Attached files

file filename
EX-32.2 - EXHIBIT 32.2 - UNITED INSURANCE HOLDINGS CORP.exh32230jun17.htm
EX-32.1 - EXHIBIT 32.1 - UNITED INSURANCE HOLDINGS CORP.exh32130jun17.htm
EX-31.2 - EXHIBIT 31.2 - UNITED INSURANCE HOLDINGS CORP.exh31230jun17.htm
EX-31.1 - EXHIBIT 31.1 - UNITED INSURANCE HOLDINGS CORP.exh31130jun17.htm
 
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, 2017
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 August 9, 2017; 42,741,004 shares of common stock, par value $0.0001 per share, were outstanding.

 


UNITED INSURANCE HOLDINGS CORP.



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

2

UNITED INSURANCE HOLDINGS CORP.



FORWARD-LOOKING STATEMENTS

Statements in this Quarterly Report on Form 10-Q as of June 30, 2017, and for the three and six months ended June 30, 2017 or in documents incorporated by reference 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, earnings per share, estimated unpaid losses on insurance policies, investment returns and expectations about our liquidity, and our ability to meet our investment objectives and to manage and mitigate market risk with respect to our investments. These statements are based on current expectations, estimates and projections about the industry and market in which we operate, and management’s beliefs and assumptions. Without limiting the generality of the foregoing, words such as “may,” “will,” “expect,” “endeavor,” “project,” “believe,” “anticipate,” “intend,” “could,” “would,” “estimate,” or “continue” or the negative variations there of, or comparable terminology are intended to identify forward-looking statements. Forward-looking statements are not guarantees of future performance and involve certain known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. The risks and uncertainties include, without limitation:

the regulatory, economic and weather conditions 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;
assessments charged by various governmental agencies;
pricing competition and other initiatives by competitors;
our ability to attract and retain the services of senior management;
the outcome of litigation pending against us, including the terms of any settlements;
dependence on investment income and the composition of our investment portfolio and related market risks;
our exposure to catastrophic events and severe weather conditions;
downgrades in our financial strength ratings;
risks and uncertainties relating to our acquisitions including our ability to successfully integrate the acquired companies; 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, 2016.

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 or the occurrence of unanticipated events or otherwise. In addition, we prepare our financial statements in accordance with U.S. generally accepted accounting principles (GAAP), which prescribes when we may reserve for particular risks, including litigation exposures. Accordingly, our results for a given reporting period could be significantly affected if and when we establish a reserve for a major contingency. Therefore, the results we report in certain accounting periods may appear to be volatile and past results may not be indicative of results in future periods.

These forward-looking statements are subject to numerous risks, uncertainties and assumptions about us described in our filings with the Securities and Exchange Commission (SEC). The forward-looking events that we discuss in this Form 10-Q are valid only as of the date of this Form 10-Q and may not occur, or may have different consequences, in light of the risks, uncertainties and assumptions that we describe from time to time in our filings with the SEC. A detailed discussion of these and other risks and uncertainties that could cause actual results and events to differ materially from our forward-looking statements is included in the section entitled “RISK FACTORS” in Part I, Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2016. Except as required by applicable law, we undertake no obligation and disclaim any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

3

UNITED INSURANCE HOLDINGS CORP.


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets


June 30,
2017

December 31, 2016
ASSETS

(Unaudited)

 
Investments available for sale, at fair value:

 

 
Fixed maturities (amortized cost of $713,524 and $497,616, respectively)

$
716,183


$
494,516

Equity securities (adjusted cost of $52,648 and $24,074, respectively)

59,431


28,398

Other investments (amortized cost of $7,506 and $5,493, respectively)

7,848


5,733

Total investments

$
783,462


$
528,647

Cash and cash equivalents

254,171


150,688

Accrued investment income

5,142


3,735

Property and equipment, net
 
19,623

 
17,860

Premiums receivable, net

93,401


38,883

Reinsurance recoverable on paid and unpaid losses

69,824


24,028

Prepaid reinsurance premiums

364,156


132,564

Goodwill
 
59,679

 
14,254

Deferred policy acquisition costs

94,865


65,473

Intangible assets
 
64,948

 
12,371

Other assets

12,000


11,183

Total Assets

$
1,821,271


$
999,686

LIABILITIES AND STOCKHOLDERS' EQUITY




Liabilities:




Unpaid losses and loss adjustment expenses

$
204,694


$
140,855

Unearned premiums

578,587


372,223

Reinsurance payable

332,011


99,891

Other liabilities

122,752


91,215

Notes payable

53,765

 
54,175

Total Liabilities

$
1,291,809


$
758,359

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; 42,953,087 and 21,858,697 issued; 42,741,004 and 21,646,614 outstanding for 2017 and 2016, respectively

4


2

Additional paid-in capital

375,029


99,353

Treasury shares, at cost; 212,083 shares

(431
)

(431
)
Accumulated other comprehensive income

5,985


822

Retained earnings

148,875


141,581

Total Stockholders' Equity

$
529,462


$
241,327

Total Liabilities and Stockholders' Equity

$
1,821,271


$
999,686







See accompanying Notes to Unaudited Consolidated Financial Statements.

4

UNITED INSURANCE HOLDINGS CORP.


Consolidated Statements of Comprehensive Income
(Unaudited)


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


2017

2016
 
2017
 
2016
REVENUE:




 
 
 
 
Gross premiums written

$
352,347

 
$
210,756

 
$
521,189

 
$
346,712

Increase in gross unearned premiums

(90,763
)
 
(46,171
)
 
(77,540
)
 
(35,625
)
Gross premiums earned

261,584

 
164,585

 
443,649

 
311,087

Ceded premiums earned

(101,966
)
 
(50,406
)
 
(176,848
)
 
(95,538
)
Net premiums earned

159,618

 
114,179

 
266,801

 
215,549

Investment income

4,637

 
2,727

 
7,588

 
5,123

Net realized gains (losses)

(132
)
 
102

 
(483
)
 
372

Other revenue

13,950

 
3,913

 
26,800

 
7,438

Total revenue

178,073

 
120,921

 
300,706

 
228,482

EXPENSES:




 
 
 
 
Losses and loss adjustment expenses

86,938

 
62,611

 
150,271

 
126,869

Policy acquisition costs

43,320

 
25,721

 
78,756

 
52,753

Operating expenses

6,257

 
5,814

 
12,129

 
9,768

General and administrative expenses

28,176

 
11,497

 
39,509

 
19,430

Interest expense

752

 
116

 
1,511

 
191

Total expenses

165,443

 
105,759

 
282,176

 
209,011

Income before other income

12,630

 
15,162

 
18,530

 
19,471

Other income

20

 
48

 
58

 
69

Income before income taxes

12,650

 
15,210

 
18,588

 
19,540

Provision for income taxes

5,393

 
5,369

 
7,432

 
6,748

Net income

$
7,257

 
$
9,841

 
$
11,156

 
$
12,792

OTHER COMPREHENSIVE INCOME:




 
 
 
 
Change in net unrealized gains on investments

4,106

 
7,420

 
7,837

 
13,800

Reclassification adjustment for net realized investment losses (gains)

132

 
(102
)
 
483

 
(372
)
Income tax expense related to items of other comprehensive income

(1,615
)
 
(2,713
)
 
(3,157
)
 
(5,074
)
Total comprehensive income

$
9,880

 
$
14,446

 
$
16,319

 
$
21,146






 
 
 
 
Weighted average shares outstanding




 
 
 
 
Basic

41,799,041

 
21,423,739

 
31,691,267

 
21,385,220

Diluted
 
42,028,013

 
21,631,077

 
31,914,559

 
21,584,287






 
 
 
 
Earnings per share




 
 
 
 
Basic

$
0.17

 
$
0.46

 
$
0.35

 
$
0.60

Diluted
 
$
0.17

 
$
0.45

 
$
0.35

 
$
0.59



 
 
 
 
 
 
 
Dividends declared per share

$
0.06

 
$
0.06

 
$
0.12

 
$
0.11






See accompanying Notes to Unaudited Consolidated Financial Statements.

5

UNITED INSURANCE HOLDINGS CORP.


Consolidated Statements of Cash Flows
(Unaudited)
 
 
Six Months Ended
June 30,
 
 
2017
 
2016
OPERATING ACTIVITIES
 
 
 
 
Net income
 
$
11,156

 
$
12,792

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
13,613

 
4,578

Bond amortization and accretion
 
2,320

 
1,611

Net realized gains
 
483

 
(372
)
Provision for uncollectable premiums/over and short
 
144

 
241

Deferred income taxes, net
 
1,323

 
(204
)
Stock based compensation
 
1,294

 
931

Changes in operating assets and liabilities:
 
 
 
 
Accrued investment income
 
(96
)
 
(76
)
Premiums receivable
 
(23,224
)
 
(266
)
Reinsurance recoverable on paid and unpaid losses
 
(25,566
)
 
(16,560
)
Prepaid reinsurance premiums
 
(209,048
)
 
(101,348
)
Deferred policy acquisition costs, net
 
(29,392
)
 
(12,054
)
Other assets
 
4,963

 
(2,297
)
Unpaid losses and loss adjustment expenses
 
3,310

 
15,254

Unearned premiums
 
77,540

 
35,625

Reinsurance payable
 
209,714

 
106,818

Other liabilities
 
19,852

 
7,846

Net cash provided by operating activities
 
$
58,386

 
$
52,519

INVESTING ACTIVITIES
 
 
 
 
Proceeds from sales and maturities of investments available for sale
 
81,998

 
111,924

Purchases of investments available for sale
 
(108,376
)
 
(79,737
)
Cash from acquisition
 
95,284

 

Purchase of subsidiary, net of cash acquired
 

 
(32,840
)
Cost of property, equipment and capitalized software acquired
 
(3,797
)
 
(2,379
)
Net cash provided by (used in) investing activities
 
$
65,109

 
$
(3,032
)
FINANCING ACTIVITIES
 
 
 
 
Tax withholding payment related to net settlement of equity awards
 

 
(271
)
Proceeds from borrowings
 

 
5,200

Repayments of borrowings
 
(468
)
 
(617
)
Dividends
 
(3,862
)
 
(2,376
)
Bank overdrafts
 
(15,682
)
 

Net cash (used in) provided by financing activities
 
$
(20,012
)
 
$
1,936

Increase in cash
 
103,483

 
51,423

Cash and cash equivalents at beginning of period
 
150,688

 
84,786

Cash and cash equivalents at end of period
 
$
254,171

 
$
136,209

Supplemental Cash Flows Information
 
 
 
 
Interest paid
 
$
1,292

 
$
137

Income taxes paid
 
$
3,917

 
$
6,312

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, 2017




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 primary insurance subsidiary is United Property & Casualty Insurance Company (UPC), which was formed in Florida in 1999 and has operated continuously since that time. Our other subsidiaries include United Insurance Management, L.C., (our managing general agent) that manages substantially all aspects of UPC's business; Skyway Claims Services, LLC (our claims adjusting affiliate) that provides services to our insurance affiliates; UPC Re (our reinsurance affiliate) that provides a portion of the reinsurance protection purchased by our insurance affiliates, Family Security Holdings, LLC (FSH), Family Security Insurance Company, Inc. (FSIC), Family Security Underwriters, LLC (FSU), Interboro Insurance Company (IIC), AmCo Holding Company (AmCo), American Coastal Insurance Company (ACIC) and BlueLine Cayman Holdings (BLUE).

On February 3, 2015, we acquired FSH and its two wholly owned subsidiaries, FSIC and FSU, via merger. On April 29, 2016, we acquired IIC via merger. On April 3, 2017, we merged with AmCo and its two wholly owned subsidiaries, ACIC and BLUE. See Note 4 in our Notes to Unaudited Consolidated Financial Statements for additional information regarding these acquisitions.

Our primary products are homeowners' and commercial insurance, which we currently offer in Connecticut, Florida, Georgia, Hawaii, Louisiana, Massachusetts, New Jersey, New York, North Carolina, Rhode Island, South Carolina, and Texas, under authorization from the insurance regulatory authorities in each state. We are also licensed to write property and casualty insurance in Alabama, Delaware, Maryland, Mississippi, New Hampshire, and Virginia; however, we have not commenced writing in these states.

We conduct our operations under one business segment.

(b)Consolidation and Presentation

We prepare our financial statements in conformity with U.S. generally accepted accounting principles (GAAP). While preparing our 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 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, reinsurance recoverable, deferred policy acquisition costs, 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 include all of our subsidiaries in our unaudited consolidated financial statements, eliminating all significant intercompany balances and transactions during consolidation.

We prepared the accompanying Unaudited Consolidated Balance Sheet as of June 30, 2017, with the Audited Consolidated Balance Sheet amounts as of December 31, 2016, presented for comparative purposes, and the related Unaudited Consolidated Statements of Comprehensive Income and Statements of Cash Flows in accordance with the instructions for Form 10-Q and Article 10-01 of Regulation S-X. In compliance with those instructions, we have omitted certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with GAAP, though management believes the disclosures made herein are sufficient to ensure that the information presented is not misleading.

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

Management believes our unaudited consolidated interim financial statements include all the normal recurring adjustments necessary to fairly present our Unaudited Consolidated Balance Sheet as of June 30, 2017, our Unaudited Consolidated

7

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
June 30, 2017



Statements of Comprehensive Income and our Unaudited Consolidated Statements of Cash Flows for all periods presented. Our unaudited consolidated interim financial statements and footnotes should be read in conjunction with our consolidated financial statements and footnotes in our Annual Report filed on Form 10-K for the year ended December 31, 2016.


2)    SIGNIFICANT ACCOUNTING POLICIES

(a) Changes to significant accounting policies

We have made no changes to our significant accounting policies as reported in our 2016 Form 10-K.

(b) Fair value assumptions

The carrying amounts for the following financial instrument categories approximate their fair values at June 30, 2017 and December 31, 2016, 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 the senior notes payable approximate fair value as the interest rates are variable. The carrying amount of our note payable with Interboro, LLC approximates fair value due to the short-term nature of the loan.

(c) 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 May 2017, The FASB has issued Accounting Standards Update (ASU) No. 2017-09, Compensation-Stock Compensation (Topic 718)-Scope of Modification Accounting (ASU 2017-09). This update 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 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 January 2017, The FASB has issued Accounting Standards Update (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.


8

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
June 30, 2017



3)    INVESTMENTS

The following table details the difference between cost or adjusted/amortized cost and estimated fair value, by major investment category, at June 30, 2017 and December 31, 2016:

 
Cost or Adjusted/Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
June 30, 2017
 
 
 
 
 
 
 
U.S. government and agency securities
$
199,665

 
$
561

 
$
1,343

 
$
198,883

Foreign government
2,027

 
35

 

 
2,062

States, municipalities and political subdivisions
197,408

 
2,154

 
547

 
199,015

Public utilities
19,079

 
175

 
46

 
19,208

Corporate securities
273,613

 
2,298

 
618

 
275,293

Asset backed securities
20,541

 
22

 
7

 
20,556

Redeemable preferred stocks
1,191

 
30

 
55

 
1,166

Total fixed maturities
713,524

 
5,275

 
2,616

 
716,183

Mutual funds
28,696

 
75

 
223

 
28,548

Public utilities
2,591

 
270

 
49

 
2,812

Other common stocks
19,804

 
6,739

 
110

 
26,433

Non-redeemable preferred stocks
1,557

 
81

 

 
1,638

Total equity securities
52,648

 
7,165

 
382

 
59,431

Other long-term investments
7,506

 
342

 

 
7,848

Total investments
$
773,678

 
$
12,782

 
$
2,998

 
$
783,462

 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
U.S. government and agency securities
$
151,656

 
$
189

 
$
1,893

 
$
149,952

Foreign government
2,031

 
30

 

 
2,061

States, municipalities and political subdivisions
170,636

 
1,027

 
2,551

 
169,112

Public utilities
7,687

 
116

 
73

 
7,730

Corporate securities
164,424

 
1,238

 
1,126

 
164,536

Redeemable preferred stocks
1,182

 
5

 
62

 
1,125

Total fixed maturities
497,616

 
2,605

 
5,705

 
494,516

Public utilities
1,343

 
164

 

 
1,507

Other common stocks
19,815

 
4,552

 
319

 
24,048

Non-redeemable preferred stocks
2,916

 
10

 
83

 
2,843

Total equity securities
24,074

 
4,726

 
402

 
28,398

Other long-term investments
5,493

 
267

 
27

 
5,733

Total investments
$
527,183

 
$
7,598

 
$
6,134

 
$
528,647



9

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
June 30, 2017



When we sell investments, we calculate the gain or loss realized on the sale by comparing the sales price (fair value) to the cost or adjusted/amortized cost of the security sold. We determine the cost or adjusted/amortized cost of the security sold using the specific-identification method. The following table details our realized gains (losses) by major investment category for the three and six month periods ended June 30, 2017 and 2016:

 
2017
 
2016
 
Gains
(Losses)
 
Fair Value at Sale
 
Gains
(Losses)
 
Fair Value at Sale
Three Months Ended June 30,
 
 
 
 
 
 
 
Fixed maturities
$
41

 
$
6,310

 
$
243

 
$
11,040

Equity securities
7

 
19

 
24

 
10,769

Total realized gains
48

 
6,329

 
267

 
21,809

Fixed maturities
(170
)
 
13,848

 
(96
)
 
3,866

Equity securities
(10
)
 
100

 
(69
)
 
10,999

Total realized losses
(180
)
 
13,948

 
(165
)
 
14,865

Net realized investment gains (losses)
$
(132
)
 
$
20,277

 
$
102

 
$
36,674

 
 
 
 
 
 
 
 
Six Months Ended June 30,
 
 
 
 
 
 
 
Fixed maturities
$
140

 
$
18,896

 
$
1,298

 
$
36,382

Equity securities
7

 
19

 
24

 
10,769

Total realized gains
147

 
18,915

 
1,322

 
47,151

Fixed maturities
(620
)
 
37,396

 
(774
)
 
13,028

Equity securities
(10
)
 
100

 
(176
)
 
17,008

Total realized losses
(630
)
 
37,496

 
(950
)
 
30,036

Net realized investment gains (losses)
$
(483
)
 
$
56,411

 
$
372

 
$
77,187


The table below summarizes our fixed maturities at June 30, 2017 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, 2017
 
Cost or Amortized Cost
 
Percent of Total
 
Fair Value
 
Percent of Total
Due in one year or less
$
69,381

 
9.7
%
 
$
69,331

 
9.7
%
Due after one year through five years
393,536

 
55.2
%
 
394,736

 
55.1
%
Due after five years through ten years
234,739

 
32.9
%
 
236,103

 
33.0
%
Due after ten years
15,868

 
2.2
%
 
16,013

 
2.2
%
Total
$
713,524

 
100.0
%
 
$
716,183

 
100.0
%


10

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
June 30, 2017



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

 
Three Months Ended June 30,
 
Six Months Ended
June 30,
 
2017
 
2016
 
2017
 
2016
Fixed maturities
$
4,087

 
$
2,343

 
$
6,585

 
$
4,442

Equity securities
345

 
204

 
565

 
467

Cash and cash equivalents
90

 
32

 
160

 
49

Other investments
109

 
143

 
261

 
156

Other assets
6

 
5

 
17

 
9

Investment income
4,637

 
2,727

 
7,588

 
5,123

Investment expenses
(19
)
 
(131
)
 
(269
)
 
(205
)
Net investment income
$
4,618

 
$
2,596

 
$
7,319

 
$
4,918


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.

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

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

11

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
June 30, 2017



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, 2017
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency securities
168

 
$
1,154

 
$
102,522

 
21

 
$
189

 
$
5,858

States, municipalities and political subdivisions
102

 
483

 
74,197

 
4

 
64

 
4,717

Public utilities
12

 
46

 
3,080

 

 

 

Corporate securities
195

 
601

 
83,816

 
1

 
17

 
1,025

Asset backed securities
19

 
7

 
13,848

 

 

 

Redeemable preferred stocks

 

 

 
3

 
55

 
310

Total fixed maturities
496

 
2,291

 
277,463

 
29

 
325

 
11,910

Mutual Fund
1

 
223

 
24,767

 

 

 

Public utilities
5

 
22

 
594

 
5

 
27

 
381

Other common stocks
11

 
61

 
1,463

 
4

 
49

 
442

Total equity securities
17

 
306

 
26,824

 
9

 
76

 
823

Total
513

 
$
2,597

 
$
304,287

 
38

 
$
401

 
$
12,733

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency securities
186

 
$
1,893

 
$
111,216

 

 
$

 
$

States, municipalities and political subdivisions
201

 
2,551

 
136,360

 

 

 

Public utilities
8

 
73

 
2,222

 

 

 

Corporate securities
215

 
1,100

 
88,605

 
1

 
26

 
1,021

Redeemable preferred stocks
7

 
62

 
764

 

 

 

Total fixed maturities
617

 
5,679

 
339,167

 
1

 
26

 
1,021

Other common stocks
16

 
140

 
2,450

 
17

 
179

 
1,732

Non-redeemable preferred stocks
12

 
52

 
1,830

 
7

 
31

 
369

Total equity securities
28

 
192

 
4,280

 
24

 
210

 
2,101

Other long-term investments
1

 
27

 
987

 

 

 

Total
646

 
$
5,898

 
$
344,434

 
25

 
$
236

 
$
3,122

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

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

During the three and six months ended June 30, 2017 and 2016, we recorded no other-than-temporary impairment charges.


12

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
June 30, 2017



Fair value measurement

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

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

Level 2: Assets and liabilities whose values are based on the following:
(a) Quoted prices for similar assets or liabilities in active markets;
(b) Quoted prices for identical or similar assets or liabilities in markets that are not active; or
(c) Valuation models whose inputs are observable, directly or indirectly, for substantially the full term of the asset or liability.

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

We estimate the fair value of our investments using the closing prices on the last business day of the reporting period, obtained from active markets such as the NYSE, NASDAQ, and NYSE MKT. For securities for which quoted prices in active markets are unavailable, we use a third-party pricing service that utilizes quoted prices in active markets for similar instruments, benchmark interest rates, broker quotes and other relevant inputs to estimate the fair value of those securities for which quoted prices are unavailable. Our estimates of fair value reflect the interest rate environment that existed as of the close of business on June 30, 2017 and December 31, 2016. Changes in interest rates subsequent to June 30, 2017 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.



13

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
June 30, 2017



Any change in the estimated fair value of our securities would impact the amount of unrealized gain or loss we have recorded, which could change the amount we have recorded for our investments and other comprehensive income on our Unaudited Consolidated Balance Sheet as of June 30, 2017.

The following table presents the fair value of our financial instruments measured on a recurring basis by level at June 30, 2017 and December 31, 2016:

 
Total
 
Level 1
 
Level 2
 
Level 3
June 30, 2017
 
 
 
 
 
 
 
U.S. government and agency securities
$
198,883

 
$

 
$
198,883

 
$

Foreign government
2,062

 

 
2,062

 

States, municipalities and political subdivisions
199,015

 

 
199,015

 

Public utilities
19,208

 

 
19,208

 

Corporate securities
275,293

 

 
275,293

 

Asset backed securities
20,556

 

 
20,556

 

Redeemable preferred stocks
1,166

 
1,166

 

 

Total fixed maturities
716,183

 
1,166

 
715,017

 

Mutual funds
28,548

 
28,548

 

 

Public utilities
2,812

 
2,812

 

 

Other common stocks
26,433

 
26,433

 

 

Non-redeemable preferred stocks
1,638

 
1,638

 

 

Total equity securities
59,431

 
59,431

 

 

Other long-term investments
7,848

 
300

 
6,852

 
696

Total investments
$
783,462

 
$
60,897

 
$
721,869

 
$
696

 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
U.S. government and agency securities
$
149,952

 
$

 
$
149,952

 
$

Foreign government
2,061

 

 
2,061

 

States, municipalities and political subdivisions
169,112

 

 
169,112

 

Public utilities
7,730

 

 
7,730

 

Corporate securities
164,536

 

 
164,536

 

Redeemable preferred stocks
1,125

 
1,125

 

 

Total fixed maturities
494,516

 
1,125

 
493,391

 

Public utilities
1,507

 
1,507

 

 

Other common stocks
24,048

 
24,048

 

 

Non-redeemable preferred stocks
2,843

 
2,843

 

 

Total equity securities
28,398

 
28,398

 

 

Other long-term investments
5,733

 
300

 
3,735

 
1,698

Total investments
$
528,647

 
$
29,823

 
$
497,126

 
$
1,698





14

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
June 30, 2017



The table below presents the rollforward of our Level 3 investments held at fair value during the six months ended June 30, 2017:
 
 
Other Investments
December 31, 2016
 
$
1,698

Transfers in
 

Transfers out
 
(990
)
Partnership income
 
25

Return of capital
 
(139
)
Unrealized gains in accumulated other comprehensive income
 
102

June 30, 2017
 
$
696



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 six months of 2017, we transferred one investment from a Level 3 to a Level 2 investment, due to changes in the availability of market observable inputs. 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, then adds final spreads to the U.S. Treasury curve at 3 p.m. (ET) as of quarter end. Since the inputs the valuation service uses in their calculations are not quoted prices in active markets, but are observable inputs, they represent Level 2 inputs.


15

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
June 30, 2017



Other investments

We acquired investments in limited partnerships, recorded in the other investments line of our Unaudited Consolidated Balance Sheets, that are currently being accounted for at fair value utilizing a discounted cash flow methodology. The estimated fair value of our investments in the limited partnership interests was $7,548,000. We have fully funded our investments in DCR Mortgage Partners VI, L.P. (DCR VI), DCR Mortgage Partners VII, L.P. (DCR VII), and RCH Mortgage Fund VI Investors, L.P. (RCH); however, we are still obligated to fund an additional $342,000 and $665,000 for our investments in Kayne Anderson Senior Credit Fund II, L.P. (Kayne) and Blackstone Alternative Solutions 2015 Trust (Blackstone), respectively. The information presented in the table below is as of June 30, 2017.

 
 
Initial Investment
 
Book Value
 
Unrealized Gain
 
Unrealized Loss
 
Fair Value
DCR Mortgage Partners VI, L.P.
 
$
310

 
$
354

 
$
342

 
$

 
$
696

         Total Level 3 limited partnership investments
 
310

 
354

 
342

 

 
696

Kayne Senior Credit Fund II, L.P.
 
1,658

 
1,491

 

 

 
1,491

DCR Mortgage Partners VII, L.P.
 
4,000

 
4,036

 

 

 
4,036

RCH Mortgage Fund VI Investors, LP
 
1,000

 
990

 

 

 
990

Blackstone Alternative Solutions 2015 Trust
 
365

 
335

 

 

 
335

         Total Level 2 limited partnership investments
 
7,023

 
6,852

 

 

 
6,852

Total limited partnership investments
 
$
7,333

 
$
7,206

 
$
342

 
$

 
$
7,548

Other short-term investments
 
300

 
300

 

 

 
300

Total other investments
 
$
7,633

 
$
7,506

 
$
342

 
$

 
$
7,848


The following table summarizes the quantitative impact that the significant unobservable inputs used to estimate the fair value of our Level 3 investment has on the estimated fair value on our investment shown in the tables above. Due to Kayne, DCR VII, RCH, and Blackstone being carried at cost, we have excluded them from the table below. The DCR VI investment was valued using a duration of 60 months for both periods presented below.
 
 
Fair Value
 
Valuation
 
 
 
Rate
 
 
Impact
 
Technique
 
Unobservable Input
 
Adjustment
June 30, 2017
 
 
 
 
 
 
 
 
DCR VI
 
$
(46
)
 
Discounted cash flow
 
Discount rate based on D&B paydex scale
 
2.35%
 
 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
 
DCR VI
 
$
(56
)
 
Discounted cash flow
 
Discount rate based on D&B paydex scale
 
2.35%
RCH
 
$
(341
)
 
Discounted cash flow
 
Discount rate based on D&B paydex scale
 
7.35%


4)
ACQUISITIONS AND MERGERS

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 they accounting had been completed on the acquisition date.







16

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
June 30, 2017



AmCo Holding Company

On April 3, 2017, the Company completed its merger with AmCo. The transaction was completed through a series of mergers that ultimately resulted in the Company issuing 20,956,355 shares of its common stock, $0.0001 par value per share, as merger consideration to the equity holders of RDX Holding, LLC, a Delaware limited liability company. The acquisition of AmCo supported the Company's growth strategy and further strengthened the Company's overall position in the commercial property and casualty insurance market.

The operations of AmCo are included in our Unaudited Consolidated Statements of Comprehensive Income effective April 3, 2017. We have one year from the acquisition date to finalize the allocation of the purchase price of AmCo and its subsidiaries. The preliminary 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
46,109

Other assets
25,932

Unpaid losses and loss adjustment expenses
(60,529
)
Unearned premiums
(128,824
)
Reinsurance payable
(22,406
)
Deferred taxes
(15,046
)
Other liabilities
(27,367
)
Total purchase price
$
274,384


The unaudited pro forma financial information below has been prepared as if the AmCo merger had taken place on January 1, 2017 and January 1, 2016, respectively. 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 or January 1, 2016, and the unaudited pro forma information does not purport to be indicative of future financial operating results.

 
Six Months Ended June 30,
 
2017
 
2016
 
As
 
Pro Forma
 
 
 
As
 
Pro Forma
 
 
 
Reported
 
Adjustments
 
Pro Forma
 
Reported
 
Adjustments
 
Pro Forma
Revenues
$
300,706

 
$
38,096

 
$
338,802

 
$
228,482

 
$
98,384

 
$
326,866

 
 
 
 
 
 
 
 
 
 
 
 
Net income
$
11,156

 
$
6,712

 
$
17,868

 
$
12,792

 
$
21,686

 
$
34,478

 
 
 
 
 
 
 
 
 
 
 
 
Diluted earnings per share
$
0.35

 
$

 
$
0.42

 
$
0.59

 
$

 
$
0.81


Interboro Insurance Company

On April 29, 2016, we completed the acquisition of IIC. The purchase price for IIC consisted of $48,450,000 in cash, $8,550,000 in a note payable and an accrued liability for $3,471,000 paid during July 2016. The acquisition of IIC supported

17

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
June 30, 2017



the Company's growth strategy and further strengthened the Company's overall position in the property and casualty insurance market in the state of New York.

The operations of IIC are included in our Unaudited Consolidated Statements of Comprehensive Income effective April 29, 2016. We had one year from the acquisition date to finalize the allocation of the purchase price of IIC. The final purchase price allocation is as follows:

Cash and cash equivalents
$
15,554

Investments
66,527

Premium and agents' receivable
3,186

Reinsurance receivable
1,042

Intangible assets
5,877

Insurance contract asset
8,334

Goodwill
10,157

Other assets
3,980

Deferred taxes
575

Unpaid losses and loss adjustment expenses
(24,967
)
Unearned premiums
(26,243
)
Advanced premiums
(1,472
)
Other liabilities
(2,079
)
Total purchase price
$
60,471



5)    EARNINGS PER SHARE

Basic earnings per share (EPS) is based on the weighted average number of common shares outstanding for the period, excluding any dilutive common share equivalents. Diluted EPS reflects the potential dilution resulting from vesting of restricted stock awards. The following table shows the computation of basic and diluted EPS for the three and six month periods ended June 30, 2017 and June 30, 2016, respectively:

 
 
Three Months Ended June 30,
 
Six Months Ended
June 30,
 
 
2017
 
2016
 
2017
 
2016
Numerator:
 
 
 
 
 
 
 
 
Net income attributable to common stockholders
 
$
7,257

 
$
9,841

 
$
11,156

 
$
12,792

 
 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
 
Weighted-average shares outstanding
 
41,799,041

 
21,423,739

 
31,691,267

 
21,385,220

Effect of dilutive securities
 
228,972

 
207,338

 
223,292

 
199,067

Weighted-average diluted shares
 
42,028,013

 
21,631,077

 
31,914,559

 
21,584,287

 
 
 
 
 
 
 
 
 
Basic earnings per share
 
$
0.17

 
$
0.46

 
$
0.35

 
$
0.60

Diluted earnings per share
 
$
0.17

 
$
0.45

 
$
0.35

 
$
0.59


See Note 16 for additional information on the stock grants related to dilutive securities.





18

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
June 30, 2017



6)    PROPERTY AND EQUIPMENT, NET

Property and equipment, net consists of the following:
 
 
June 30,
2017
 
December 31,
2016
Land
 
$
2,114

 
$
2,114

Building and building improvements
 
5,502

 
5,502

Computer hardware and software
 
18,029

 
14,699

Office furniture and equipment
 
3,121

 
2,652

Total, at cost
 
28,766

 
24,967

Less: accumulated depreciation and amortization
 
(9,143
)
 
(7,107
)
Property and equipment, net
 
$
19,623

 
$
17,860


Depreciation and amortization expense under property and equipment was $1,421,000 and $593,000 for the three months ended June 30, 2017 and 2016, respectively, and $2,036,000 and $1,215,000 for the six months ended June 30, 2017 and 2016, respectively.


7) GOODWILL AND INTANGIBLE ASSETS

Goodwill

The changes in the carrying amount of goodwill for the six months ended June 30, 2017 and 2016 are as follows:

 
 
June 30
 
 
2017
 
2016
Balance at beginning of period
 
$
14,254

 
$
3,413

Acquisitions
 
46,109

 
10,841

Adjustments to finalize purchase price allocation
 
(684
)
 

Impairment
 

 

Balance at end of period
 
$
59,679

 
$
14,254


Using a qualitative assessment, we completed our most recent goodwill impairment testing during the fourth quarter of 2016 and determined that there was no impairment in the value of the asset as of December 31, 2016.

No impairment loss in the value of goodwill or goodwill amortization expense was recognized during the six months ended June 30, 2017. Additionally, there was no accumulated impairment or accumulated amortization related to goodwill at June 30, 2017 or December 31, 2016.


Intangible Assets

The following is a summary of intangible assets excluding goodwill recorded as other assets at June 30, 2017 and December 31, 2016:

19

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
June 30, 2017



 
 
Weighted-average remaining amortization period (in years)
 
Gross carrying amount
 
Accumulated amortization
 
Net carrying amount
June 30, 2017
 
 
 
 
 
 
 
 
Amortizing intangible assets
 
 
 
 
 
 
 
 
      VOBA
 
0.8
 
$
42,788

 
$
(17,428
)
 
$
25,360

      Agency agreements acquired
 
8.4
 
34,661

 
(4,422
)
 
30,239

      Trade names acquired
 
6.5
 
6,381

 
(587
)
 
5,794

Non-amortizing intangible assets
 
 
 
 
 
 
 
 
      Licenses acquired
 
 
 
3,555

 

 
3,555

Total
 
 
 
$
87,385

 
$
(22,437
)
 
$
64,948

 
 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
 
Amortizing intangible assets
 
 
 
 
 
 
 
 
      VOBA
 
0.3
 
$
8,975

 
$
(7,867
)
 
$
1,108

      Agency agreements acquired
 
3.8
 
10,284

 
(2,784
)
 
7,500

      Trade names acquired
 
2.1
 
720

 
(264
)
 
456

Non-amortizing intangible assets
 
 
 
 
 
 
 
 
      Licenses acquired
 
 
 
3,307

 

 
3,307

Total
 
 
 
$
23,286

 
$
(10,915
)
 
$
12,371


No impairment in the value of amortizing or non-amortizing intangible assets was recognized during the three and six months ended June 30, 2017 and June 30, 2016.
Amortization expense of our intangible assets was $10,167,000 and $11,522,000 for the three and six months ended June 30, 2017, respectively. Amortization expense of our intangible assets was $3,066,000 and $3,352,000 for the three and six months ended June 30, 2016, 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 2017
 
$
20,232

2018
 
13,920

2019
 
5,355

2020
 
4,267

2021
 
3,555

2022
 
3,246



20

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
June 30, 2017



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 shareholders 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, 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 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 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 Holding; 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 American Coastal 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 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.

The total cost of the 2017-18 catastrophe reinsurance program is estimated to be $314,169,000.

Effective December 1, 2016, UPC Insurance, through our wholly owned insurance subsidiary, UPC, entered into a quota share reinsurance agreement (the "quota share agreement") with private reinsurers. Also, effective January 1, 2017, we renewed our aggregate excess of loss reinsurance agreement (the "aggregate excess of loss agreement," and, together with the quota share agreement, the "agreements") with private reinsurers. These agreements provide coverage for in-force, new and renewal business. The quota share agreement provides coverage only for UPC, while the aggregate excess of loss agreement provides coverage for UPC, ACIC, FSIC, and IIC. These new reinsurance programs are designed to work in conjunction with our catastrophe excess of loss reinsurance program to provide us broad risk transfer protection and to lessen financial volatility.


21

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
June 30, 2017



The quota share agreement includes a cession rate of 20% (15% on single year and 5% over a two-year period) for all subject business. The quota share agreement provides coverage for all catastrophe perils (e.g. hurricanes, tropical storms, tropical depressions and earthquakes), other-catastrophe perils (e.g. weather-related perils other than hurricanes, tropical storms, tropical depressions and earthquakes), and attritional losses. For other-catastrophe perils, the quota share agreement provides coverage alongside the aggregate excess of loss program described herein, after our retention has been satisfied. For catastrophe perils, the quota share agreement provides ground-up protection that effectively reduces our retention for catastrophe losses. Quota share agreement reinsurers' participation in paying attritional losses is subject to an attritional loss ratio cap.

The aggregate excess of loss agreement provides coverage only for other-catastrophe perils. Under this agreement, for other-catastrophe losses in excess of $1,000,000 but less than $15,000,000, UPC will retain, in the aggregate, 100% of those losses up to $30,000,000. The reinsurers will then be liable for all losses excess of $30,000,000 in the aggregate not to exceed an annual aggregate limit of $30,000,000. This program was placed at 85% rather than 100% because of the quota share agreement reinsurers' participation in paying other-catastrophe losses after the $30,000,000 retention. We have now met the $30,000,000 retention under this reinsurance program, which means the next $30,000,000 of catastrophe losses, other than named windstorms or earthquakes, incurred during the remainder of 2017 will be ceded to third party reinsurers up to the $60,000,000 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 June 30,
 
Six Months Ended
June 30,
 
2017
 
2016
 
2017
 
2016
Excess-of-loss
$
(342,868
)
 
$
(177,970
)
 
$
(372,467
)
 
$
(182,027
)
Equipment & identity theft
(2,596
)
 
(2,201
)
 
(4,669
)
 
(3,777
)
Novation of auto policies (1)

 
(2,396
)
 

 
(2,396
)
Flood
(5,369
)
 
(4,920
)
 
(8,760
)
 
(7,963
)
Ceded premiums written
$
(350,833
)
 
$
(187,487
)
 
$
(385,896
)
 
$
(196,163
)
Increase in ceded unearned premiums
248,867

 
137,081

 
209,048

 
100,625

Ceded premiums earned
$
(101,966
)
 
$
(50,406
)
 
$
(176,848
)
 
$
(95,538
)
(1) Reflects ceding of auto policy premiums to Maidstone Insurance Company as part of the settlement of the novation agreement entered into at the closing of the Interboro Insurance Company transaction.

Current year catastrophe losses by the event magnitude are shown in the following table for the three and six months ended June 30, 2017 and 2016.


22

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
June 30, 2017



 
 
2017
 
2016
 
 
Number of Events
 
Incurred Loss and LAE (1) 
 
Combined Ratio Impact
 
Number of Events
 
Incurred Loss and LAE (1) 
 
Combined Ratio Impact
Three Months Ended June 30,
 
 
 
 
 
 
 
 
 
 
 
 
Current period catastrophe losses incurred
 
 
 
 
 
 
 
 
 
 
 
 
$ 1 million to $5 million(2)
 
6

 
$
17,110

 
10.8
%
 
4

 
$
5,688

 
5.0
 %
Less than $1 million(3)
 
9

 
4,688

 
2.9
%
 
12

 
(1,968
)
 
(1.7
)%
Total
 
15

 
$
21,798

 
13.7
%
 
16

 
$
3,720

 
3.3
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30,
 
 
 
 
 
 
 
 
 
 
 
 
Current period catastrophe losses incurred
 
 
 
 
 
 
 
 
 
 
 
 
$ 5 million to $10 million(4)
 
1

 
$
6,963

 
2.6
%
 

 
$

 
 %
$ 1 million to $5 million(5)
 
8

 
21,056

 
7.9
%
 
9

 
14,789

 
6.9
 %
Less than $1 million(6)
 
6

 
4,391

 
1.6
%
 
7

 
3,987

 
1.8
 %
Total
 
15

 
$
32,410

 
12.1
%
 
16

 
$
18,776

 
8.7
 %
(1)
Incurred loss and LAE 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 number of events includes the development on storms during both the three and six months ended June 30, 2017. During the second quarter of 2017, we incurred losses and LAE from ten new storms.
(2)
Reflects 2017 losses from Florida, Gulf, and Southeast region hail and wind storms, thunderstorms, and tornadoes, including development on storms which occurred during the first quarter of 2017. Reflects 2016 losses from Florida tornadoes, Texas hail and a Florida windstorm in 2016.
(3) Reflects 2017 losses from hail and wind storms in Texas and Louisiana, as well as from Tropical Storm Cindy. Reflects 2016 losses from Florida tornadoes, a Florida windstorm, and Texas hail.
(4)
Reflects 2017 losses from a Gulf region thunderstorm in January 2017.
(5) Reflects 2017 losses from Florida, Gulf, and Southeast region hail and wind storms, thunderstorms, and tornadoes. Reflects 2016 losses from Tropical Storm Colin, Texas spring storms and flooding, Winter Storm Olympia, and Florida tornadoes.
(6) Reflects 2017 losses from hail and wind storms in Texas and Louisiana, as well as from Tropical Storm Cindy. Reflects 2016 losses from Florida tornadoes, a Florida windstorm, and Texas hail as well as development on Florida tornadoes that occurred in the first quarter of 2016.

We collected cash recoveries under our reinsurance agreements totaling $18,081,000 and $591,000 for the three month periods ended June 30, 2017 and 2016, respectively, and $20,565,000 and $857,000 for the six month periods ended June 30, 2017 and 2016, 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 $303,000 and $256,000 for the three month periods ended June 30, 2017 and 2016, respectively, and $597,000 and $502,000 for the six month periods ended June 30, 2017 and 2016, respectively.


9) LIABILITY FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSE
We determine the reserve for unpaid losses on an individual-case basis for all incidents reported. The liability also includes amounts for IBNR claims as of the balance sheet date.
The table below shows the analysis of our reserve for unpaid losses for the six months ended June 30, 2017 and June 30, 2016 on a GAAP basis:

23

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
June 30, 2017



 
June 30,
 
2017
 
2016
Balance at January 1
$
140,855

 
$
76,792

Less: reinsurance recoverable on unpaid losses
18,724

 
2,114

Net balance at January 1
$
122,131

 
$
74,678

 
 
 
 
Acquisition of IIC reserves

 
22,576

Acquisition of AMCO reserves (net of reinsurance recoverables of $19,945)
40,583

 

 
 
 
 
Incurred related to:
 
 
 
Current year
152,061

 
121,693

Prior years
(1,790
)
 
5,176

Total incurred
$
150,271

 
$
126,869

Paid related to:
 
 
 
Current year
91,732

 
78,634

Prior years
69,878

 
42,251

Total paid
$
161,610

 
$
120,885

 
 
 
 
Net balance at June 30
$
151,375

 
$
103,238

Plus: reinsurance recoverable on unpaid losses
53,319

 
13,775

Balance at June 30
$
204,694

 
$
117,013

 
 
 
 
Composition of reserve for unpaid losses and LAE:

 
 
 
     Case reserves
$
94,608

 
$
67,388

     IBNR reserves
110,086

 
49,625

Balance at June 30
$
204,694

 
$
117,013


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 2017 was primarily the result of losses related to the 2016 and 2015 accident years coming in better than expected. During 2016, we had a reserve deficiency. Since we place substantial reliance on loss-development-based actuarial models when determining our estimate of ultimate losses, the deficiencies resulted from additional development on prior accident years which caused our ultimate losses to increase.


10)    LONG-TERM DEBT

Florida State Board of Administration Note Payable

Our long-term debt at June 30, 2017 included a note payable to the Florida State Board of Administration (SBA note). At June 30, 2017 and December 31, 2016, we owed $10,882,000 and $11,176,000, respectively, on the note and the interest rate was 2.42% and 1.56%, respectively. During the three months ended June 30, 2017, we did not make any payments of principal or interest. However, during the six months ended June 30, 2017, we paid $294,000 and $70,000 of principal and interest, respectively. All other terms and conditions of the note remain as described in our 2016 Form 10-K.


24

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
June 30, 2017



The SBA note requires UPC to maintain surplus as regards policyholders at or above a calculated level, which was $23,000,000 at June 30, 2017. Each quarter, we monitor the surplus as regards policyholders for all of our insurance affiliates and, for various reasons, we occasionally provide additional capital to our insurance affiliates.

Our SBA note requires that UPC maintain either a 2:1 ratio of net written premium to surplus, or net writing ratio, or a 6:1 ratio of gross written premium to surplus, or gross writing ratio, to avoid additional interest penalties. The SBA note agreement defines surplus for the purpose of calculating the required ratios as the $20,000,000 of capital contributed to UPC under the agreement plus the outstanding balance of the note. Should UPC fail to exceed either a net writing ratio of 1.5:1 or a gross writing ratio of 4.5:1, UPC's interest rate will increase by 450 basis points above the 10-year Constant Maturity Treasury rate which was 2.31% at the end of June 2017. Any other writing ratio deficiencies result in an interest rate penalty of 25 basis points above the stated rate of the note, which is 2.42% at the end of June 2017. Our SBA note further provides that the SBA may, among other things, declare its loan immediately due and payable for all defaults existing under the SBA note; however, any payment is subject to approval by the insurance regulatory authority. At June 30, 2017, we were in compliance with the covenants as specified in the SBA note.

Interboro, LLC Promissory Note Payable

On April 29, 2016, we issued an $8,550,000 promissory note to Interboro, LLC, the former parent company of IIC, as part of the purchase price paid to acquire our insurance affiliate. The note will mature in 18 months after the closing of the transaction and bears interest at an annual rate of 6% which is paid in full at maturity. In accordance with the stock purchase agreement, we have the right to reduce the amount of the outstanding principal by the amount of all or part of any loss relating to a claim for indemnification to which we may be entitled under the stock purchase agreement.

In the event of default, Interboro, LLC, at its option, may declare the loan immediately due and payable.

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. The interest rate resets monthly and was 2.69% at June 30, 2017. Principal and interest are payable monthly. During the three months ended June 30, 2017, we paid $87,000 and $34,000 of principal and interest, respectively, and during the six months ended June 30, 2017, we paid $173,000 and $64,000 of principal and interest, respectively. At June 30, 2017 and December 31, 2016, we owed $4,824,000 and $4,998,000, respectively, on the note.

The BB&T note requires that at all times while there has been no "Non-Recurring Losses", UPC Insurance will maintain a minimum Cash Flow Coverage ratio of 1.2:1. The Cash Flow Coverage ratio is defined as UPC Insurance's cash flow to borrower's debt services. Cash flow is defined as earnings before taxes, plus depreciation and amortization and interest. Debt service is defined as prior year's current maturities of long term debt plus interest expense. This ratio will be tested annually, based on UPC Insurance's audited financial statements. For the annual period only following a "Non-Recurring Loss", UPC Insurance will maintain a minimum Cash Flow Coverage ratio of 1.0:1.

For purposes of both of the foregoing, "Non-Recurring Losses" is defined as losses from our insurance subsidiaries' operations, as determined from time to time in the bank's sole discretion. This covenant will only be effective if the Pre Non-Recurring Losses test is failed, and is only available and effective for one (1) annual test period. Thereafter, the Non-Recurring Loss Cash Flow Coverage Ratio of 1.2:1 will immediately apply. At the time of the most recent annual test period, December 31, 2016, we were in compliance with the covenants as specified in the BB&T note.

In addition, the BB&T note requires that we establish and maintain with BB&T a noninterest bearing DDA account with a minimum balance of $500,000, and an interest bearing account with a minimum balance of $1,500,000, at all times during the term of the loan.

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. At June 30, 2017, we were in compliance with the covenants as specified in the BB&T note.


25

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
June 30, 2017



Senior Notes Payable

On December 5, 2016, we issued $30,000,000 of senior notes pursuant to an Indenture (the "Indenture") dated as of December 5, 2016, by and between the Company and private investors. During the three and six months ended June 30, 2017, we paid $516,000 and $998,000 of interest, respectively.

The notes bear interest at a floating rate equal to the three month LIBOR plus 5.75% per annum with interest payable quarterly in arrears. The interest rate resets quarterly and was 6.88% at June 30, 2017. The notes will mature 10 years after the issue date, have no scheduled amortization, and may be redeemed at par any time without a pre-payment penalty.

The Indenture contains customary event of default provisions. It also contains covenants that, among other things, restrict the Company's ability to incur indebtedness without first providing written notification and receiving approval from the majority of the holders of the notes, limit the Company's ability to create, incur or assume liens other than permitted liens that secure any indebtedness on any asset or property of the Company, require the Company to maintain reinsurance coverage during the life of the notes, and maintain a maximum debt to capital ratio of 20% beginning from December 31, 2017. At June 30, 2017, we were in compliance with the covenants as specified in the senior notes.

Debt Issuance Costs

The table below presents the rollforward of our debt issuance costs paid, in conjunction with the debts instruments described above, during the year ended June 30, 2017:
 
2017
Balance at January 1,
$
549

Additions

Amortization
(57
)
Balance at June 30,
$
492



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

At June 30, 2017, 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 affiliates. 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 affiliates, UPC, ACIC, FSIC and IIC are domiciled in Florida, Florida, Hawaii and New York, respectively. At June 30, 2017, and during the three and six months then ended, our insurance affiliates met all regulatory requirements of the states in which they operate, and they did not incur any material assessments.


26

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
June 30, 2017



The National Association of Insurance Commissioners (NAIC) published Risk-Based Capital (RBC) guidelines for insurance companies that are designed to assess capital adequacy and to raise the level of protection that statutory surplus provides for 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 affiliates' ability to pay dividends or make distributions if the amount of the intended dividend or distribution would cause statutory surplus to fall below minimum 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 surplus note. Any payment of principal or interest requires permission from the insurance regulatory authority.

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

Statutory accounting requires that we exclude certain assets, called non-admitted assets, from the balance sheet.
 
Statutory accounting requires us to expense policy acquisition costs when incurred, while GAAP allows us to defer to the extent realizable, and amortize policy acquisition costs over the estimated life of the policies.

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

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

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

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 affiliate's domiciliary state and a reserve for uncollectable reinsurance is charged through earnings rather than surplus or equity.

Statutory accounting requires an additional admissibility test and the change in deferred income tax is reported directly in capital and surplus, rather than being reported as a component of income tax expense under GAAP.

Our insurance affiliates must file with the various insurance regulatory authorities an “Annual Statement” which reports, among other items, statutory net income (loss) and surplus as regards policyholders, which is called stockholder’s equity under

27

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
June 30, 2017



GAAP. For the three and six month periods ended June 30, 2017 and 2016, UPC, ACIC, FSIC and IIC recorded the following amounts of statutory net income (loss).
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
UPC
$
(5,940
)
 
$
(8,152
)
 
$
(11,979
)
 
$
(9,324
)
ACIC (1)
$
5,694

 
N/A

 
$
11,814

 
N/A

FSIC
$
(2,200
)
 
$
87

 
$
737

 
$
183

IIC
$
1,939

 
5,837

 
$
4,018

 
8,187

(1) There is not a reportable value for ACIC for the three and six months ended June 30, 2016 as we did not own the company until April 2017.

Our insurance affiliates must maintain capital and surplus ratios or balances as determined by the regulatory authority of the states in which they are domiciled. 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 June 30, 2017 and December 31, 2016, respectively.
 
Minimum Requirement
 
June 30, 2017
 
December 31, 2016
UPC (1)
$
46,614

 
$
153,111

 
$
155,587

ACIC (1)(2)
$
17,828

 
$
155,979

 
N/A

FSIC
$
3,250

 
$
18,804

 
$
16,269

IIC
$
4,700

 
$
45,442

 
$
40,442

(1) UPC and ACIC are required to maintain capital and surplus equal to the greater of 10% of their total liabilities or $5,000,000.
(2) There is not a reportable value for ACIC as of December 31, 2016 as we did not own the company until April 2017.

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. During the three months ended June 30, 2017 and 2016, Groelle & Salmon, PA billed us approximately $775,000 and $513,000, respectively. During the six months ended June 30, 2017 and 2016, Groelle & Salmon, PA billed us approximately $1,643,000 and $1,109,000, respectively. Ms. Salmon's spouse has a 50% interest in these billings, or approximately $388,000 and $257,000, for the three months ended June 30, 2017 and 2016, respectively, and approximately $822,000 and $555,000, for the six months ended June 30, 2017 and 2016, respectively.

AmRisc, a Managing General Underwriter, handles the underwriting, claims processing, premium collection and reinsurance review for the Company. R. Daniel Peed, Vice Chairman of our Board of Directors, 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 $110,310,000 of gross written premiums for the three months ended June 30, 2017, resulting in fees and commission (including a profit commission) of $16,823,000 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 $1,772,000 in ceded premiums to AmRisc as a reinsurance intermediary for the three months ended June 30, 2017. We also incurred $16,000 during that period for rent under a sublease agreement with AmRisc.
Net premiums receivable (net of commissions) of $46,929,000 were due from AmRisc as of June 30, 2017. These premiums are 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


28

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
June 30, 2017



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, 2016
$
1,464

 
$
(642
)
 
$
822

Changes in net unrealized gains on investments
7,837

 
(2,971
)
 
4,866

Reclassification adjustment for realized losses
483

 
(186
)
 
297

June 30, 2017
$
9,784

 
$
(3,799
)
 
$
5,985


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):

 
 
Six Months Ended June 30,
 
 
2017
 
2016
 
 
Per Share Amount
 
Aggregate Amount
 
Per Share Amount
 
Aggregate Amount
First Quarter
 
$
0.06

 
$
1,301

 
$
0.05

 
$
1,076

Second Quarter
 
$
0.06

 
$
2,561

 
$
0.06

 
$
1,300


On April 3, 2017, we completed the acquisition of AmCo Holding Company by issuing 20,956,355 shares of our
common stock as payment of the initial purchase price. See Note 4 for additional information on this acquisition.

We are authorized to issue 875,000 shares of "blank check" preferred stock, which may be issued from time to time in one or more series upon authorization by our Board of Directors. Our Board, without further approval of the stockholders, is authorized to fix the designations, powers, including voting powers, preferences and the relative, participating optional or other special rights of the shares of each series and any qualifications, limitations and restrictions thereof. As of June 30, 2017, we had not issued any shares of preferred stock.


16) STOCK-BASED COMPENSATION

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

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

We granted 65,000 and 155,122 shares of restricted common stock during the three and six month periods ended June 30, 2017, respectively, which had weighted-average grant date fair values of $14.91 and $15.57 per share, respectively. We granted 65,000 and 111,205 shares of restricted common stock during the three and six month periods ended June 30, 2016, respectively, which had a weighted-average grant date fair values of $16.61 and $17.03 per share, respectively.

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


29

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
June 30, 2017



 
Number of Restricted Shares
 
Weighted Average Grant Date Fair Value
Outstanding as of December 31, 2016
169,642

 
$
16.87

Granted
155,122

 
15.57

Less: Forfeited
17,087

 
14.08

Less: Vested
103,883

 
16.34

Outstanding as of June 30, 2017
203,794

 
$
16.39


We had approximately $1,766,000 of unrecognized stock compensation expense on June 30, 2017 related to non-vested stock-based compensation granted, that we expect to recognize over the next three years. We recognized $410,000 and $786,000 of stock-based compensation expense during the three and six month periods ended June 30, 2017, respectively. We recognized $208,000 and $405,000 of stock-based compensation expense during the three and six month periods ended June 30, 2016, respectively.

We had approximately $831,000 of unrecognized director stock-based compensation expense at June 30, 2017 related to non-vested director stock-based compensation granted, that we expect to recognize ratably until the 2018 Annual Meeting of Stockholders. We recognized $242,000 and $508,000 of director stock-based compensation expense during the three and six months ended June 30, 2017, respectively. We recognized $264,000 and $526,000 of director stock-based compensation expense during the three and six months ended June 30, 2017, respectively.


17)    SUBSEQUENT EVENTS

On August 7, 2017, our Board of Directors declared a $0.06 per share quarterly cash dividend payable on August 28, 2017, to stockholders of record on August 21, 2017.







30

UNITED INSURANCE HOLDINGS CORP.


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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Unaudited Consolidated Financial Statements and related notes appearing elsewhere in this Form 10-Q, as well as with the Consolidated Financial Statements and related footnotes under Part II. Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2016.

EXECUTIVE SUMMARY

Overview

United Insurance Holdings Corp. serves as the holding company for UPC and its affiliated companies. We conduct our business principally through ten wholly owned operating subsidiaries: UPC, ACIC, FSIC, IIC, United Insurance Management, L.C., AmCo, BlueLine Cayman Holdings, Family Security Underwriters, LLC, Skyway Claims Services, LLC (our claims adjusting affiliate), and UPC Re (our reinsurance affiliate). Collectively, including United Insurance Holdings Corp., we refer to these entities as “UPC Insurance,” which is the preferred brand identification we are establishing for our Company.

UPC Insurance is primarily engaged in the homeowners' and commercial property and casualty insurance business in the United States. We currently write in Connecticut, Florida, Georgia, Hawaii, Louisiana, Massachusetts, New Jersey, New York, North Carolina, Rhode Island, South Carolina and Texas, and we are licensed to write in Alabama, Delaware, Maryland, Mississippi, New Hampshire, and Virginia. Our target market currently consists of areas where the perceived threat of natural catastrophe has caused large national insurance carriers to reduce their concentration of policies. In such areas we believe an opportunity exists for UPC Insurance to write profitable business.

We manage our risk of catastrophic loss primarily through sophisticated pricing algorithms, avoidance of policy concentration, and the use of a comprehensive catastrophe reinsurance program. UPC Insurance has been operating continuously in Florida since 1999, and has successfully managed its business through various hurricanes, tropical storms, and other weather related events. We believe our record of successful risk management and experience in writing business in catastrophe-exposed areas provides us with a competitive advantage as we grow our business in other states facing similar perceived threats.

The following discussion highlights significant factors influencing the consolidated financial position and results of operations of UPC Insurance. In evaluating our results of operations, we use premiums written and earned, policies in-force and new and renewal policies by geographic concentration. We also consider the impact of catastrophe losses and prior year development on our loss ratios, expense ratios and combined ratios. In monitoring our investments, we use credit quality, investment income, cash flows, realized gains and losses, unrealized gains and losses, asset diversification and portfolio duration. To evaluate our financial condition, we consider the following factors: liquidity, financial strength, ratings, book value per share and return on equity.

Recent Events
 
On August 7, 2017, our Board of Directors declared a $0.06 per share quarterly cash dividend payable on August 28, 2017, to stockholders of record on August 21, 2017.

On April 3, 2017, the Company successfully completed its merger with AmCo. The acquisition was completed through a series of mergers that ultimately resulted in the Company issuing 20,956,355 shares of its common stock, $0.0001 par value per share, as merger consideration to the equity holders of RDX Holding, LLC, a Delaware limited liability company.









31

UNITED INSURANCE HOLDINGS CORP.



2017 Highlights

($ in thousands, except per share, ratios and policies in-force)
Three Months Ended June 30,
 
Six Months Ended
June 30,
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
Gross premiums written
$
352,347

 
$
210,756

 
$
521,189

 
$
346,712

Gross premiums earned
261,584

 
164,585

 
443,649

 
311,087

Net premiums earned
159,618

 
114,179

 
266,801

 
215,549

Total revenues
178,073

 
120,921

 
300,706

 
228,482

Earnings before income tax
12,650

 
15,210

 
18,588

 
19,540

Consolidated net income
7,257

 
9,841

 
11,156

 
12,792

Net income per diluted share
$
0.17

 
$
0.45

 
0.35

 
0.59

 
 
 
 
 
 
 
 
Reconciliation of net income to operating income:
 
 
 
 
 
 
 
Plus: Merger expenses, net of tax
4,383

 
399

 
4,481

 
447

Plus: Non-cash amortization of intangible assets, net of tax
7,407

 
2,261

 
8,573

 
2,710

Less: Realized gains (losses), net of tax
(86
)
 
66

 
(314
)
 
242

Operating income (1)
19,133

 
12,435

 
24,524

 
15,707

Operating income per diluted share
0.46

 
0.57

 
0.77

 
0.73

 
 
 
 
 
 
 
 
Book value per share
 
 
 
 
12.39

 
11.97

Policies in-force
 
 
 
 
488,574

 
414,308

(1) Operating income, a measure that is not based on U.S. generally accepted accounting principles (GAAP), is reconciled above to net income, the most directly comparable GAAP measure. Additional information regarding non-GAAP financial measures presented in this document is in "Definitions of Non-GAAP Measures" below.

 

32

UNITED INSURANCE HOLDINGS CORP.


Consolidated Net Income
 
 
Three Months Ended June 30,
 
Six Months Ended
June 30,
 
 
2017
 
2016
 
2017
 
2016
REVENUE:
 
 
 
 
 
 
 
 
Gross premiums written
 
$
352,347

 
$
210,756

 
$
521,189

 
$
346,712

Decrease in gross unearned premiums
 
(90,763
)
 
(46,171
)
 
(77,540
)
 
(35,625
)
Gross premiums earned
 
261,584

 
164,585

 
443,649

 
311,087

Ceded premiums earned
 
(101,966
)
 
(50,406
)
 
(176,848
)
 
(95,538
)
Net premiums earned
 
159,618

 
114,179

 
266,801

 
215,549

Investment income
 
4,637

 
2,727

 
7,588

 
5,123

Net realized gains (losses)
 
(132
)
 
102

 
(483
)
 
372

Other revenue
 
13,950

 
3,913

 
26,800

 
7,438

Total revenue
 
178,073

 
120,921

 
300,706

 
228,482

EXPENSES:
 
 
 
 
 
 
 
 
Losses and loss adjustment expenses
 
86,938

 
62,611

 
150,271

 
126,869

Policy acquisition costs
 
43,320

 
25,721

 
78,756

 
52,753

Operating expenses
 
6,257

 
5,814

 
12,129

 
9,768

General and administrative expenses
 
28,176

 
11,497

 
39,509

 
19,430

Interest expense
 
752

 
116

 
1,511

 
191

Total expenses
 
165,443

 
105,759

 
282,176

 
209,011

Income before other income
 
12,630

 
15,162

 
18,530

 
19,471

Other income
 
20

 
48

 
58

 
69

Income before income taxes
 
12,650

 
15,210

 
18,588

 
19,540

Provision for income taxes
 
5,393

 
5,369

 
7,432

 
6,748

Net income
 
$
7,257

 
$
9,841

 
$
11,156

 
$
12,792

Net income per diluted share
 
$
0.17

 
$
0.45

 
$
0.35

 
$
0.59

Book value per share
 
 
 
 
 
$
12.39

 
$
11.97

Return on equity based on GAAP net income
 
 
 
 
 
3.5
 %
 
5.3
%
Loss ratio, net (1)
 
54.5
 %
 
54.8
%
 
56.3
 %
 
58.9
%
Expense ratio (2)
 
48.7
 %
 
37.7
%
 
48.9
 %
 
38.0
%
Combined ratio (CR) (3)
 
103.2
 %
 
92.5
%
 
105.2
 %
 
96.9
%
Effect of current year catastrophe losses on CR
 
13.7
 %
 
3.3
%
 
12.1
 %
 
8.7
%
Effect of prior year development on CR
 
(0.8
)%
 
0.4
%
 
(0.7
)%
 
1.7
%
Effect of ceding commission income on CR
 
6.6
 %
 
0.8
%
 
7.5
 %
 
0.8
%
Underlying combined ratio (4)
 
83.7
 %
 
88.0
%
 
86.3
 %
 
85.7
%
(1) Loss ratio, net is calculated as losses and loss adjustment expenses relative to net premiums earned.
(2) Expense ratio is calculated as the sum of all operating expenses less interest expense relative to net premiums earned.
(3) Combined ratio is the sum of the loss ratio, net and the expense ratio, net.
(4) Underlying combined ratio, a measure that is not based on U.S. generally accepted accounting principles (GAAP), is reconciled above to the combined ratio, the most directly comparable GAAP measure. Additional information regarding non-GAAP financial measures presented in this document is in "Definitions of Non-GAAP Measures" below.

Definitions of Non-GAAP Measures

We believe that investors' understanding of UPC Insurance's performance is enhanced by our disclosure of the following non-GAAP measures. Our methods for calculating these measures may differ from those used by other companies and therefore comparability may be limited.

Combined ratio excluding the effects of current year catastrophe losses, prior year reserve development and ceding commission income earned (underlying combined ratio) is a non-GAAP ratio, which is computed by subtracting the effect of current year catastrophe losses, prior year development, ceding commission income earned related to our quota share reinsurance agreement from the combined ratio. We believe that this ratio is useful to investors and it is used by management

33

UNITED INSURANCE HOLDINGS CORP.


to reveal the trends in our business that may be obscured by current year catastrophe losses, losses from lines in run-off, prior year development, and ceding commission income earned. Current year catastrophe losses cause our loss trends to vary significantly between periods as a result of their incidence of occurrence and magnitude, and can have a significant impact on the combined ratio. Prior year development is caused by unexpected loss development on historical reserves. Ceding commission income compensates the Company for expenses it incurs in generating the premium ceded under our quota share agreement. We believe it is useful for investors to evaluate these components separately and in the aggregate when reviewing our performance. The most direct comparable GAAP measure is the combined ratio. The underlying combined ratio should not be considered as a substitute for the combined ratio and does not reflect the overall profitability of our business.

Net Loss and LAE excluding the effects of current year catastrophe losses and reserve development (underlying Loss and LAE) is a non-GAAP measure which is computed by subtracting current year catastrophe losses and prior year reserve development from Loss and LAE. We use underlying loss and LAE figures to analyze our loss trends that may be impacted by current year catastrophe losses and prior year development on our reserves. As discussed previously, these two items can have a significant impact on our loss trend in a given period. The most direct comparable GAAP measure is net loss and LAE. The underlying loss and LAE measure should not be considered a substitute for net losses and LAE and does not reflect the overall profitability of our business.

Net Operating Expense excluding the effects of ceding commission income earned, merger expenses, and amortization of intangible assets (underlying expense) is a non-GAAP measure which is computed by subtracting ceding income earned related to our quota share reinsurance agreement, merger expenses and amortization from operating expenses. Ceding commission income compensates the Company for expenses it incurs in generating the premium ceded under our quota share reinsurance agreement. Merger expenses are directly related to past mergers and are not reflective of current period operating performance. Similarly, amortization expense is related to the amortization of intangible assets acquired through merger and therefore the expense does not arise through normal operations. We believe it is useful for investors to evaluate these components separately and in the aggregate when reviewing our performance. The most direct comparable GAAP measure is net expense ratio. The underlying expense measure should not be considered a substitute for the net expense ratio and does not reflect the overall profitability of our business.

Net Income excluding the effects of merger expenses, non-cash amortization of intangible assets and realized gains (losses), net of tax (operating income) is a non-GAAP measure which is computed by subtracting merger expenses, net of tax, amortization, net of tax, and realized gains (losses) net of tax, from net income. Merger expenses are directly related to past mergers and are not reflective of current period operating performance. Similarly, amortization expense is related to the amortization of intangible assets acquired through merger and therefore the expense does not arise through normal operations. We believe it is useful for investors to evaluate these components separately and in the aggregate when reviewing our performance. The most direct comparable GAAP measure is net income. The operating income measure should not be considered a substitute for net income and does not reflect the overall profitability of our business.


CRITICAL ACCOUNTING POLICIES AND ESTIMATES

When we prepare our consolidated financial statements and accompanying notes in conformity with U.S. GAAP, we must make estimates and assumptions about future events that affect the amounts we report. Certain of these estimates result from judgments that can be subjective and complex. As a result of that subjectivity and complexity, and because we continuously evaluate these estimates and assumptions based on a variety of factors, actual results could materially differ from our estimates and assumptions if changes in one or more factors require us to make accounting adjustments. During the three and six months ended June 30, 2017, we reassessed our critical accounting policies and estimates as disclosed in our 2016 Form 10-K; however, we have made no material changes or additions with regard to those policies and estimates.


RECENT ACCOUNTING STANDARDS

Please refer to Note 2 in the Notes to Unaudited Consolidated Financial Statements for a discussion of recent accounting standards that may affect us.



34

UNITED INSURANCE HOLDINGS CORP.


ANALYSIS OF FINANCIAL CONDITION - JUNE 30, 2017 COMPARED TO DECEMBER 31, 2016

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our accompanying unaudited consolidated interim financial statements and related notes, and in conjunction with the section entitled MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS in our 2016 Form 10-K.

Investments

The primary goals of our investment strategy are to preserve capital, maximize after-tax investment income, maintain liquidity and minimize risk. To accomplish our goals, we purchase debt securities in sectors that represent the most attractive relative value, and we maintain a moderate equity exposure. Limiting equity exposure limits risk and helps to preserve capital for two reasons; first, bond market returns are less volatile than stock market returns, and second, should the bond issuer enter bankruptcy liquidation, bondholders are paid first, before other expenses are paid.

We must comply with applicable state insurance regulations that prescribe the type, quality and concentrations of investments our insurance affiliates can make; therefore, our current investment policy limits investment in non-investment-grade fixed maturities and limits total investment amounts in preferred stock, common stock and mortgage notes receivable. We do not invest in derivative securities.

Two outside asset management companies, which have authority and discretion to buy and sell securities for us, manage our investments subject to (i) the guidelines established by our Board of Directors, and (ii) the direction of management. The Investment Committee of our Board of Directors reviews and approves our investment policy on a regular basis.

Our cash, cash equivalents and investment portfolio totaled $1,037,633,000 at June 30, 2017, compared to $679,335,000 at December 31, 2016.

The following table summarizes our investments, by type:
 
 
June 30, 2017
 
December 31, 2016
 
Estimated Fair Value
 
Percent of Total
 
Estimated Fair Value
 
Percent of Total
U.S. government and agency securities
$
198,883

 
19.1
%
 
$
149,952

 
22.1
%
Foreign government
2,062

 
0.2
%
 
2,061

 
0.3
%
States, municipalities and political subdivisions
199,015

 
19.2
%
 
169,112

 
24.9
%
Public utilities
19,208

 
1.9
%
 
7,730

 
1.1
%
Corporate securities
275,293

 
26.4
%
 
164,536

 
24.2
%
Asset backed securities
20,556

 
2.0
%
 

 
%
Redeemable preferred stocks
1,166

 
0.1
%
 
1,125

 
0.2
%
Total fixed maturities
716,183

 
68.9
%
 
494,516

 
72.8
%
Mutual funds
28,548

 
2.8
%
 

 
%
Public utilities
2,812

 
0.3
%
 
1,507

 
0.2
%
Other common stocks
26,433

 
2.5
%
 
24,048

 
3.6
%
Non-redeemable preferred stocks
1,638

 
0.2
%
 
2,843

 
0.4
%
Total equity securities
59,431

 
5.8
%
 
28,398

 
4.2
%
Other long-term investments
7,848

 
0.8
%
 
5,733

 
0.8
%
Total investments
783,462

 
75.5
%
 
528,647

 
77.8
%
Cash and cash equivalents
254,171

 
24.5
%
 
150,688

 
22.2
%
Total cash, cash equivalents and investments
$
1,037,633

 
100.0
%
 
$
679,335

 
100.0
%

We classify all of our investments as available-for-sale. Our investments at June 30, 2017 and December 31, 2016 consisted mainly of U.S. government and agency securities, states, municipalities and political subdivisions and securities of investment-grade corporate issuers. Our equity holdings consisted mainly of securities issued by companies in the energy, consumer products, financial, technology and industrial sectors. Most of the corporate bonds we hold reflected a similar

35

UNITED INSURANCE HOLDINGS CORP.


investment profile. At June 30, 2017, approximately 87% of our fixed maturities were U.S. Treasuries or corporate bonds rated “A” or better, and 13% were corporate bonds rated “BBB” or "BB".

At June 30, 2017, securities in an unrealized loss position for a period of 12 months or longer reflected unrealized losses of $401,000; approximately $325,000 of the total related to 29 fixed maturities, while nine equity securities reflected an unrealized loss of $76,000.  We currently have no plans to sell these 38 securities, and we expect to fully recover our cost basis. We reviewed all of our securities and determined that we did not need to record any impairment charges at June 30, 2017. Similarly, we did not record impairment charges at December 31, 2016.

Reinsurance Payable

We follow industry practice of reinsuring a portion of our risks. Reinsurance involves transferring, or "ceding", all or a
portion of the risk exposure on policies we write to another insurer, known as a reinsurer. To the extent that our reinsurers are
unable to meet the obligations they assume under our reinsurance agreements, we remain primarily liable for the entire insured loss under the policies we write.

During the second quarter of 2017, we placed our reinsurance program for the 2017 hurricane season. We purchased catastrophe excess of loss reinsurance protection of $2,747,500,000. The contracts reinsure for personal lines property excess catastrophe losses caused by multiple perils including hurricanes, tropical storms, and tornadoes. The agreements were effective as of June 1, 2017, for a one-year term and incorporate the mandatory coverage required by and placed with the FHCF. The private agreements provide coverage against severe weather events such as hurricanes, tropical storms and tornadoes. Effective January 1, 2017, we placed a reinsurance agreement to provide coverage against accumulated losses from specified catastrophe events, that will expire on December 31, 2017.

See Note 8 in our Notes to Unaudited Consolidated Financial Statements for additional information regarding our reinsurance program.


Unpaid Losses and Loss Adjustments

We generally use the term loss(es) to collectively refer to both loss and loss adjusting expenses. We establish reserves for both reported and unreported unpaid losses that have occurred at or before the balance sheet date in amounts that we estimate we will be required to pay in the future, including provisions for claims that have been reported but are unpaid at the balance sheet date and for obligations on claims that have been incurred but not reported at the balance sheet date. Our policy is to establish these loss reserves after considering all information known to us at each reporting period. At any given point in time, our loss reserve represents our best estimate of the ultimate settlement and administration costs of our insured claims incurred and unpaid.

Unpaid losses and loss adjustment expenses totaled $204,694,000 and $140,855,000 as of June 30, 2017 and December 31, 2016, respectively.

Since the process of estimating loss reserves requires significant judgment due to a number of variables, such as fluctuations in inflation, judicial decisions, legislative changes and changes in claims handling procedures, our ultimate liability will likely differ from these estimates. We periodically revise our reserve for unpaid losses as additional information becomes available, and reflect adjustments, if any, in our earnings in the periods in which we determine the adjustments as necessary.

See Note 9 in our Notes to Unaudited Consolidated Financial Statements for additional information regarding our losses and loss adjustments.


36

UNITED INSURANCE HOLDINGS CORP.


RESULTS OF OPERATIONS - COMPARISON OF THE THREE-MONTH PERIODS ENDED JUNE 30, 2017 AND 2016

Revenue

Net income for the three months ended June 30, 2017 decreased $2,584,000, or 26.3%, to $7,257,000 for the second quarter of 2017 from $9,841,000 for the same period in 2016. The decrease in net income was primarily due to increases in catastrophe losses for the second quarter of 2017 compared to the second quarter of 2016.

Our gross written premiums increased $141,591,000, or 67.2%, to $352,347,000 for the second quarter ended June 30, 2017 from $210,756,000 for the same period in 2016, primarily reflecting our merger with AmCo, as well as organic growth in new and renewal business generated in our Gulf and Florida region. The breakdown of the quarter-over-quarter changes in both direct and assumed written premiums by region and gross written premium by line of business are shown in the table below.

($ in thousands)
 
Three Months Ended June 30,
 
 
2017
 
2016
 
Change
Direct Written and Assumed Premium by Region (1)
 
 
 
 
 
 
Florida
 
$
199,736

 
$
110,381

 
$
89,355

Gulf
 
56,622

 
42,991

 
13,631

Northeast
 
40,842

 
32,103

 
8,739

Southeast
 
25,088

 
24,240

 
848

Total direct written premium by region
 
322,288

 
209,715

 
112,573

Assumed premium (2)
 
30,059

 
1,041

 
29,018

Total gross written premium by region
 
$
352,347

 
$
210,756

 
$
141,591

 
 
 
 
 
 
 
Gross Written Premium by Line of Business
 
 
 
 
 
 
Personal property
 
$
235,132

 
$
203,634

 
$
31,498

Commercial property
 
117,215

 
7,122

 
110,093

Total gross written premium by line of business
 
$
352,347

 
$
210,756

 
$
141,591

(1) Each region is comprised of the following states: Gulf includes Hawaii, Louisiana and Texas; Northeast includes Connecticut, Massachusetts, New Jersey, New York and Rhode Island; and Southeast includes Georgia, North Carolina and South Carolina.
(2) Assumed premium for 2017 includes commercial property business assumed from an unaffiliated insurer and assumed premium for 2016 includes homeowners business from Citizens Property Insurance Corporation and Texas Windstorm Insurance Association.

 
Three Months Ended June 30,
New and Renewal Policies By Region (1)
2017
 
2016
 
Change
Florida
70,098

 
60,619

 
9,479

Gulf
35,326

 
27,713

 
7,613

Northeast
30,924

 
23,248

 
7,676

Southeast
21,233

 
18,149

 
3,084

Total
157,581

 
129,729

 
27,852

(1) Only includes new and renewal homeowner, commercial and dwelling fire policies written during the quarter.

We expect our gross written premium growth to continue as we increase our policies in-force in the states in which we currently write policies and as we expand into other states in which we are currently licensed to write property and casualty insurance.


37

UNITED INSURANCE HOLDINGS CORP.


Expenses

Expenses for the three months ended June 30, 2017 increased $59,684,000, or 56.4%, to $165,443,000 for the second quarter of 2017 from $105,759,000 for the same period in 2016. The increase in expenses was primarily due to increased losses and loss adjustment expense, policy acquisition costs, and general and administrative expenses. The calculation of our underlying loss ratios is shown below.
 
 
Three Months Ended June 30,
2017
 
2016
 
Change
Net Loss and LAE
$
86,938

 
$
62,611

 
$
24,327

% of Gross earned premiums
33.2
%
 
38.0
%
 
(4.8) pts

% of Net earned premiums
54.5
%
 
54.8
%
 
(0.3) pts

Less:
 
 
 
 
 
Current year catastrophe losses
$
21,798

 
$
3,720

 
$
18,078

Prior year reserve (favorable) development
(1,264
)
 
490

 
(1,754
)
Underlying loss and LAE (1)
$
66,404

 
$
58,401

 
$
8,003

% of Gross earned premiums
25.4
%
 
35.5
%
 
(10.1) pts

% of Net earned premiums
41.6
%
 
51.1
%
 
(9.5) pts

(1) Underlying Loss and LAE is a non-GAAP measure and is reconciled above to Net Loss and LAE, the most directly comparable GAAP measure. Additional information regarding non-GAAP financial measures presented in this document is in the "Definitions of Non-GAAP Measures" section of this document.

The calculation of our underlying expense ratios is shown below.
 
Three Months Ended June 30,
2017
 
2016
 
Change
Policy acquisition costs
$
43,320

 
$
25,721

 
$
17,599

Operating and underwriting
6,257

 
5,814

 
443

General and administrative
28,176

 
11,497

 
16,679

Total Operating Expenses
$
77,753

 
$
43,032

 
$
34,721

% of Gross earned premiums
29.7
%
 
26.1
%
 
3.6 pts

% of Net earned premiums
48.7
%
 
37.7
%
 
11.0 pts

Less:
 
 
 
 
 
Ceding commission income
$
10,562

 
$
946

 
9,616

Merger expenses and amortization
18,138

 
4,092

 
14,046

Underlying expense (1)
$
49,053

 
$
37,994

 
$
11,059

% of Gross earned premiums
18.8
%
 
23.1
%
 
(4.3) pts

% of Net earned premiums
30.7
%
 
33.3
%
 
(2.6) pts

(1) Underlying Expense is a non-GAAP measure and is reconciled above to total operating expenses, the most directly comparable GAAP measure. Additional information regarding non-GAAP financial measures presented in this document is in the "Definitions of Non-GAAP Measures" section of this document.

Loss and LAE increased $24,327,000, or 38.9%, to $86,938,000 for the second quarter of 2017 from $62,611,000 for the second quarter of 2016. Loss and LAE expense as a percentage of net earned premiums decreased 0.3 points to 54.5% for the quarter, compared to 54.8% for the same period last year. Excluding catastrophe losses and reserve development, our gross underlying loss and LAE ratio for the quarter was 25.4%, a decrease of 9.7 points from 35.5% during the second quarter of 2016.

Policy acquisition costs increased $17,599,000, or 68.4%, to $43,320,000 for the second quarter of 2017 from $25,721,000 for the second quarter of 2016. These costs vary directly with changes in gross premiums earned and were generally consistent with our growth in premium production and higher average market commission rates outside of Florida.


38

UNITED INSURANCE HOLDINGS CORP.


Operating and underwriting expenses increased $443,000, or 7.6%, to $6,257,000 for the second quarter of 2016 from $5,814,000 for the second quarter of 2016, primarily due to increased costs related to the Company's ongoing growth.

General and administrative expenses increased $16,679,000, or 145.1%, to $28,176,000 for the second quarter of 2016 from $11,497,000 for the second quarter of 2016, primarily due to non-recurring merger expenses and amortization costs related to the merger with AmCo which occurred during the second quarter of 2017.

 
RESULTS OF OPERATIONS - COMPARISON OF THE SIX-MONTH PERIODS ENDED JUNE 30, 2017 AND 2016

Revenue

Net income for the six months ended June 30, 2017 decreased $1,636,000, or 12.8%, to $11,156,000 for the six months ended June 30, 2017 from $12,792,000 for the same period in 2016. The decrease in net income was primarily due to increases in catastrophe losses for the six months ended June 30, 2017 compared to the six months ended June 30, 2016.

Our gross written premiums increased $174,477,000, or 50.3%, to $521,189,000 for the six months ended June 30, 2017 from $346,712,000 for the same period in 2016, primarily reflecting our merger with AmCo, as well as organic growth in new and renewal business generated in our Gulf and Florida region. The breakdown of the year-over-year changes in both direct and assumed written premiums by region and gross written premium by line of business are shown in the table below.

($ in thousands)
 
Six Months Ended June 30,
 
 
2017
 
2016
 
Change
Direct Written and Assumed Premium by Region (1)
 
 
 
 
 
 
Florida
 
$
275,100

 
$
184,079

 
$
91,021

Gulf
 
97,400

 
72,660

 
24,740

Northeast
 
71,979

 
49,347

 
22,632

Southeast
 
45,280

 
42,874

 
2,406

Total direct written premium by region
 
489,759

 
348,960

 
140,799

Assumed premium (2)
 
31,430

 
(2,248
)
 
33,678

Total gross written premium by region
 
$
521,189

 
$
346,712

 
$
174,477

 
 
 
 
 
 
 
Gross Written Premium by Line of Business
 
 
 
 
 
 
Personal property
 
$
400,005

 
$
335,725

 
$
64,280

Commercial property
 
121,184

 
10,987

 
110,197

Total gross written premium by line of business
 
$
521,189

 
$
346,712

 
$
174,477

(1) Each region is comprised of the following states: Gulf includes Hawaii, Louisiana and Texas; Northeast includes Connecticut, Massachusetts, New Jersey, New York and Rhode Island' and Southeast includes Georgia, North Carolina and South Carolina.
(2) Assumed premium for 2017 includes commercial property business assumed from an unaffiliated insurer and assumed premium for 2016 includes homeowners business from Citizens Property Insurance Corporation and Texas Windstorm Insurance Association.

 
Six Months Ended June 30,
New and Renewal Policies By Region (1)
2017
 
2016
 
Change
Florida
115,452

 
103,438

 
12,014

Gulf
62,631

 
47,682

 
14,949

Northeast
54,219

 
36,326

 
17,893

Southeast
38,189

 
32,541

 
5,648

Total
270,491

 
219,987

 
50,504

(1) Only includes new and renewal homeowner, commercial and dwelling fire policies written during the year.



39

UNITED INSURANCE HOLDINGS CORP.


We expect our gross written premium growth to continue as we increase our policies in-force in the states in which we currently write policies and as we expand into other states in which we are currently licensed to write property and casualty insurance.



Expenses

Expenses for the six months ended June 30, 2017 increased $73,165,000, or 35.0%, to $282,176,000 for the six months ended June 30, 2017 from $209,011,000 for the same period in 2016. The increase in expenses was primarily due to increased policy acquisition costs, operating costs and general and administrative expenses. The calculation of our underlying loss ratios is shown below.
 
 
Six Months Ended June 30,
2017
 
2016
 
Change
Net Loss and LAE
$
150,271

 
$
126,869

 
$
23,402

% of Gross earned premiums
33.9
%
 
40.8
%
 
(6.9) pts

% of Net earned premiums
56.3
%
 
58.9
%
 
(2.6) pts

Less:
 
 
 
 
 
Current year catastrophe losses
$
32,410

 
$
18,776

 
$
13,634

Prior year reserve (favorable) development
(1,790
)
 
3,676

 
(5,466
)
Underlying loss and LAE (1)
$
119,651

 
$
104,417

 
$
15,234

% of Gross earned premiums
27.0
%
 
33.6
%
 
(6.6) pts

% of Net earned premiums
44.8
%
 
48.5
%
 
(3.7) pts

(1) Underlying Loss and LAE is a non-GAAP measure and is reconciled above to Net Loss and LAE, the most directly comparable GAAP measure. Additional information regarding non-GAAP financial measures presented in this document is in the "Definitions of Non-GAAP Measures" section of this document.

The calculation of our underlying expense ratios is shown below.
 
Six Months Ended June 30,
2017
 
2016
 
Change
Policy acquisition costs
$
78,756

 
$
52,753

 
$
26,003

Operating and underwriting
12,129

 
9,768

 
2,361

General and administrative
39,509

 
19,430

 
20,079

Total Operating Expenses
$
130,394

 
$
81,951

 
$
48,443

% of Gross earned premiums
29.4
%
 
26.3
%
 
3.1 pts

% of Net earned premiums
48.9
%
 
38.0
%
 
10.9 pts

Less:
 
 
 
 
 
Ceding commission income
$
20,094

 
$
1,765

 
$
18,329

Merger expenses and amortization
20,083

 
4,857

 
15,226

Underlying expense (1)
$
90,217

 
$
75,329

 
$
14,888

% of Gross earned premiums
20.3
%
 
24.2
%
 
(3.9) pts

% of Net earned premiums
33.8
%
 
34.9
%
 
(1.1) pts

(1) Underlying Expense is a non-GAAP measure and is reconciled above to total operating expenses, the most directly comparable GAAP measure. Additional information regarding non-GAAP financial measures presented in this document is in the "Definitions of Non-GAAP Measures" section of this document.

Loss and LAE increased $23,402,000, or 18.4%, to $150,271,000 for the six months ended June 30, 2017 from $126,869,000 for the same period in 2016. Loss and LAE expense as a percentage of net earned premiums decreased 2.6 points to 56.3% for the year, compared to 58.9% for the same period last year. Excluding catastrophe losses and reserve development, our gross underlying loss and LAE ratio for the quarter was 27.0%, a decrease of 6.4 points from 33.6% during the six months ended June 30, 2016.

40

UNITED INSURANCE HOLDINGS CORP.



Policy acquisition costs increased $26,003,000, or 49.3%, to $78,756,000 for the six months ended June 30, 2017 from $52,753,000 for the same period in 2016. These costs vary directly with changes in gross premiums earned and were generally consistent with our growth in premium production and higher average market commission rates outside of Florida.

Operating expenses increased $2,361,000, or 24.2%, to $12,129,000 for the six months ended June 30, 2017 from $9,768,000 for the same period in 2016, primarily due to increased costs related to the Company's ongoing growth.

General and administrative expenses increased $20,079,000, or 103.3%, to $39,509,000 for the six months ended June 30, 2017 from $19,430,000 for the same period in 2016, primarily due to non-recurring merger expenses and amortization costs related to the merger with AmCo which occurred during the six months ended June 30, 2016.

LIQUIDITY AND CAPITAL RESOURCES
 
We generate cash through premium collections, reinsurance recoveries, investment income, the sale or maturity of invested assets and the issuance of additional shares of our stock. We use our cash to pay reinsurance premiums, claims and related costs, policy acquisition costs, salaries and employee benefits, other expenses and stockholder dividends, as well as to purchase investments.

As a holding company, we do not conduct any business operations of our own and as a result, we rely on cash dividends or intercompany loans from our management affiliates to pay our general and administrative expenses. Insurance regulatory authorities heavily regulate our insurance affiliates, including restricting any dividends paid by our insurance affiliates and requiring approval of any management fees our insurance affiliates pay to our management affiliates for services rendered; however, nothing restricts our non-insurance company subsidiaries from paying us dividends other than state corporate laws regarding solvency. Our management affiliates pay us dividends primarily using cash from the collection of management fees from our insurance affiliates, pursuant to the management agreements in effect between those entities. In accordance with state laws, our insurance affiliates may pay dividends or make distributions out of that part of their statutory surplus derived from their net operating profit and their net realized capital gains. The RBC guidelines published by the NAIC may further restrict our insurance affiliates' ability to pay dividends or make distributions if the amount of the intended dividend or distribution would cause their respective surplus as regards policyholders to fall below minimum RBC guidelines. See Note 12 in our Notes to Unaudited Consolidated Financial Statements for additional information.

During the six month period ended June 30, 2017, we did not contribute any capital to our insurance affiliates. During the six month period ended June 30, 2016 we contributed $11,000,000 of capital to our insurance affiliates. We may make future contributions of capital to our insurance affiliates as circumstances require.

On April 3, 2017, the Company successfully completed its merger with AmCo. The acquisition was completed through a series of mergers that ultimately resulted in the Company issuing 20,956,355 shares of its common stock, $0.0001 par value per share, as merger consideration to the equity holders of RDX Holding, LLC, a Delaware limited liability company. Please refer to Note 4 in the Notes to Unaudited Consolidated Financial Statements for additional information on the merger transaction.

On April 29, 2016, we acquired all of the outstanding common stock of IIC for $60,471,000. We paid $48,450,000 in cash at closing and issued an $8,550,000 promissory note to the Seller, which will mature 18 months from the acquisition date and bear interest at an annual rate of 6%. Please refer to Note 10 in the Notes to Unaudited Consolidated Financial Statements for a discussion on the additional terms associated with this note. The purchase price also consisted of an accrued liability of $3,471,000 which was paid during July 2016.

On May 26, 2016, we issued a $5,200,000, 15-year term note payable to BB&T 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. The interest rate resets monthly and was 2.69% at June 30, 2017. Please refer to Note 10 in the Notes to Unaudited Consolidated Financial Statements for a discussion on the additional terms associated with this note.

On December 5, 2016, we issued $30,000,000 of senior notes to private investors. The notes bear interest at 5.75% in excess of the three month LIBOR. The notes will mature ten years after the issue date, have no scheduled amortization, and may be redeemed at par value any time without a pre-payment penalty. Please refer to Note 10 in the Notes to Consolidated Financial Statements for a discussion on the additional terms associated with these notes.

Operating Activities


41

UNITED INSURANCE HOLDINGS CORP.


During the six months ended June 30, 2017, our operations provided cash of $58,386,000, compared to providing cash of $52,519,000 during the same period in 2016. The $5,867,000 increase in operating cash was primarily driven by an increase in cash inflows related to premiums collected of $110,639,000 and an increase in cash provided by assumptions of $36,915,000 during the first six months of 2017 compared to the same period in 2016. Additionally, cash inflows from reinsurance recoveries increased $18,491,000 during the first six months of 2017 compared to the same period last year. These increases in cash inflows were offset by increases in cash outflows related to reinsurance payments, claims payments, and operating expense payments of $77,944,000, $58,745,000, and $17,443,000, respectively, during the first six months of 2017 compared to the same period last year.

Investing Activities

During the six months ended June 30, 2017, our investing activities provided $65,109,000 of cash compared to using $3,032,000 of cash in the same period of the prior year. The increase in cash provided primarily relates to $95,284,000 of cash acquired from the merger with AmCo in the second quarter of 2017. This was offset by the net cash used in the purchase of IIC for $32,840,000 during the second quarter of 2016.

Financing Activities

During the six months ended June 30, 2017, our financing activities used cash of $20,012,000 compared to providing cash of $1,936,000 during the six months ended June 30, 2016. The increase in cash used by financing activities primarily relates to bank overdrafts of $15,682,000 during the six months ended June 30, 2017 compared to no bank overdrafts during the same period in the prior year.

We believe our current capital resources, together with cash provided from our operations, are sufficient to meet currently anticipated working capital requirements.


OFF-BALANCE SHEET ARRANGEMENTS

At June 30, 2017, we did not have any off-balance-sheet arrangements.


CONTRACTUAL OBLIGATIONS

The following table summarizes our expected payments for contractual obligations at June 30, 2017:

 
Payment Due by Period
 
Total
 
Less than 1 Year
 
1-3 Years
 
4-5 Years
 
More than 5 Years
Leases (1)
$
462

 
$
91

 
$
223

 
$
148

 
$

Service agreements (2)
23,553

 
6,567

 
10,347

 
4,567

 
2,072

Long-term debt (3)
53,765

 
9,559

 
2,945

 
2,947

 
38,314

Employment agreements (4)
4,750

 
750

 
2,000

 
2,000

 

Unpaid loss and loss adjustment expenses (5)
204,694

 
109,716

 
64,587

 
23,787

 
6,604

Total
$
287,224

 
$
126,683

 
$
80,102

 
$
33,449

 
$
46,990

(1) 
Represents operating and capital leases for our insurance subsidiaries.
(2) Represents agreements entered into to purchase goods and services in the normal course of business.
(3) 
Represents principal payments over the life of the SBA Note debt. Also includes a note payable for $8,550,000 which we are obligated to pay as consideration for the IIC transaction, a $5,200,000 term note payable to BB&T, and $30,000,000 senior notes payable. See Note 11 in our Notes to Consolidated Financial Statements for additional information regarding our long-term debt.
(4) 
Represents base salary for the unfulfilled portion of the original employment agreements with certain executive officers.
(5) 
As of June 30, 2017, UPC, ACIC, FSIC, and IIC had unpaid loss and loss adjustment expenses (LAE) of $204,694,000. The specific amounts and timing of obligations related to known and unknown reserves and related LAE reserves are not set contractually, and the amounts and timing of these obligations are unknown. Nonetheless, based upon our cumulative claims paid over the last 17 years, we estimate that the loss and LAE reserves will be paid in the periods shown above. While we believe that historical performance of loss payment patterns is a reasonable source for projecting future claims payments, there is inherent uncertainty in this estimated projected settlement of loss and LAE reserves, and as a result these estimates will differ, perhaps significantly, from actual future payments.

42

UNITED INSURANCE HOLDINGS CORP.



Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risks, including risks related to changes in interest rates, the financial condition of the issuers of our fixed-maturities and equity security prices. These risks were disclosed in Part 1, Item 1A of our 2016 Form 10-K; we have material additions to that disclosure with the acquisition of AmCo Holding Company.

INTEREST RATE RISK

Our fixed-maturities are sensitive to potential losses resulting from unfavorable changes in interest rates. We manage the risk by analyzing anticipated movements in interest rates and considering our future capital and liquidity requirements.

The following table illustrates the impact of hypothetical changes in interest rates on the fair value of our fixed-maturities at June 30, 2017:

 
 
 
 
 
 
Percentage
 
 
 
 
 
 
Increase
 
 
 
 
Change in
 
(Decrease) in
 
 
Estimated
 
Estimated
 
Estimated
Hypothetical Change in Interest Rates
 
Fair Value
 
Fair Value
 
Fair Value
300 basis point increase
 
$
633,890

 
$
(82,293
)
 
(11.5
)%
200 basis point increase
 
$
661,324

 
$
(54,859
)
 
(7.7
)%
100 basis point increase
 
$
688,754

 
$
(27,429
)
 
(3.8
)%
Fair value
 
$
716,183

 
$

 
 %
100 basis point decrease
 
$
743,606

 
$
27,423

 
3.8
 %
200 basis point decrease
 
$
768,068

 
$
51,885

 
7.2
 %
300 basis point decrease
 
$
780,326

 
$
64,143

 
9.0
 %

Our calculations of the potential effects of hypothetical interest rate changes are based on several assumptions, including maintenance of the existing composition of fixed-maturity investments, and should not be indicative of future results. Based on our analysis, a 300 basis point decrease or increase in interest rates from the June 30, 2017 period end rates would not have a material impact on our results of operations or cash flows.

CREDIT RISK

Credit risk can expose us to potential losses arising principally from adverse changes in the financial condition of the issuer of our fixed-maturities. We mitigate this risk by investing in fixed-maturities that are generally investment grade and by diversifying our investment portfolio to avoid concentrations in any single issuer or market sector.

The following table presents the composition of our fixed-maturity portfolio by rating at June 30, 2017:

 
 
 
 
% of Total
 
 
 
 
 
 
Amortized
 
Amortized
 
 
 
% of Total
Comparable Rating
 
Cost
 
Cost
 
Fair Value
 
Fair Value
AAA
 
$
133,458

 
18.7
%
 
$
134,318

 
18.8
%
AA+, AA, AA-
 
327,743

 
45.9

 
328,059

 
45.7

A+, A, A-
 
158,449

 
22.2

 
159,227

 
22.2

BBB+, BBB, BBB-
 
92,081

 
12.9

 
92,783

 
13.0

BB+, BB, BB-
 
1,793

 
0.3

 
1,796

 
0.3

Total
 
$
713,524

 
100.0
%
 
$
716,183

 
100.0
%

EQUITY PRICE RISK


43

UNITED INSURANCE HOLDINGS CORP.


Our equity investment portfolio at June 30, 2017 consists of common stocks, mutual funds and non-redeemable preferred stocks. We may incur potential losses due to adverse changes in equity security prices. We manage this risk primarily through industry and issuer diversification and asset allocation techniques.

The following table illustrates the composition of our equity portfolio at June 30, 2017:

 
 
 
 
% of Total
Stocks by Sector
 
Fair Value
 
Fair Value
Funds
 
$
28,548

 
48.0
%
Consumer, Non-cyclical
 
8,848

 
14.9

Industrial
 
6,332

 
10.7

Financial
 
4,343

 
7.3

Technology
 
3,230

 
5.4

Consumer, Cyclical
 
3,211

 
5.4

Utilities
 
2,812

 
4.7

Communications
 
890

 
1.5

Energy
 
687

 
1.2

Basic Materials
 
530

 
0.9

Total
 
$
59,431

 
100.0
%


Item 4. Controls and Procedures

We maintain a set of disclosure controls and procedures designed to ensure that the information we must disclose in reports we file or submit under the Securities Exchange Act of 1934, as amended (Exchange Act), is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. We designed our disclosure controls with the objective of ensuring we accumulate and communicate this information to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operations of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under Exchange Act, as of the end of the period covered by this report. Based on our evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

During the fiscal quarter ended June 30, 2017, we did not make any changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


44

UNITED INSURANCE HOLDINGS CORP.


PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We are party to lawsuits arising out of the normal course of our business. In management's opinion, we are not party to any litigation or similar proceedings that would, individually or in the aggregate, be reasonably expected to have a material adverse effect on our consolidated results of operations, financial position, or cash flows.


Item 1A. Risk Factors

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should consider the factors discussed in Part 1, Item 1A "Risk Factors" in our 2016 Annual Report on Form 10-K, as updated in our subsequent quarterly reports. The risks described in our 2016 Annual Report on Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to use or that we currently deem to be immaterial may also materially adversely affect our business, financial condition, or results of operations.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Unregistered Sales of Equity Securities. During the three and six months ended June 30, 2017, we did not sell any unregistered equity securities.

Working Capital Restrictions and Other Limitations on Payment of Dividends. Under Florida law, a Florida-domiciled insurer like UPC or ACIC may not pay any dividend or distribute cash or other property to its shareholders except out of its available and accumulated surplus funds which are derived from realized net operating profits on its business and net realized capital gains. Additionally, Florida-domiciled insurers may not make dividend payments or distributions to shareholders without the prior approval of the insurance regulatory authority if the dividend or distribution would exceed the larger of:

1.
the lesser of:

a.
ten percent of capital surplus, or

b.
net gain from operations, or

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

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

3.
the lesser of:

a.
ten percent of capital surplus, or

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

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

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

a.
ten percent of the insurer’s surplus as to policyholders derived from realized net operating profits on its business and net realized capital gains, or

b.
the insurer’s entire net operating profits and realized net capital gains derived during the immediately preceding calendar year, and:


45

UNITED INSURANCE HOLDINGS CORP.


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

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

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

Except as provided above, a Florida-domiciled insurer may only pay a dividend or make a distribution (i) subject to prior approval by the insurance regulatory authority, or (ii) 30 days after the insurance regulatory authority has received notice of intent to pay such dividend or distribution and has not disapproved it within such time. At June 30, 2017, we were in compliance with these requirements.

Under the insurance regulations of Hawaii, the maximum amount of dividends that FSIC may pay to its parent company without prior approval from the Insurance Commissioner is:

1.
the lesser of:

a.
ten percent (10%) of FSIC's surplus as of December 31 of the preceding year, or

b.
ten percent (10%) of the net income, not including realized capital gains, for the twelve-month period ending December 31 of the preceding year.

In performing the net income test, property and casualty insurers may carry-forward income from the previous two calendar years that has not already been paid out as dividends. This carry-forward is computed by taking the net income from the second and third preceding calendar years, not including realized capital gains, less dividends paid in the second and third immediately preceding calendar years.

Under the insurance regulations of New York, no company may declare or distribute any dividend to shareholders which, together with all dividends declared or distributed by it during the next preceding twelve months, exceeds:

1.the lesser of:
a.ten percent (10%) of IIC's surplus to policyholders as shown on its
latest statement on file with the Superintendent, or

b.100% of "adjusted net investment income" during that period.

N.Y. Ins. Law 4105(a)(2) (McKinney 2000) defines "adjusted net investment income" to mean:
        
Net investment income for the twelve months immediately preceding
the declaration or distribution of the current dividend increased by the
excess, if any, of net investment income over dividends declared or
distributed during the period commencing thirty-six months prior to
the declaration or distribution of the current dividend and ending twelve
months prior thereto.

Under an agreement with the New York Department of Financial Services, we will not issue dividends on behalf of IIC within two years of the acquisition date.

Repurchases. During the three and six months ended June 30, 2017, we did not repurchase any equity securities.


Item 3. Defaults Upon Senior Securities

None.



46

UNITED INSURANCE HOLDINGS CORP.


Item 4. Mine Safety Disclosures

Not applicable.


Item 5. Other Information

None.


Item 6. Exhibits

The following exhibits are filed herewith or are incorporated herein by reference:
 
Exhibit
  
Description
 
 
 
  
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act.
 
 
 
  
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act.
 
 
 
  
Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act.
 
 
 
  
Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act.
 
 
 
 
XBRL Instance Document
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema
 
 
 
 
XBRL Taxonomy Extension Calculation Linkbase
 
 
 
 
XBRL Taxonomy Extension Definition Linkbase
 
 
 
 
XBRL Taxonomy Extension Label Linkbase
 
 
 
 
XBRL Taxonomy Extension Presentation Linkbase



47

UNITED INSURANCE HOLDINGS CORP.


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
 
UNITED INSURANCE HOLDINGS CORP.
 
 
 
August 9, 2017
By:
/s/ John Forney
 
 
John Forney, Chief Executive Officer
 (principal executive officer and duly authorized officer)
 
August 9, 2017
By:
/s/ B. Bradford Martz
 
 
B. Bradford Martz, Chief Financial Officer
(principal financial officer and principal accounting officer)




48