | — |
| | — |
|
Redeemable preferred stocks | — |
| | — |
| | — |
| | 3 |
| | 74 |
| | 303 |
|
Total fixed maturities | 532 |
| | 2,310 |
| | 348,062 |
| | 214 |
| | 2,394 |
| | 111,703 |
|
Mutual Funds | 1 |
| | — |
| | 131 |
| | — |
| | — |
| | — |
|
Other common stocks | 5 |
| | 47 |
| | 748 |
| | — |
| | — |
| | — |
|
Non-redeemable preferred stocks | 4 |
| | 4 |
| | 87 |
| | — |
| | — |
| | — |
|
Total equity securities | 10 |
| | 51 |
| | 966 |
| | — |
| | — |
| | — |
|
Total | 542 |
| | $ | 2,361 |
| | $ | 349,028 |
| | 214 |
| | $ | 2,394 |
| | $ | 111,703 |
|
(1) This amount represents the actual number of discrete securities, not the number of shares or units of those securities. The numbers are not presented in thousands.
During our quarterly evaluations of our securities for impairment, we determined that none of our investments in debt and equity securities that reflected an unrealized loss position were other-than-temporarily impaired. The issuers of our debt securities continue to make interest payments on a timely basis. We do not intend to sell nor is it likely that we would be required to sell the debt securities before we recover our amortized cost basis. Due to the adoption of ASU 2016-01, equity securities are reported at fair value with changes in fair value recognized in valuation of equity investments and are no longer included in impairment write-downs, change in intent write-downs and sales.
During the three months ended March 31, 2018 and 2017, we recorded no other-than-temporary impairment charges.
UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
March 31, 2018
Fair value measurement
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The hierarchy for inputs used in determining fair value maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Assets and liabilities recorded on our Unaudited Consolidated Balance Sheets at fair value are categorized in the fair value hierarchy based on the observability of inputs to the valuation techniques as follows:
Level 1: Assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that we can access.
Level 2: Assets and liabilities whose values are based on the following:
(a) Quoted prices for similar assets or liabilities in active markets;
(b) Quoted prices for identical or similar assets or liabilities in markets that are not active; or
(c) Valuation models whose inputs are observable, directly or indirectly, for substantially the full term of the asset or liability.
Level 3: Assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. Unobservable inputs reflect our estimates of the assumptions that market participants would use in valuing the assets and liabilities.
We estimate the fair value of our investments using the closing prices on the last business day of the reporting period, obtained from active markets such as the NYSE, Nasdaq and NYSE MKT. For securities for which quoted prices in active markets are unavailable, we use a third-party pricing service that utilizes quoted prices in active markets for similar instruments, benchmark interest rates, broker quotes and other relevant inputs to estimate the fair value of those securities for which quoted prices are unavailable. Our estimates of fair value reflect the interest rate environment that existed as of the close of business on March 31, 2018 and December 31, 2017. Changes in interest rates subsequent to March 31, 2018 may affect the fair value of our investments.
The fair value of our fixed maturities is initially calculated by a third-party pricing service. Valuation service providers typically obtain data about market transactions and other key valuation model inputs from multiple sources and, through the use of proprietary models, produce valuation information in the form of a single fair value for individual fixed income and other securities for which a fair value has been requested. The inputs used by the valuation service providers include, but are not limited to, market prices from recently completed transactions and transactions of comparable securities, interest rate yield curves, credit spreads, liquidity spreads, currency rates and other information, as applicable. Credit and liquidity spreads are typically implied from completed transactions and transactions of comparable securities. Valuation service providers also use proprietary discounted cash flow models that are widely accepted in the financial services industry and similar to those used by other market participants to value the same financial information. The valuation models take into account, among other things, market observable information as of the measurement date, as described above, as well as the specific attributes of the security being valued, including its term, interest rate, credit rating, industry sector and, where applicable, collateral quality and other issue or issuer specific information. Executing valuation models effectively requires seasoned professional judgment and experience.
For our Level 3 assets, our internal pricing methods are primarily based on models using discounted cash flow methodologies that determine a single best estimate of fair value for individual financial instruments. In addition, our models use a discount rate and internally assigned credit ratings as inputs (which are generally consistent with any external ratings) and those we use to report our holdings by credit rating. Market related inputs used in these fair values, which we believe are representative of inputs other market participants would use to determine fair value of the same instruments include: interest rate yield curves, quoted market prices of comparable securities, credit spreads and other applicable market data. As a result of the significance of non-market observable inputs, including internally assigned credit ratings as described above, judgment is required in developing these fair values. The fair value of these financial assets may differ from the amount actually received if we were to sell the asset. Moreover, the use of different valuation assumptions may have a material effect on the fair values on the financial assets.
UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
March 31, 2018
Any change in the estimated fair value of our fixed-income securities would impact the amount of unrealized gain or loss we have recorded, which could change the amount we have recorded for our investments and other comprehensive income on our Unaudited Consolidated Balance Sheet as of March 31, 2018.
The following table presents the fair value of our financial instruments measured on a recurring basis by level at March 31, 2018 and December 31, 2017:
|
| | | | | | | | | | | | | | | |
| Total | | Level 1 | | Level 2 | | Level 3 |
March 31, 2018 | | | | | | | |
U.S. government and agency securities | $ | 242,259 |
| | $ | — |
| | $ | 242,259 |
| | $ | — |
|
Foreign government | 2,012 |
| | — |
| | 2,012 |
| | — |
|
States, municipalities and political subdivisions | 185,868 |
| | — |
| | 185,868 |
| | — |
|
Public utilities | 24,169 |
| | — |
| | 24,169 |
| | — |
|
Corporate securities | 287,247 |
| | — |
| | 287,247 |
| | — |
|
Asset backed securities | 44,903 |
| | — |
| | 44,903 |
| | — |
|
Redeemable preferred stocks | 687 |
| | 687 |
| | — |
| | — |
|
Total fixed maturities | 787,145 |
| | 687 |
| | 786,458 |
| | — |
|
Mutual funds | 46,236 |
| | 46,236 |
| | — |
| | — |
|
Public utilities | 1,603 |
| | 1,603 |
| | — |
| | — |
|
Other common stocks | 27,577 |
| | 27,577 |
| | — |
| | — |
|
Non-redeemable preferred stocks | 1,739 |
| | 1,739 |
| | — |
| | — |
|
Total equity securities | 77,155 |
| | 77,155 |
| | — |
| | — |
|
Other long-term investments | 8,144 |
| | 300 |
| | 7,190 |
| | 654 |
|
Total investments | $ | 872,444 |
| | $ | 78,142 |
| | $ | 793,648 |
| | $ | 654 |
|
| | | | | | | |
December 31, 2017 | | | | | | | |
U.S. government and agency securities | $ | 235,891 |
| | $ | — |
| | $ | 235,891 |
| | $ | — |
|
Foreign government | 2,036 |
| | — |
| | 2,036 |
| | — |
|
States, municipalities and political subdivisions | 201,512 |
| | — |
| | 201,512 |
| | — |
|
Public utilities | 20,257 |
| | — |
| | 20,257 |
| | — |
|
Corporate securities | 287,562 |
| | — |
| | 287,562 |
| | — |
|
Asset-backed securities | 14,905 |
| | — |
| | 14,905 |
| | — |
|
Redeemable preferred stocks | 692 |
| | 692 |
| | — |
| | — |
|
Total fixed maturities | 762,855 |
| | 692 |
| | 762,163 |
| | — |
|
Mutual Funds | 31,924 |
| | 31,924 |
| | — |
| | — |
|
Public utilities | 1,702 |
| | 1,702 |
| | — |
| | — |
|
Other common stocks | 27,902 |
| | 27,902 |
| | — |
| | — |
|
Non-redeemable preferred stocks | 1,767 |
| | 1,767 |
| | — |
| | — |
|
Total equity securities | 63,295 |
| | 63,295 |
| | — |
| | — |
|
Other long-term investments | 8,381 |
| | 300 |
| | 7,447 |
| | 634 |
|
Total investments | $ | 834,531 |
| | $ | 64,287 |
| | $ | 769,610 |
| | $ | 634 |
|
UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
March 31, 2018
The table below presents the rollforward of our Level 3 investments held at fair value during the three months ended March 31, 2018:
|
| | | | |
| | Other Investments |
December 31, 2017 | | $ | 634 |
|
Partnership income | | 53 |
|
Return of capital | | (90 | ) |
Unrealized gains in accumulated other comprehensive income | | 57 |
|
March 31, 2018 | | $ | 654 |
|
We are responsible for the determination of fair value and the supporting assumptions and methodologies. We have implemented a system of processes and controls designed to provide assurance that our assets and liabilities are appropriately valued. For fair values received from third parties, our processes are designed to provide assurance that the valuation methodologies and inputs are appropriate and consistently applied, the assumptions are reasonable and consistent with the objective of determining fair value, and the fair values are accurately recorded.
At the end of each quarter, we determine whether we need to transfer the fair values of any securities between levels of the fair value hierarchy and, if so, we report the transfer as of the end of the quarter. During the first three months of 2018, we did not transfer any investments between levels. We used unobservable inputs to derive our estimated fair value for Level 3 investments, and the unobservable inputs are significant to the overall fair value measurement.
For our investments in U.S. government securities that do not have prices in active markets, agency securities, state and municipal governments, and corporate bonds, we obtain the fair values from our investment custodians, which use a third-party valuation service. The valuation service calculates prices for our investments in the aforementioned security types on a month-end basis by using several matrix-pricing methodologies that incorporate inputs from various sources. The model the valuation service uses to price U.S. government securities and securities of states and municipalities incorporates inputs from active market makers and inter-dealer brokers. To price corporate bonds and agency securities, the valuation service calculates non-call yield spreads on all issuers, uses option-adjusted yield spreads to account for any early redemption features, and adds final spreads to the U.S. Treasury curve at 3 p.m. (ET) as of quarter end. Since the inputs the valuation service uses in its calculations are not quoted prices in active markets, but are observable inputs, they represent Level 2 inputs.
UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
March 31, 2018
Other investments
We acquired investments in limited partnerships, recorded in the other investments line of our Consolidated Balance Sheets and are currently being accounted for at fair value utilizing a discounted cash flow methodology. The estimated fair value of our investments in the limited partnership interests at March 31, 2018 was $7,844,000. We have fully funded two investments and are still obligated to fund an additional $1,320,000 for the remaining three investments.
The information presented in the table below is as of March 31, 2018:
|
| | | | | | | | | | | | | | | | |
| | Book Value | | Unrealized Gain | | Unrealized Loss | | Fair Value |
Limited partnership investments | | $ | 7,463 |
| | $ | 381 |
| | $ | — |
| | $ | 7,844 |
|
Certificates of deposit | | 300 |
| | — |
| | — |
| | 300 |
|
Total other investments | | $ | 7,763 |
| | $ | 381 |
| | $ | — |
| | $ | 8,144 |
|
The following table summarizes the quantitative impact that the significant unobservable inputs used to estimate the fair value of our Level 3 investments has on the estimated fair value of our investments shown in the tables above. Those limited partnership investments being carried at cost are excluded from the table below. Our investment in DCR Mortgage Partners VI, L.P. (DCR VI) was valued using a duration of 60 months for both periods presented below.
|
| | | | | | | | | | |
| | Fair Value | | Valuation | | | | Rate |
| | Impact | | Technique | | Unobservable Input | | Adjustment |
March 31, 2018 | | | | | | | | |
DCR VI | | $ | (33 | ) | | Discounted cash flow | | Discount rate based on D&B paydex scale | | 2.35% |
| | | | | | | | |
December 31, 2017 | | | | | | | | |
DCR VI | | $ | (37 | ) | | Discounted cash flow | | Discount rate based on D&B paydex scale | | 2.35% |
Portfolio loans
At March 31, 2018, we held commercial portfolio loans of $20,000,000. We believe that making sound loans is a necessary and desirable means of employing funds available for investment. Recognizing our obligation to our stockholders, management is expected to seek to develop and make sound, profitable loans that resources permit and that opportunity affords. These are short-term collateralized loans (less than one year), which we expect to be repaid primarily from cash flows of the borrowers.
We have not calculated an allowance for a loan loss at March 31, 2018. The allowance would represent an estimate of the amount of probable losses believed to be inherent in our portfolio. Due to the short-term nature of the loans, the projects being substantially complete and the fact that all loans are current with respect to their scheduled payments, we determined that an allowance for loan losses was not necessary, and therefore the related disclosures on the allowance for loan losses and past due loans have been omitted. Our loans were repaid in full upon completion of the projects in April 2018.
We account for business acquisitions in accordance with the acquisition method of accounting, which requires, among other things, that most assets acquired, liabilities assumed and earn-out consideration be recognized at their fair values as of the acquisition date. Measurement period adjustments to provisional purchase price allocations are recognized in the period in which they are determined as if the accounting had been completed on the acquisition date.
UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
March 31, 2018
On April 3, 2017, we completed our acquisition of AmCo and its subsidiaries. The transaction was completed through a series of mergers that ultimately resulted in the Company issuing 20,956,355 shares of its common stock as merger consideration to the equity holders of RDX Holding, LLC, the former parent company of AmCo. As a result of the mergers, AmCo merged with and into a wholly-owned subsidiary of the Company. The acquisition of AmCo supported our growth strategy and further strengthened our overall position in the commercial property and casualty insurance market. Goodwill recorded in the transaction, which reflected the synergies expected from the acquisition and enhanced reinsurance opportunities, is not tax deductible.
The operations of AmCo are included in our Unaudited Consolidated Statements of Comprehensive Income effective April 3, 2017. The final purchase price allocation is as follows:
|
| | | |
Cash and cash equivalents | $ | 95,284 |
|
Investments | 222,920 |
|
Premium and agents' receivable | 31,439 |
|
Reinsurance recoverable | 20,230 |
|
Prepaid reinsurance premiums | 22,544 |
|
Intangible assets | 30,286 |
|
Insurance contract asset | 33,812 |
|
Goodwill | 59,475 |
|
Other assets | 4,591 |
|
Unpaid losses and loss adjustment expenses | (60,529 | ) |
Unearned premiums | (128,824 | ) |
Reinsurance payable | (22,406 | ) |
Deferred taxes | (17,093 | ) |
Other liabilities | (6,261 | ) |
Total purchase price | $ | 285,468 |
|
The unaudited pro forma financial information below has been prepared as if the acquisition of AmCo had taken place on January 1, 2017. The unaudited pro forma financial information is not necessarily indicative of the results that we would have achieved had the transaction taken place on January 1, 2017, and the unaudited pro forma information does not purport to be indicative of future financial operating results.
|
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2017 |
| As | | Pro Forma | | |
| Reported | | Adjustments | | Pro Forma |
Revenues | $ | 122,633 |
| | $ | 38,096 |
| | $ | 160,729 |
|
| | | | | |
Net income (loss) | $ | 3,899 |
| | $ | 6,712 |
| | $ | 10,611 |
|
| | | | | |
Diluted earnings per share | $ | 0.18 |
| | $ | — |
| | $ | 0.25 |
|
5) EARNINGS PER SHARE
UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
March 31, 2018
Basic earnings per share (EPS) is based on the weighted average number of common shares outstanding for the period, excluding any dilutive common share equivalents. Diluted EPS reflects the potential dilution resulting from vesting of restricted stock awards. The following table shows the computation of basic and diluted EPS for the three-month periods ended March 31, 2018 and 2017, respectively:
|
| | | | | | | | |
| | Three Months Ended March 31, |
| | 2018 | | 2017 |
Numerator: | | | | |
Net income attributable to common stockholders | | $ | 8,369 |
| | $ | 3,899 |
|
| | | | |
Denominator: | | | | |
Weighted-average shares outstanding | | 42,581,939 |
| | 21,471,185 |
|
Effect of dilutive securities | | 166,688 |
| | 217,548 |
|
Weighted-average diluted shares | | 42,748,627 |
| | 21,688,733 |
|
| | | | |
Basic earnings per share | | $ | 0.20 |
| | $ | 0.18 |
|
Diluted earnings per share | | $ | 0.20 |
| | $ | 0.18 |
|
See Note 16 for additional information on the stock grants related to dilutive securities.
6) PROPERTY AND EQUIPMENT, NET
Property and equipment, net consisted of the following:
|
| | | | | | | | |
| | March 31, 2018 | | December 31, 2017 |
Land | | $ | 2,114 |
| | $ | 2,114 |
|
Building and building improvements | | 6,000 |
| | 5,695 |
|
Computer hardware and software | | 19,283 |
| | 18,985 |
|
Office furniture and equipment | | 3,801 |
| | 3,413 |
|
Leasehold improvements | | 19 |
| | — |
|
Total, at cost | | 31,217 |
| | 30,207 |
|
Less: accumulated depreciation and amortization | | (13,660 | ) | | (12,916 | ) |
Property and equipment, net | | $ | 17,557 |
| | $ | 17,291 |
|
Depreciation and amortization expense under property and equipment was $744,000 and $615,000 for the three months ended March 31, 2018 and 2017, respectively.
7) GOODWILL AND INTANGIBLE ASSETS
Goodwill
The carrying amount of goodwill, both at March 31, 2018 and December 31, 2017, was $73,045,000. There was no goodwill acquired or disposed of during the three-month period ended March 31, 2018.
UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
March 31, 2018
Using a qualitative assessment, we completed our most recent goodwill impairment testing during the fourth quarter of 2017 and determined that there was no impairment in the value of the asset as of December 31, 2017.
No impairment loss in the value of goodwill was recognized during the three-months ended March 31, 2018. Additionally, there was no accumulated impairment or accumulated amortization related to goodwill at March 31, 2018 or December 31, 2017.
Intangible Assets
The following is a summary of intangible assets excluding goodwill recorded as other assets:
|
| | | | | | | | |
| | March 31, 2018 | | December 31, 2017 |
Intangible assets subject to amortization | | $ | 31,890 |
| | $ | 41,715 |
|
Indefinite-lived intangible assets(1) | | 3,556 |
| | 3,556 |
|
Total | | $ | 35,446 |
| | $ | 45,271 |
|
(1) Indefinite-lived intangible assets are comprised of state insurance and agent licenses, as well as perpetual software licenses.
Intangible assets subject to amortization consisted of the following:
|
| | | | | | | | | | | | | | |
| | Weighted-average remaining amortization period (in years) | | Gross carrying amount | | Accumulated amortization | | Net carrying amount |
March 31, 2018 | | | | | | | | |
Value of business acquired | | — | | $ | 42,788 |
| | $ | (42,788 | ) | | $ | — |
|
Agency agreements acquired | | 7.8 | | 34,661 |
| | (7,793 | ) | | 26,868 |
|
Trade names acquired | | 5.8 | | 6,381 |
| | (1,359 | ) | | 5,022 |
|
Total | | | | $ | 83,830 |
| | $ | (51,940 | ) | | $ | 31,890 |
|
| | | | | | | | |
December 31, 2017 | | | | | | | | |
Value of business acquired | | 0.3 | | $ | 42,788 |
| | $ | (34,335 | ) | | $ | 8,453 |
|
Agency agreements acquired | | 8.0 | | 34,661 |
| | (6,669 | ) | | 27,992 |
|
Trade names acquired | | 6.0 | | 6,381 |
| | (1,111 | ) | | 5,270 |
|
Total | | | | $ | 83,830 |
| | $ | (42,115 | ) | | $ | 41,715 |
|
No impairment in the value of amortizing or non-amortizing intangible assets was recognized during the three months ended March 31, 2018 and 2017.
Amortization expense of our intangible assets was $9,825,000 for the three months ended March 31, 2018. Amortization expense of our intangible assets was $1,794,000 for the three months ended March 31, 2017.
Estimated amortization expense of our intangible assets to be recognized by the Company over the next five years is as follows:
|
| | | | |
Year ending December 31, | | Estimated Amortization Expense |
Remaining 2018 | | $ | 4,095 |
|
2019 | | 5,355 |
|
2020 | | 4,267 |
|
2021 | | 3,555 |
|
2022 | | 3,246 |
|
2023 | | 3,246 |
|
UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
March 31, 2018
8) REINSURANCE
Our reinsurance program is designed, utilizing our risk management methodology, to address our exposure to catastrophes. According to the Insurance Service Office (ISO), a catastrophe loss is defined as a single unpredictable incident or series of closely related incidents that result in $25,000,000 or more in U.S. industry-wide direct insured losses to property and that affect a significant number of policyholders and insurers (ISO catastrophes). In addition to ISO catastrophes, we also include as catastrophes those events (non-ISO catastrophes), which may include losses, that we believe are, or will be, material to our operations, either in amount or in number of claims made.
Our program provides reinsurance protection for catastrophes including hurricanes, tropical storms and tornadoes. These reinsurance agreements are part of our catastrophe management strategy, which is intended to provide our stockholders an acceptable return on the risks assumed in our property business, and to reduce variability of earnings, while providing protection to our policyholders.
Effective January 1, 2018, UPC Insurance, through its wholly-owned insurance subsidiaries UPC, ACIC, IIC and FSIC, renewed the aggregate excess of loss agreement with a private reinsurer. The treaty provides coverage for all catastrophe perils other than hurricanes, tropical storms, tropical depressions and earthquakes. Under this agreement, we will retain, in the aggregate, 100% of those losses up to 4.75% of the covered companies’ gross earned premium. The reinsurer will then be liable for all losses in excess of 4.75% of the covered companies’ gross earned premium in the aggregate not to exceed $20,000,000 over the term of the treaty. Recoveries under this treaty will be calculated quarterly based on the cumulative gross earned premium. We ceded $19,189,000 of catastrophe losses to this treaty for the three months ended March 31, 2018. Reinsurance recoveries under this agreement may change in future periods as the cumulative subject gross earned premiums and eligible gross catastrophe losses incurred are recognized in subsequent calendar quarters during 2018 in accordance with the terms of the agreement. No allowance has been recorded against the $19,189,000 reinsurance recoverable at March 31, 2018 since future catastrophe losses are inherently unpredictable and can't be reasonably estimated.
Effective December 31, 2017, UPC Insurance, through our wholly-owned insurance subsidiary UPC, replaced its quota share agreement with private reinsurers. The quota share agreement has a term of 12 months and a cession rate of 20% for all subject business. The quota share agreement provides coverage for all catastrophe perils and attritional losses. For all catastrophe perils, the quota share agreement provides ground-up protection effectively reducing our retention for catastrophe losses. Quota share reinsurers’ participation in paying attritional losses is subject to an attritional loss ratio cap.
Effective June 1, 2017, UPC Insurance, through our wholly owned insurance subsidiaries UPC, ACIC, FSIC and IIC, entered into reinsurance agreements with several private reinsurers and with the Florida State Board of Administration (SBA), which administers the Florida Hurricane Catastrophe Fund (FHCF). These agreements provide coverage for catastrophe losses from named or numbered windstorms and earthquakes in all states in which UPC operates except for the FHCF agreement, which only provides coverage in Florida against storms that the National Hurricane Center designates as hurricanes.
Highlights of the coverage embedded in these contracts include:
| |
• | More frequency and severity protection than in any prior year, with an overall program exhaustion point of $2,747,500,000; |
| |
◦ | Sufficient coverage for a single 1-in-400 year event (AIR Touchstone v3.1 Standard Event Set); |
| |
◦ | Sufficient coverage for a 1-in-100 year event followed by a 1-in-50 year event in the same season; |
| |
• | Group retention of $55,000,000 for a first event and $30,000,000 for a second and subsequent events including a $5,000,000 retention related to our captive reinsurer BlueLine Cayman Holdings; this represents approximately 11% of group equity for a first event, lower than in any prior year for UPC Insurance; |
| |
• | Realized cost synergies by placing a combined program with ACIC that surpassed our previously stated goal of $20,000,000 annually; |
| |
• | Coverage from 43 reinsurers with 70% of the open market limit placed on a fully collateralized basis to mitigate credit risk; carriers providing uncollateralized limit have minimum A.M. Best financial strength ratings of A-; |
| |
• | Approximately $87,500,000 of multi-year limit; and |
| |
• | Coverage expanded to include the entire life of a hurricane in lieu of an hours clause |
For the FHCF reimbursement contracts effective June 1, 2017, UPC Insurance has elected a 45% coverage for all its insurance subsidiaries with Florida exposure. We estimate the mandatory FHCF layer will provide approximately $789,000,000
UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
March 31, 2018
of aggregate coverage with varying retentions and limits among the three FHCF contracts that all inure to the benefit of the open market coverage secured from private reinsurers.
The $1,928,000,000 of aggregate open market catastrophe reinsurance coverage is structured into multiple layers with a cascading feature that all layers drop down as layers below them are exhausted. Any remaining unused layer protection drops down for subsequent events until exhausted, ensuring there are no potential gaps in coverage up to the $2,747,500,000 program exhaustion point.
We amortize our prepaid reinsurance premiums over the annual agreement period, and we record that amortization in ceded premiums earned on our Unaudited Consolidated Statements of Comprehensive Income. The table below summarizes the amounts of our ceded premiums written under the various types of agreements, as well as the amortization of prepaid reinsurance premiums:
|
| | | | | | | |
| Three Months Ended March 31, |
| 2018 | | 2017 |
Quota share | $ | (22,607 | ) | | $ | (19,370 | ) |
Excess-of-loss | (13,861 | ) | | (10,229 | ) |
Equipment & identity theft | (2,120 | ) | | (2,073 | ) |
Flood | (3,671 | ) | | (3,391 | ) |
Ceded premiums written | $ | (42,259 | ) | | $ | (35,063 | ) |
Increase (decrease) in ceded unearned premiums | (74,016 | ) | | (39,819 | ) |
Ceded premiums earned | $ | (116,275 | ) | | $ | (74,882 | ) |
Current year catastrophe losses disaggregated between named and numbered storms and all other catastrophe loss events are shown in the following table:
|
| | | | | | | | | | | | | | | | | | | | |
| | 2018 | | 2017 |
| | Number of Events | | Incurred Loss and LAE (1) | | Combined Ratio Impact | | Number of Events | | Incurred Loss and LAE (1) | | Combined Ratio Impact |
Three Months Ended March 31, | | | | | | | | | | | | |
Current period catastrophe losses incurred | | | | | | | | | | | | |
Named and numbered storms | | — |
| | $ | — |
| | — | % | | — |
| | $ | — |
| | — | % |
All other catastrophe loss events | | 8 |
| | 6,317 |
| | 3.9 | % | | 5 |
| | 10,612 |
| | 9.9 | % |
Total | | 8 |
| | $ | 6,317 |
| | 3.9 | % | | 5 |
| | $ | 10,612 |
| | 9.9 | % |
(1) Incurred loss and LAE (as defined below) is equal to losses and LAE paid plus the change in case and incurred but not reported reserves. Shown net of losses ceded to reinsurers. Incurred loss and LAE and number of events includes the development on storms during the year in which it occurred.
We collected cash recoveries under our reinsurance agreements totaling $122,512,000 and $2,484,000 for the three-month periods ended March 31, 2018 and 2017, respectively.
We write flood insurance under an agreement with the National Flood Insurance Program. We cede 100% of the premiums written and the related risk of loss to the federal government. We earn commissions for the issuance of flood policies based upon a fixed percentage of net written premiums and the processing of flood claims based upon a fixed percentage of incurred losses, and we can earn additional commissions by meeting certain growth targets for the number of in-force policies. We recognized commission revenue from our flood program of $388,000 and $294,000 for the three-month periods ended March 31, 2018 and 2017, respectively.
9) LIABILITY FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSE (LAE)
UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
March 31, 2018
We determine the reserve for unpaid losses on an individual-case basis for all incidents reported. The liability also includes amounts for incurred but not reported (IBNR) claims as of the balance sheet date.
The table below shows the analysis of our reserve for unpaid losses for the three months ended March 31, 2018 and 2017 on a GAAP basis:
|
| | | | | | | |
| March 31, |
| 2018 | | 2017 |
Balance at January 1 | $ | 482,232 |
| | $ | 140,855 |
|
Less: reinsurance recoverable on unpaid losses | 305,673 |
| | 18,724 |
|
Net balance at January 1 | $ | 176,559 |
| | $ | 122,131 |
|
| | | |
Incurred related to: | | | |
Current year | 77,927 |
| | 63,859 |
|
Prior years | (681 | ) | | (526 | ) |
Total incurred | $ | 77,246 |
| | $ | 63,333 |
|
Paid related to: | | | |
Current year | 34,800 |
| | 21,986 |
|
Prior years | 74,570 |
| | 42,528 |
|
Total paid | $ | 109,370 |
| | $ | 64,514 |
|
| | | |
Net balance at March 31 | $ | 144,435 |
| | $ | 120,950 |
|
Plus: reinsurance recoverable on unpaid losses | 399,814 |
| | 20,152 |
|
Balance at March 31 | $ | 544,249 |
| | $ | 141,102 |
|
| | | |
Composition of reserve for unpaid losses and LAE:
| | | |
Case reserves | $ | 214,067 |
| | $ | 82,987 |
|
IBNR reserves | 330,182 |
| | 58,115 |
|
Balance at March 31 | $ | 544,249 |
| | $ | 141,102 |
|
Based upon our internal analysis and our review of the statement of actuarial opinion provided by our actuarial consultants, we believe that the reserve for unpaid losses reasonably represents the amount necessary to pay all claims and related expenses which may arise from incidents that have occurred as of the balance sheet date.
As reflected by our losses incurred related to prior years, the favorable development experienced in 2018 and 2017 was primarily the result of losses related to the 2017 and 2016 accident years coming in better than expected.
10) LONG-TERM DEBT
Long-Term Debt
The table below presents all long-term debt outstanding as of March 31, 2018 and December 31, 2017:
UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
March 31, 2018
|
| | | | | | | | | | | |
| | | Effective Interest Rate | | Carrying Value at |
| Maturity | | | March 31, 2018 | | December 31, 2017 |
$150M Senior Notes Payable | December 15, 2027 | | 6.25% | | $ | 150,000 |
| | $ | 150,000 |
|
Florida State Board of Administration Note Payable | July 1, 2026 | | 2.43% | | 9,706 |
| | 10,000 |
|
BB&T Term Note Payable | May 26, 2031 | | 3.31% | | 4,564 |
| | 4,651 |
|
Total long-term debt | | | | | $ | 164,270 |
| | $ | 164,651 |
|
$150M Senior Notes Payable
On December 13, 2017, we issued $150,000,000 of senior notes (the $150M seniors notes) that will mature in 10 years and bear interest at a rate equal to 6.25% per annum payable semi-annually on each June 15 and December 15, commencing June 15, 2018. The $150M senior notes are senior unsecured obligations of the Company. We may redeem the $150M senior notes at our option, at any time and from time to time in whole or in part, at a redemption price equal to the greater of (i) 100% of the principal amount of the notes to be redeemed and (ii) the sum of the present values of the remaining scheduled payments of principal and interest thereon from the date of redemption to September 15, 2027. Thereafter, we may redeem the $150M senior notes at par.
Florida State Board of Administration Note Payable
On September 22, 2006, we issued a $20,000,000, 20-year note payable to the Florida State Board of Administration (the SBA note). For the first three years of the SBA note we were required to pay interest only. On October 1, 2009, we began to repay the principal in addition to interest. The note bears an annual interest rate equivalent to the 10-year U.S. Treasury Bond rate. The rate will be adjusted quarterly for the term of the SBA note based on the 10-year Constant Maturity Treasury rate.
BB&T Term Note Payable
On May 26, 2016, we issued a $5,200,000, 15-year term note payable to BB&T (the BB&T note) with the intent to use the funds to purchase, renovate, furnish and equip our home office. The note bears interest at 1.65% in excess of the one-month LIBOR. In the event of default, BB&T may, among other things, declare its loan immediately due and payable, require us to pledge additional collateral to the bank, and take possession of and foreclose upon our home office, which has been pledged to the bank as security for the loan.
Financial Covenants
The $150M senior notes, SBA note and BB&T note contain representations and warranties, conditions and covenants. If these requirements are not met, all amounts outstanding or otherwise owed could become due and payable immediately and other limitations could be placed on our ability to use any available borrowing capacity. At March 31, 2018, we were in compliance with all covenants as specified in the $150M senior notes, SBA note and BB&T note. Refer to Part I; Item 2 for additional information regarding financial covenants.
Debt Issuance Costs
The table below presents the rollforward of our debt issuance costs paid, in conjunction with the debt instruments described above, during the three months ended March 31, 2018:
|
| | | |
| 2018 |
Balance at January 1, | $ | 3,287 |
|
Additions | 63 |
|
Amortization | (89 | ) |
Balance at March 31, | $ | 3,261 |
|
UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
March 31, 2018
11) COMMITMENTS AND CONTINGENCIES
We are involved in claims-related legal actions arising in the ordinary course of business. We accrue amounts resulting from claims-related legal actions in unpaid losses and LAE during the period that we determine an unfavorable outcome becomes probable and we can estimate the amounts. Management makes revisions to our estimates based on its analysis of subsequent information that we receive regarding various factors, including: (i) per claim information; (ii) company and industry historical loss experience; (iii) judicial decisions and legal developments in the awarding of damages, and (iv) trends in general economic conditions, including the effects of inflation.
At March 31, 2018, we were not involved in any material non-claims-related legal actions.
See Note 10 for information regarding commitments related to long-term debt, and Note 12 for commitments related to regulatory actions.
12) STATUTORY ACCOUNTING AND REGULATION
The insurance industry is heavily regulated. State laws and regulations, as well as national regulatory agency requirements, govern the operations of all insurers such as our insurance subsidiaries. The various laws and regulations require that insurers maintain minimum amounts of statutory surplus and risk-based capital, restrict insurers' ability to pay dividends, specify allowable investment types and investment mixes, and subject insurers to assessments. Our insurance subsidiaries, UPC and ACIC, are domiciled in Florida, while FSIC and IIC are domiciled in Hawaii and New York, respectively. At March 31, 2018, and during the three months then ended, our insurance subsidiaries met all regulatory requirements of the states in which they operate. In March 2018, we received a recouperable assessment for $570,000 from the Texas Fair Plan Association. We did not receive any additional significant assessments from regulatory authorities in the states in which our insurance subsidiaries operate.
The National Association of Insurance Commissioners (NAIC) has Risk-Based Capital (RBC) guidelines for insurance companies that are designed to assess capital adequacy and to raise the level of protection that statutory surplus provides for policyholders. Most states, including Florida, Hawaii and New York, have enacted statutory requirements adopting the NAIC RBC guidelines, and insurers having less statutory surplus than required will be subject to varying degrees of regulatory action, depending on the level of capital inadequacy. State insurance regulatory authorities could require an insurer to cease operations in the event the insurer fails to maintain the required statutory capital.
The state laws of Florida, Hawaii and New York permit an insurer to pay dividends or make distributions out of that part of statutory surplus derived from net operating profit and net realized capital gains. The state laws further provide calculations to determine the amount of dividends or distributions that can be made without the prior approval of the insurance regulatory authorities in those states and the amount of dividends or distributions that would require prior approval of the insurance regulatory authorities in those states. Statutory RBC requirements may further restrict our insurance subsidiaries' ability to pay dividends or make distributions if the amount of the intended dividend or distribution would cause statutory surplus to fall below minimum RBC requirements.
The SBA note is considered a surplus note pursuant to statutory accounting principles. As a result, UPC is subject to the authority of the Insurance Commissioner of the State of Florida with regard to its ability to repay principal and interest on the SBA note. Any payment of principal or interest requires permission from the insurance regulatory authority.
We have reported our insurance subsidiaries' assets, liabilities and results of operations in accordance with GAAP, which varies from statutory accounting principles prescribed or permitted by state laws and regulations, as well as by general industry practices. The following items are principal differences between statutory accounting and GAAP:
| |
• | Statutory accounting requires that we exclude certain assets, called non-admitted assets, from the balance sheet. |
| |
• | Statutory accounting requires us to expense policy acquisition costs when incurred, while GAAP allows us to defer to the extent realizable, and amortize policy acquisition costs over the estimated life of the policies. |
UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
March 31, 2018
| |
• | Statutory accounting requires that surplus notes, also known as surplus debentures, be recorded in statutory surplus, while GAAP requires us to record surplus notes as a liability. |
| |
• | Statutory accounting allows certain investments to be carried at amortized cost or fair value based on the rating received from the Securities Valuation Office of the NAIC, while they are recorded at fair value for GAAP because the investments are held as available for sale. |
| |
• | Statutory accounting allows ceding commission income to be recognized when written if the cost of acquiring and renewing the associated business exceeds the ceding commissions, but under GAAP such income is deferred and recognized over the coverage period. |
| |
• | Statutory accounting requires that unearned premiums and loss reserves are presented net of related reinsurance rather than on a gross basis under GAAP. |
| |
• | Statutory accounting requires that a provision for reinsurance liability be established for reinsurance recoverable on paid losses aged over 90 days and for unsecured amounts recoverable from unauthorized reinsurers. Under GAAP there is no charge for uncollateralized amounts ceded to a company not licensed in the insurance subsidiary's domiciliary state and a reserve for uncollectable reinsurance is charged through earnings rather than surplus or equity. |
| |
• | Statutory accounting requires an additional admissibility test and the change in deferred income tax is reported directly in capital and surplus, rather than being reported as a component of income tax expense under GAAP. |
Our insurance subsidiaries must each file with the various insurance regulatory authorities an “Annual Statement” which reports, among other items, statutory net income (loss) and surplus as regards policyholders, which is called stockholders' equity under GAAP. For the three months ended March 31, 2018 and 2017, UPC, ACIC, FSIC and IIC recorded the following amounts of statutory net income (loss).
|
| | | | | | | |
| Three Months Ended March 31, |
| 2018 | | 2017 |
UPC | $ | (22 | ) | | $ | (6,039 | ) |
ACIC (1) | $ | 5,852 |
| | N/A |
|
FSIC | $ | 2,798 |
| | $ | 2,937 |
|
IIC | $ | 358 |
| | 2,079 |
|
(1) There is not a reportable value for ACIC for the three months ended March 31, 2017, as we did not own the company until April 2017.
Our insurance subsidiaries must maintain capital and surplus ratios or balances as determined by the regulatory authority of the states in which they are domiciled. The table below shows the minimum capital and surplus requirements, as well as the amount of surplus as regards policyholders for our regulated entities at March 31, 2018 and December 31, 2017, respectively.
|
| | | | | | | | | | | |
| Minimum Requirement | | March 31, 2018 | | December 31, 2017 |
UPC (1) | $ | 43,448 |
| | $ | 167,127 |
| | $ | 164,281 |
|
ACIC (1) | $ | 16,168 |
| | $ | 166,988 |
| | $ | 160,238 |
|
FSIC | $ | 3,250 |
| | $ | 25,019 |
| | $ | 22,038 |
|
IIC | $ | 4,700 |
| | $ | 43,190 |
| | $ | 42,827 |
|
(1) UPC and ACIC are required to maintain capital and surplus equal to the greater of 10% of their total liabilities or $10,000,000.
13) RELATED PARTY TRANSACTIONS
One of our executive officers, Ms. Salmon, is a former partner at the law firm of Groelle & Salmon, PA, where her spouse remains partner and co-owner. Groelle & Salmon, PA provides legal representation to us related to our claims litigation, and also provided representation to us for several years prior to Ms. Salmon joining UPC Insurance in 2014. During the three months ended March 31, 2018 and 2017, Groelle & Salmon, PA billed us approximately $708,000 and $868,000, respectively.
UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
March 31, 2018
Ms. Salmon's spouse has a 50% interest in these billings, or approximately $354,000 and $434,000, for the three months ended March 31, 2018 and 2017, respectively.
AmRisc, LLC (AmRisc), a managing general agent, handles the underwriting, claims processing, premium collection and reinsurance review for AmCo. R. Daniel Peed, Vice Chairman of our Board of Directors (Board), beneficially owns approximately 7.7% of AmRisc and is also the Chief Executive Officer of AmRisc.
In accordance with the managing general agent underwriting contract with AmRisc, we recorded $94,005,000 of gross written premiums for the three-month period ended March 31, 2018, resulting in fees and commission (including a profit commission) of $25,599,000 due to AmRisc. Receivables are stated net of the fees and commission due under the contract.
In addition to the direct premiums written, we recorded $1,561,000 in ceded premiums to AmRisc as a reinsurance intermediary for the three-month period ended March 31, 2018. We also incurred $5,000 during that period for rent under a sublease agreement with AmRisc.
Net premiums receivable (net of commissions) of $35,971,000 were due from AmRisc as of March 31, 2018. These premiums were paid by AmRisc to our premium trust account by wire transfer within 15 days of collection pursuant to the underwriting contract with AmRisc.
14) ACCUMULATED OTHER COMPREHENSIVE INCOME
We report changes in other comprehensive income items within comprehensive income on the Unaudited Consolidated Statements of Comprehensive Income, and we include accumulated other comprehensive income as a component of stockholders' equity on our Consolidated Balance Sheets.
The table below details the components of accumulated other comprehensive income at period end:
|
| | | | | | | | | | | |
| Pre-Tax Amount | | Tax (Expense)Benefit | | Net-of-Tax Amount |
December 31, 2017 | $ | 12,044 |
| | $ | (2,823 | ) | | $ | 9,221 |
|
Reclassification adjustment for adoption of ASU 2016-01(1) | $ | (12,300 | ) | | $ | 2,962 |
| | $ | (9,338 | ) |
Adjusted balance at December 31, 2017 | (256 | ) | | 139 |
| | (117 | ) |
| | | | | |
Changes in net unrealized gains on investments | (11,084 | ) | | 2,908 |
| | (8,176 | ) |
Reclassification adjustment for realized gains | (211 | ) | | 53 |
| | (158 | ) |
March 31, 2018 | $ | (11,551 | ) | | $ | 3,100 |
| | $ | (8,451 | ) |
(1) Reflects the fair value changes on equity securities as of December 31, 2017, which are reclassed under the new accounting guidance. Refer to Note 2 for further information. 15) STOCKHOLDERS' EQUITY
Our Board declared dividends on our outstanding shares of common stock to stockholders of record as follows for the periods presented (in thousands except per share amounts):
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| | 2018 | | |