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 June 30, 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 July 31, 2018, 42,822,187 shares of common stock, par value $0.0001 per share, were outstanding.

 

UNITED INSURANCE HOLDINGS CORP.


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

2
UNITED INSURANCE HOLDINGS CORP.


FORWARD-LOOKING STATEMENTS

Statements in this Form 10-Q contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements about anticipated growth in revenues, gross written premium, earnings per share, estimated unpaid losses on insurance policies, investment returns, and diversification and expectations about our liquidity, 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 thereof or comparable terminology are intended to identify forward-looking statements. These statements are based on current expectations, estimates and projections about the industry and market in which we operate, and management's beliefs and assumptions. Forward-looking statements are not guarantees of future performance and involve certain known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. The risks and uncertainties include, without limitation:

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

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

3
UNITED INSURANCE HOLDINGS CORP.

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

Condensed Consolidated Balance Sheets
(Unaudited)


June 30,
2018

December 31, 2017
ASSETS



 
Investments, at fair value:

 

 
Fixed maturities, available-for-sale (amortized cost of $864,321 and $763,434, respectively)

$
848,882


$
762,855

Equity securities

83,345


63,295

Other investments (amortized cost of $7,884 and $8,057, respectively)

8,242


8,381

   Portfolio loans
 
—

 
20,000

Total investments

$
940,469


$
854,531

  Cash and cash equivalents

208,675


229,556

Restricted cash
 
33,526

 
46,719

Total cash, cash equivalents and restricted cash
 
$
242,201

 
$
276,275

Accrued investment income

6,181


5,577

Property and equipment, net
 
17,742

 
17,291

Premiums receivable, net

116,894


75,275

Reinsurance recoverable on paid and unpaid losses

369,651


395,774

Prepaid reinsurance premiums

395,819


201,904

Goodwill
 
73,045

 
73,045

Deferred policy acquisition costs

109,601


103,882

Intangible assets
 
34,081

 
45,271

Other assets

11,978


11,096

Total Assets

$
2,317,662


$
2,059,921

LIABILITIES AND STOCKHOLDERS' EQUITY




Liabilities:




Unpaid losses and loss adjustment expenses

$
432,431


$
482,232

Unearned premiums

651,561


555,873

Reinsurance payable

374,499


149,117

Payments outstanding
 
43,443

 
41,786

Accounts payable and accrued expenses
 
56,069

 
46,594

Other liabilities

54,207


85,830

Notes payable

160,718

 
161,364

Total Liabilities

$
1,772,928


$
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; 43,034,270 and 42,965,137 issued, respectively; 42,822,187 and 42,753,054 outstanding, respectively

4


4

Additional paid-in capital

388,193


387,145

Treasury shares, at cost: 212,083 shares

(431
)

(431
)
Accumulated other comprehensive income (loss)

(11,493
)

9,221

Retained earnings

168,461


141,186

Total Stockholders' Equity

$
544,734


$
537,125

Total Liabilities and Stockholders' Equity

$
2,317,662


$
2,059,921

See accompanying Notes to Unaudited Consolidated Financial Statements.

4
UNITED INSURANCE HOLDINGS CORP.

Condensed Consolidated Statements of Comprehensive Income
(Unaudited)


Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,


2018

2017
 
2018
 
2017
REVENUE:




 
 
 
 
Gross premiums written

$
384,662

 
$
352,347

 
$
664,279

 
$
521,189

Change in gross unearned premiums

(95,021
)
 
(90,763
)
 
(95,688
)
 
(77,540
)
Gross premiums earned

289,641

 
261,584

 
568,591

 
443,649

Ceded premiums earned

(118,335
)
 
(101,966
)
 
(232,385
)
 
(176,848
)
Net premiums earned

171,306

 
159,618

 
336,206

 
266,801

Investment income

7,091

 
4,637

 
12,777

 
7,588

Net realized investment losses

(438
)
 
(132
)
 
(227
)
 
(483
)
Net unrealized gains (losses) on equity securities

1,381

 
—

 
(1,063
)
 
—

Other revenue

3,808

 
13,950

 
7,508

 
26,800

Total revenue

183,148

 
178,073

 
355,201

 
300,706

EXPENSES:




 
 
 
 
Losses and loss adjustment expenses

88,595

 
86,938

 
165,841

 
150,271

Policy acquisition costs

50,454

 
43,320

 
99,516

 
78,756

Operating expenses

9,682

 
6,257

 
18,000

 
12,129

General and administrative expenses

12,643

 
28,176

 
35,968

 
39,509

Interest expense

2,458

 
752

 
4,916

 
1,511

Total expenses

163,832

 
165,443

 
324,241

 
282,176

Income before other income

19,316

 
12,630

 
30,960

 
18,530

Other income

16

 
20

 
87

 
58

Income before income taxes

19,332

 
12,650

 
31,047

 
18,588

Provision for income taxes

4,631

 
5,393

 
7,978

 
7,432

Net income

$
14,701

 
$
7,257

 
$
23,069

 
$
11,156

OTHER COMPREHENSIVE INCOME:




 
 
 
 
Change in net unrealized gains (losses) on investments

(3,968
)
 
4,106

 
(27,352
)
 
7,837

Reclassification adjustment for net realized investment losses (gains)

438

 
132

 
227

 
483

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

488

 
(1,615
)
 
6,411

 
(3,157
)
Total comprehensive income (loss)

$
11,659

 
$
9,880

 
$
2,355

 
$
16,319






 
 
 
 
Weighted average shares outstanding




 
 
 
 
Basic

42,648,660

 
41,799,041

 
42,615,484

 
31,691,267

Diluted
 
42,790,346

 
42,028,013

 
42,769,602

 
31,914,559






 
 
 
 
Earnings per share




 
 
 
 
Basic

$
0.34

 
$
0.17

 
$
0.54

 
$
0.35

Diluted
 
$
0.34

 
$
0.17

 
$
0.54

 
$
0.35



 
 
 
 
 
 
 
Dividends declared per share

$
0.06

 
$
0.06

 
$
0.12

 
$
0.12




See accompanying Notes to Unaudited Consolidated Financial Statements.

5
UNITED INSURANCE HOLDINGS CORP.

Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
 
Six Months Ended June 30,
 
 
2018
 
2017
OPERATING ACTIVITIES
 
 
 
 
Net income
 
$
23,069

 
$
11,156

Adjustments to reconcile net income to net cash used by operating activities:
 
 
 
 
Depreciation and amortization
 
12,931

 
13,613

Bond amortization and accretion
 
2,639

 
2,320

Net realized losses (gains) on investments
 
227

 
483

Net unrealized losses (gains) on equity securities
 
1,063

 
—

Provision for uncollectable premiums
 
(61
)
 
144

Deferred income taxes, net
 
1,624

 
1,323

Stock based compensation
 
1,048

 
1,294

Changes in operating assets and liabilities:
 
 
 
 
Accrued investment income
 
(604
)
 
(96
)
Premiums receivable
 
(41,558
)
 
(23,224
)
Reinsurance recoverable on paid and unpaid losses
 
26,123

 
(25,566
)
Prepaid reinsurance premiums
 
(193,915
)
 
(209,048
)
Deferred policy acquisition costs, net
 
(5,719
)
 
(29,392
)
Other assets
 
(882
)
 
4,963

Unpaid losses and loss adjustment expenses
 
(49,801
)
 
3,310

Unearned premiums
 
95,688

 
77,540

Reinsurance payable
 
225,382

 
209,714

Payments outstanding
 
1,657

 
(37
)
Accounts payable and accrued expenses
 
9,475

 
11,926

Other liabilities
 
(29,799
)
 
7,963

Net cash provided by operating activities
 
$
78,587

 
$
58,386

INVESTING ACTIVITIES
 
 
 
 
Proceeds from sales, maturities and repayments of investments
 
116,116

 
81,998

Purchases of investments
 
(220,809
)
 
(108,376
)
Cash from acquisition
 
 
 
95,284

Cost of property, equipment and capitalized software acquired
 
(2,014
)
 
(3,797
)
Net cash provided by (used in) investing activities
 
$
(106,707
)
 
$
65,109

FINANCING ACTIVITIES
 
 
 
 
Repayments of borrowings
 
(762
)
 
(468
)
Payments of debt issuance costs
 
(62
)
 
—

Dividends
 
(5,130
)
 
(3,862
)
Outstanding checks in excess of funds on deposit
 
—

 
(15,682
)
Net cash used in financing activities
 
$
(5,954
)
 
$
(20,012
)
(Decrease) increase in cash, cash equivalents and restricted cash
 
(34,074
)
 
103,483

Cash, cash equivalents and restricted cash at beginning of period
 
276,275

 
150,688

Cash, cash equivalents and restricted cash at end of period
 
$
242,201

 
$
254,171

Supplemental Cash Flows Information
 
 
 
 
Interest paid
 
$
4,948

 
$
1,292

Income taxes paid
 
$
4,565

 
$
3,917

Non-cash transactions
 
 
 
 
Issuance of common stock
 
$
—

 
$
274,384

See accompanying Notes to Unaudited Consolidated Financial Statements.

6
UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
June 30, 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 these 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, which provides claims adjusting services to UPC, FSIC and IIC; AmCo Holding Company (AmCo) and Family Security Holdings (FSH), which are holding company subsidiaries that consolidate their respective insurance companies; BlueLine Cayman Holdings (BlueLine) which reinsures portfolios of excess and surplus policies; UPC Re which can provide a portion of the reinsurance protection purchased by our insurance subsidiaries when needed; and Skyway Reinsurance Services which 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 an additional 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 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 or 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.

2)    SIGNIFICANT ACCOUNTING POLICIES

(a) Changes to significant accounting policies


7
UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
June 30, 2018

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 June 30, 2018, we had 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 as during this period, the U.S. Treasury Department and the Internal Revenue Service have not issued further clarification or guidance for the items for which our accounting for the Tax Act is incomplete. Interpretive guidance of the Tax Act will be received throughout 2018, and we expect to update our estimates and our disclosure on a quarterly basis as interpretive guidance is received within each quarter that it is received.

(c) Fair value assumptions

The carrying amounts for the following financial instrument categories approximate their fair values at June 30, 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) Reinsurance

We record provisional ceding commissions that we receive in connection with our reinsurance contracts for the 2018 underwriting year as an offset to deferred acquisition costs to the extent that they relate to compensation for acquisition costs that are incurred that are deferrable. The remaining provisional ceding commissions are recorded as unearned reinsurance commission and are recognized as an offset to other acquisition costs based in proportion to the premiums earned or coverage provided by the reinsurance contracts.

(e) Recently Adopted Accounting Pronouncements

In May 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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.

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (ASU 2016-18). This standard provides guidance on the presentation of restricted cash in the statement of cash flows. We are required to explain the changes during a reporting period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents in the statement of cash flows. We retrospectively adopted this standard on April 1, 2018. The adoption of this new accounting standard impacted the presentation of our Unaudited Consolidated Statement of Cash Flows but had no effect on our results of operations. The restricted cash on our consolidated balance sheets at June 30, 2018 and December 31, 2017 represents cash that is held in trust for assumed business and cash held in deposit accounts to satisfy state statutory deposit requirements.

In January 2016, the FASB issued 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

8
UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
June 30, 2018

consolidated financial statements. Refer to Note 14 in these Notes to Unaudited Consolidated Financial Statements for a reconciliation.

(f) 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. Any impact of the standard on our consolidated financial statements and related disclosures will be dependent on market conditions of the reporting units at the time of adoption.

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 using a retrospective approach upon adoption. We are currently quantifying the expected recognition on our balance sheet for a right to use asset and a lease liability as required by this standard.


9
UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
June 30, 2018

3)    INVESTMENTS

The following table details fixed maturity available-for-sale and equity securities, by major investment category, at June 30, 2018 and December 31, 2017:
 
Cost or Adjusted/Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
June 30, 2018
 
 
 
 
 
 
 
U.S. government and agency securities
$
90,391

 
$
2

 
$
1,912

 
$
88,481

Foreign government
3,002

 
—

 
24

 
2,978

States, municipalities and political subdivisions
161,257

 
555

 
1,997

 
159,815

Public utilities
25,892

 
17

 
738

 
25,171

Corporate securities
290,701

 
224

 
6,597

 
284,328

Mortgage-backed securities
212,320

 
37

 
4,711

 
207,646

Asset backed securities
79,993

 
2

 
217

 
79,778

Redeemable preferred stocks
765

 
7

 
87

 
685

Total fixed maturities
$
864,321

 
$
844

 
$
16,283

 
$
848,882

 
 
 
 
 
 
 
 
Mutual funds
$
44,385

 
$
3,219

 
$
44

 
$
47,560

Public utilities
1,946

 
327

 
30

 
2,243

Other common stocks
24,059

 
8,188

 
446

 
31,801

Non-redeemable preferred stocks
1,718

 
39

 
16

 
1,741

Total equity securities
$
72,108

 
$
11,773

 
$
536

 
$
83,345

 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
U.S. government and agency securities
$
93,827

 
$
40

 
$
1,241

 
$
92,626

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

Mortgage-backed securities
143,982

 
235

 
952

 
143,265

Asset-backed securities
14,902

 
23

 
20

 
14,905

Redeemable preferred stocks
755

 
11

 
74

 
692

Total fixed maturities
$
763,434

 
$
4,125

 
$
4,704

 
$
762,855

 
 
 
 
 
 
 
 
Mutual fund
$
29,079

 
$
2,845

 
$
—

 
$
31,924

Public utilities
1,343

 
359

 
—

 
1,702

Other common stocks
18,856

 
9,093

 
47

 
27,902

Non-redeemable preferred stocks
1,718

 
53

 
4

 
1,767

Total equity securities
$
50,996

 
$
12,350

 
$
51

 
$
63,295


10
UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
June 30, 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 and six months ended June 30, 2018 and 2017:

 
2018
 
2017
 
Gains
(Losses)
 
Fair Value at Sale
 
Gains
(Losses)
 
Fair Value at Sale
Three Months Ended June 30,
 
 
 
 
 
 
 
Fixed maturities
$
14

 
$
4,706

 
$
41

 
$
6,310

Equity securities
59

 
207

 
7

 
19

Total realized gains
73

 
4,913

 
48

 
6,329

Fixed maturities
(511
)
 
38,091

 
(170
)
 
13,848

Equity securities
—

 
—

 
(10
)
 
100

Total realized losses
(511
)
 
38,091

 
(180
)
 
13,948

Net realized investment gains (losses)
$
(438
)
 
$
43,004

 
$
(132
)
 
$
20,277

 
 
 
 
 
 
 
 
Six Months Ended June 30,
 
 
 
 
 
 
 
Fixed maturities
$
56

 
$
6,881

 
$
140

 
$
18,896

Equity securities
509

 
1,182

 
7

 
19

Total realized gains
565

 
8,063

 
147

 
18,915

Fixed maturities
(792
)
 
70,319

 
(620
)
 
37,396

Equity securities
—

 
—

 
(10
)
 
100

Total realized losses
(792
)
 
70,319

 
(630
)
 
37,496

Net realized investment gains (losses)
$
(227
)
 
$
78,382

 
$
(483
)
 
$
56,411


The table below summarizes our fixed maturities at June 30, 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.

 
June 30, 2018
 
Cost or Amortized Cost
 
Percent of Total
 
Fair Value
 
Percent of Total
Due in one year or less
$
60,570

 
7.0
%
 
$
60,252

 
7.1
%
Due after one year through five years
321,349

 
37.2
%
 
316,312

 
37.3
%
Due after five years through ten years
179,582

 
20.8
%
 
174,875

 
20.6
%
Due after ten years
10,507

 
1.2
%
 
10,020

 
1.2
%
Asset and mortgage backed securities
292,313

 
33.8
%
 
287,423

 
33.8
%
Total
$
864,321

 
100.0
%
 
$
848,882

 
100.0
%


11
UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
June 30, 2018

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

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Fixed maturities
$
5,392

 
$
4,087

 
$
10,204

 
$
6,585

Equity securities
467

 
345

 
930

 
565

Cash and cash equivalents
617

 
90

 
839

 
160

Other investments
607

 
109

 
789

 
261

Other assets
8

 
6

 
15

 
17

Investment income
7,091

 
4,637

 
12,777

 
7,588

Investment expenses
(246
)
 
(19
)
 
(489
)
 
(269
)
Net investment income
$
6,845

 
$
4,618

 
$
12,288

 
$
7,319


Portfolio monitoring

We have a comprehensive portfolio monitoring process to identify and evaluate each fixed income 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 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 securities are assumptions and estimates about the financial condition and future earnings potential of the issue or issuer. Some of the factors that may be considered in evaluating whether a decline in fair value is other-than-temporary are: (1) the financial condition, near-term and long-term prospects of the issue or issuer, including relevant industry specific market conditions and trends, geographic location and implications of rating agency actions and offering prices; (2) the specific reasons that a security is in an unrealized loss position, including overall market conditions which could affect liquidity; and (3) the length of time and extent to which the fair value has been less than amortized cost or cost.

12
UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
June 30, 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
June 30, 2018
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency securities
41

 
$
547

 
$
33,151

 
57

 
$
1,364

 
$
53,423

Foreign governments
5

 
24

 
2,979

 
—

 
—

 
—

States, municipalities and political subdivisions
145

 
1,634

 
113,255

 
23

 
363

 
14,571

Public utilities
43

 
668

 
22,118

 
5

 
70

 
986

Corporate securities
521

 
5,860

 
240,733

 
44

 
737

 
18,231

Mortgage-backed securities
187

 
3,923

 
176,704

 
60

 
788

 
15,118

Asset backed securities
87

 
214

 
70,926

 
5

 
3

 
1,249

Redeemable preferred stocks
1

 
3

 
122

 
3

 
85

 
304

Total fixed maturities
1,030

 
12,873

 
659,988

 
197

 
3,410

 
103,882

Mutual Fund
1

 
44

 
14,937

 
—

 
—

 
—

Public utilities
4

 
30

 
629

 
—

 
—

 
—

Other common stocks
54

 
410

 
5,342

 
2

 
36

 
205

Non-redeemable preferred stocks
12

 
16

 
563

 
—

 
—

 
—

Total equity securities
71

 
500

 
21,471

 
2

 
36

 
205

Total
1,101

 
$
13,373

 
$
681,459

 
199

 
$
3,446

 
$
104,087

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency securities
40

 
$
166

 
$
26,979

 
73

 
$
1,075

 
$
58,980

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

Mortgage-backed securities
89

 
475

 
76,349

 
50

 
477

 
15,210

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 fixed-income 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 as of January 1, 2018, 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 and six months ended June 30, 2018 and 2017, we recorded no other-than-temporary impairment charges.

13
UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
June 30, 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 June 30, 2018 and December 31, 2017. Changes in interest rates subsequent to June 30, 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 of the financial assets.

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 June 30, 2018.


14
UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
June 30, 2018

The following table presents the fair value of our financial instruments measured on a recurring basis by level at June 30, 2018 and December 31, 2017:

 
Total
 
Level 1
 
Level 2
 
Level 3
June 30, 2018
 
 
 
 
 
 
 
U.S. government and agency securities
$
88,481

 
$
—

 
$
88,481

 
$
—

Foreign government
2,979

 
—

 
2,979

 
—

States, municipalities and political subdivisions
159,815

 
—

 
159,815

 
—

Public utilities
25,172

 
—

 
25,172

 
—

Corporate securities
284,328

 
—

 
284,328

 
—

Mortgage-backed securities
207,646

 
—

 
207,646

 
—

Asset-backed securities
79,778

 
—

 
79,778

 
—

Redeemable preferred stocks
685

 
563

 
122

 
—

Total fixed maturities
848,884

 
563

 
848,321

 
—

Mutual funds
47,560

 
47,560

 
—

 
—

Public utilities
2,242

 
2,242

 
—

 
—

Other common stocks
31,802

 
31,802

 
—

 
—

Non-redeemable preferred stocks
1,741

 
1,741

 
—

 
—

Total equity securities
83,345

 
83,345

 
—

 
—

Other long-term investments
8,242

 
300

 
7,296

 
646

Total investments
$
940,471

 
$
84,208

 
$
855,617

 
$
646

 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
U.S. government and agency securities
$
92,626

 
$
—

 
$
92,626

 
$
—

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

 
—

Mortgage-backed securities
143,265

 
—

 
143,265

 
—

Asset-backed securities
14,905

 
—

 
14,905

 
—

Redeemable preferred stocks
692

 
692

 
—

 
—

Total fixed maturities
762,855

 
692

 
762,163

 
—

Mutual Funds
31,924

 
31,924

 
—

 
—

Public utilities
1,702

 
1,702

 
—

 
—

Other common stocks
27,902

 
27,902

 
—

 
—

Non-redeemable preferred stocks
1,767

 
1,767

 
—

 
—

Total equity securities
63,295

 
63,295

 
—

 
—

Other long-term investments
8,381

 
300

 
7,447

 
634

Total investments
$
834,531

 
$
64,287

 
$
769,610

 
$
634





15
UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
June 30, 2018

The table below presents the rollforward of our Level 3 investments held at fair value during the six months ended June 30, 2018:
 
 
Other Investments
December 31, 2017
 
$
634

Transfers in
 
—

Partnership income
 
71

Return of capital
 
(93
)
Unrealized gains in accumulated other comprehensive income
 
34

June 30, 2018
 
$
646



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 quarter ended June 30, 2018, we did not transfer any investments between levels. We used unobservable inputs to derive our estimated fair value for Level 3 investments, and the unobservable inputs are significant to the overall fair value measurement.

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


16
UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
June 30, 2018

Other investments

We acquired investments in limited partnerships, recorded in the other investments line of our Unaudited Consolidated Balance Sheets and these investments 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 June 30, 2018 was $7,942,000. We have fully funded two investments and are still obligated to fund an additional $3,170,000 for the remaining four investments.

The information presented in the table below is as of June 30, 2018:

 
 
Book Value
 
Unrealized Gain
 
Unrealized Loss
 
Fair Value
Limited partnership investments
 
$
7,584

 
$
358

 
$
—

 
$
7,942

Certificates of deposit
 
300

 
—

 
—

 
300

Total other investments
 
$
7,884

 
$
358

 
$
—

 
$
8,242


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
June 30, 2018
 
 
 
 
 
 
 
 
DCR VI
 
$
(32
)
 
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 December 31, 2017, 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 were short-term collateralized loans (less than one year), which were repaid in full in April 2018, primarily from cash flows of the borrowers.

4)
ACQUISITIONS

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

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 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:

17
UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
June 30, 2018


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.

 
Six Months Ended June 30,
 
2017
 
As
 
Pro Forma
 
 
 
Reported
 
Adjustments
 
Pro Forma
Revenues
$
300,706

 
$
38,096

 
$
338,802

Net income (loss)
11,156

 
6,712

 
17,868

Diluted earnings per share
0.35

 
—

 
0.42


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 the 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, 2018 and 2017, respectively:


18
UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
June 30, 2018

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Numerator:
 
 
 
 
 
 
 
 
Net income attributable to common stockholders
 
$
14,701

 
$
7,257

 
$
23,069

 
$
11,156

 
 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
 
Weighted-average shares outstanding
 
42,648,660

 
41,799,041

 
42,615,484

 
31,691,267

Effect of dilutive securities
 
141,686

 
228,972

 
154,118

 
223,292

Weighted-average diluted shares
 
42,790,346

 
42,028,013

 
42,769,602

 
31,914,559

 
 
 
 
 
 
 
 
 
Basic earnings per share
 
$
0.34

 
$
0.17

 
$
0.54

 
$
0.35

Diluted earnings per share
 
$
0.34

 
$
0.17

 
$
0.54

 
$
0.35


See Note 16 of these Notes to Unaudited Consolidated Financial Statements for additional information on the stock grants related to dilutive securities.

6)    PROPERTY AND EQUIPMENT, NET

Property and equipment, net consisted of the following:
 
 
June 30,
2018
 
December 31,
2017
Land
 
$
2,114

 
$
2,114

Building and building improvements
 
6,504

 
5,695

Computer hardware and software
 
17,640

 
18,985

Office furniture and equipment
 
2,752

 
3,413

Leasehold improvements
 
20

 
—

Total, at cost
 
29,030

 
30,207

Less: accumulated depreciation and amortization
 
(11,288
)
 
(12,916
)
Property and equipment, net
 
$
17,742

 
$
17,291


Depreciation and amortization expense under property and equipment was $819,000 and $1,421,000 for the three months ended June 30, 2018 and 2017, respectively, and $1,563,000 and $2,036,000 for the six months ended June 30, 2018 and 2017, respectively.

7) GOODWILL AND INTANGIBLE ASSETS

Goodwill

The carrying amount of goodwill, both at June 30, 2018 and December 31, 2017, was $73,045,000. There was no goodwill acquired or disposed of during the three-month or six-month periods ended June 30, 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 six months ended June 30, 2018. Additionally, there was no accumulated impairment or accumulated amortization related to goodwill at June 30, 2018 or December 31, 2017.







19
UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
June 30, 2018



Intangible Assets

The following is a summary of intangible assets excluding goodwill recorded as intangible assets on our Unaudited Consolidated Balance Sheets:
 
 
June 30, 2018
 
December 31, 2017
Intangible assets subject to amortization
 
$
30,525

 
$
41,715

Indefinite-lived intangible assets(1)
 
3,556

 
3,556

Total
 
$
34,081

 
$
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
June 30, 2018
 
 
 
 
 
 
 
 
Value of business acquired
 
—
 
$
42,788

 
$
(42,788
)
 
$
—

Agency agreements acquired
 
7.6
 
34,661

 
(8,917
)
 
25,744

Trade names acquired
 
5.6
 
6,381

 
(1,600
)
 
4,781

Total
 
 
 
$
83,830

 
$
(53,305
)
 
$
30,525

 
 
 
 
 
 
 
 
 
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 and six months ended June 30, 2018 and 2017.

Amortization expense of our intangible assets was $1,365,000 and $10,167,000 for the three months ended June 30, 2018 and 2017, respectively. Amortization expense of our intangible assets was $11,190,000 and $11,522,000 for the six months ended June 30, 2018 and 2017, respectively.

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
 
$
2,730

2019
 
5,355

2020
 
4,267

2021
 
3,555

2022
 
3,246

2023
 
3,246


20
UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
June 30, 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 June 1, 2018, UPC Insurance, through our wholly-owned insurance subsidiaries ACIC, UPC, FSIC, IIC and BlueLine, entered into reinsurance agreements with private reinsurers and with the Florida State Board of Administration, 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 Insurance operates except for the agreement with FHCF, which only provides coverage in Florida against storms that the National Hurricane Center designates as hurricanes.

Highlights of the coverage within these contracts include:
•
Increased frequency and severity protection, with an overall program exhaustion point excess of $3,100,000,000;
◦
Sufficient coverage for approximately a single 1-in-400 year event;
◦
Sufficient coverage for a 1-in-100 year event followed by a 1-in-50 year event in the same season;
•
Lower per occurrence retention levels which include all BlueLine business;
◦
First event retention of $60,000,000 in Florida and $25,000,000 outside of Florida which, as a percentage of the group equity, represents approximately 11% and 4.6%, respectively;
◦
$25,000,000 for second event in all states;
•
Successful completion of Armor Re II CAT Bond providing $100,000,000 of limit on a multi-year basis;
•
Coverage from 41 reinsurers with 93% of the open market limit placed on a fully collateralized basis or with reinsurers having an A+ or better A.M. Best financial strength rating; and
•
Up to $262,500,000 of multi-year limit including the CAT Bond limit.

For the FHCF reimbursement contracts effective June 1, 2018, UPC Insurance has elected a 45% coverage for all its insurance subsidiaries with Florida exposure. We estimate the total mandatory FHCF layer will provide approximately $907,000,000 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 $2,185,000,000 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 $3,100,000,000 program exhaustion point.

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 $20,000,000 of catastrophe losses to this treaty for the six months ended June 30, 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 $20,000,000 reinsurance recoverable at June 30, 2018 since future catastrophe losses are inherently unpredictable and cannot 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

21
UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
June 30, 2018

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.

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,
 
2018
 
2017
 
2018
 
2017
Quota share
$
(27,400
)
 
$
(27,411
)
 
$
(47,972
)
 
$
(46,781
)
Excess-of-loss
(350,230
)
 
(315,457
)
 
(364,091
)
 
(325,686
)
Equipment & identity theft
(2,631
)
 
(2,596
)
 
(4,751
)
 
(4,669
)
Flood
(5,568
)
 
(5,369
)
 
(9,239
)
 
(8,760
)
Ceded premiums written
$
(385,829
)
 
$
(350,833
)
 
$
(426,053
)
 
$
(385,896
)
Increase (decrease) in ceded unearned premiums
267,494

 
248,867

 
193,668

 
209,048

Ceded premiums earned
$
(118,335
)
 
$
(101,966
)
 
$
(232,385
)
 
$
(176,848
)

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 June 30,
 
 
 
 
 
 
 
 
 
 
 
 
Current period catastrophe losses incurred
 
 
 
 
 
 
 
 
 
 
 
 
Named and numbered storms
 
1

 
$
1,214

 
0.7
%
 
1

 
$
264

 
0.2
%
All other catastrophe loss events
 
8

 
16,126

 
9.4
%
 
14

 
21,534

 
13.5
%
Total