K e e p t h e P r o m i s e
UNITED INSURANCE HOLDINGS CORP.
®
2017 ANNUAL REPORT
FIVE FOUNDATIONS OF UPC INSURANCE
FINANCIAL STABILITY
SUPERIOR CLAIMS SERVICE
Our financial strength assures our ability to pay claims
Financial stability is the first and most
important of our Five Foundations. We
have over $530 million of equity capital in
our company, and purchase an additional
$3 billion of reinsurance – making us one of
the ten largest purchasers of U.S. property
catastrophe reinsurance in the world. No
historical event or storm season would use
much more than half of our reinsurance,
tower, and that means you can rest easy
knowing that UPC Insurance is here today,
here tomorrow to meet all of your needs no
matter the circumstances. Financial Stability.
Count on it from UPC.
PRODUCTS THAT WORK
Flexible product options meet unique needs
We offer a selection of customizable products,
designed to provide affordable options with
superior protection. For both residential and
commercial lines, we listen to our agents to
understand the needs of policyholders and
develop products that meet these needs.
Timely, fair resolution of claims
We process claims using professional in-house
UPC associates who share our commitment to
excellence. No matter the situation, we strive
to provide all policyholders a timely response
and fair resolution of their claims. The results
are prompt restoration or replacement of the
property and high customer satisfaction.
EASE OF DOING BUSINESS
We’re easy to work with!
We know you’re busy, so for both agents and
policyholders, we want your experience of doing
business with UPC to be easy and efficient.
That means the ability to report claims and
access policy information online, easy access to
a UPC representative by phone to answer your
questions, and much more.
AK
FAIR PRICING
Our sensible pricing supports everyone’s best interests
We pledge always to provide a price that
accurately reflects the risk we are assuming in
writing a policy. That is fair pricing, and in the
long run it works to the benefit of agents and
policyholders. We want to be competitive with
other carriers, but we won’t cut prices to win
business if it jeopardizes our financial stability
and ability to pay claims in all circumstances.
A LETTER TO
SHAREHOLDERS
PRESIDENT & CHIEF EXECUTIVE OFFICER JOHN FORNEY
Recently, I have heard several insurance industry CEO’s use the same Charles Dickens
quote to describe the state of our industry: “It was the best of times, it was the worst of
times.” I like a good quote as much as (probably more than) the next guy, but this one has
gotten a little tired from overuse, and besides, at least for our company, it’s not true. No, at
UPC Insurance, it’s all good. Consider:
The inside front cover of this report lists the Five Foundations of UPC Insurance. In
combination, these foundations comprise our value proposition – to our associates, to our
agents, to our reinsurers, to our regulators, and to our investors. We need every one of
them. In the six years since we set out to leverage our long, successful history as a Florida
personal lines property underwriter to other cat-exposed states and lines of business, we have
focused on building value the hard way – one state at a time, one agent at a time, one policy
at a time. Since we have not focused on take-outs or acquisitions as our primary means of
growth, it has been imperative that we present a compelling value proposition that enables
us to grow profitably and create a win-win relationship with our core partners. That’s what the
Five Foundations are all about, and while we have not executed perfectly, our strategy and
execution have created demonstrable value. Here are two charts that illustrate the point:
510% INCREASE IN GAAP EQUITY
FROM 2012 - 2017
17.1% CAGR IN BOOK VALUE PER SHARE
FROM 2012 - 2017
600,000
500,000
400,000
300,000
200,000
100,000
87,986
–
$ in thousands
537,125
$13.00
$12.00
$11.00
$10.00
$9.00
$8.00
$7.00
$6.00
$5.00
$4.00
$5.70
$12.56
2012
2013
2014
2015
2016
2017
GAAP Equity
STAT Equity
2
1
‘
4
Q
3
1
‘
3
1
‘
3
1
‘
3
1
‘
4
1
‘
4
1
‘
4
1
‘
4
1
‘
5
1
‘
5
1
‘
5
1
‘
5
1
‘
6
1
‘
6
1
‘
6
1
‘
6
1
‘
7
1
‘
7
1
‘
7
1
‘
7
1
‘
1
Q
2
Q
3
Q
4
Q
1
Q
2
Q
3
Q
4
Q
1
Q
2
Q
3
Q
4
Q
1
Q
2
Q
3
Q
4
Q
1
Q
2
Q
3
Q
4
Q
It has been gratifying and humbling to be a part of a team that has created that much value
over an extended period while venturing into new territory, operating in a competitive market,
and facing challenges from cat activity and other complications. When I recently suggested
Low Estimate
to a company advisor that the past six years have demonstrated that our team knows what it’s
$125 B
U.S. INSURED CATASTROPHE LOSSES
Actual/Best Estimate
High Estimate
$125 B
$100 B
Notable Events (Swiss Re/Aon figures)
03 - Atlantic Hurricanes ($93 B/$90 B)
Harvey, Irma and Maria
$115 B
LETTER TO SHAREHOLDERS – 1
$105 B
$76.8 B
04 - California Wildfires ($7 B/$11 B)
Tubbs, Atlas and Mendocino Lake
doing, she challenged me to say instead that ”it appears we have made some good decisions
over the past six years,” the point being that we all make most decisions with imperfect
information, and the fact that the results are good does not necessarily mean we made
consistently good decisions. Trust the process, in other words, and don’t focus on the results.
If you follow a good decision-making process over time, your long-run results should be good,
although Lady Luck (and in our case, Mother Nature) always gets a vote.
537,125
$12.56
$13.00
$12.00
$11.00
$ in thousands
510% INCREASE IN GAAP EQUITY
FROM 2012 - 2017
17.1% CAGR IN BOOK VALUE PER SHARE
FROM 2012 - 2017
One decision process we have always followed is to prioritize our Five Foundations. Of the
five, four are fixable in the short-term. Products, claims service, ease of use, and pricing can all
be adjusted as we course correct and seek continuous improvement. In fact, we have made
many mistakes in these areas, but have always taken corrective action and improved over time.
600,000
Sub-optimal in the short-term, at times, yes, but never fatal. The one unforgiving foundation is
500,000
Financial Stability, so we don’t take chances with this one. That’s why we have a lot of capital
400,000
in our business, use low operating and financial leverage, and augment our capital with a lot
of reinsurance. The events of 2017 allowed UPC Insurance both to demonstrate its Financial
300,000
Stability and to bolster it.
200,000
Demonstrating Financial Stability
100,000
In 2017, our company retained over $116 million of catastrophe losses, 11.8% of our gross
premiums earned. That’s a lot of pre-tax margin to give up, yet we were still able to report a
profit for the year. It was an unprecedented year, with two CAT 4 hurricanes making landfall in
2
3
4
Q
Q
Q
the United States for the first time in recorded history, and U.S insured cat losses exceeding
$100 billion, also for the first time, as shown by this table from a recent industry report from
Kroll Bond Rating Agency:
GAAP Equity
STAT Equity
$10.00
$4.00
$5.70
$9.00
$6.00
$8.00
$5.00
$7.00
87,986
2012
2017
2014
2015
2016
2013
1
Q
4
Q
2
Q
2
Q
3
Q
3
Q
1
Q
3
Q
2
Q
4
Q
1
Q
3
Q
2
Q
4
Q
4
Q
1
Q
1
Q
4
Q
6
1
6
1
3
1
3
1
4
1
3
1
7
1
5
1
4
1
7
1
4
1
3
1
5
1
7
1
6
1
5
1
5
1
2
1
4
1
6
1
7
1
–
‘
‘
‘
‘
‘
‘
‘
‘
‘
‘
‘
‘
‘
‘
‘
‘
‘
‘
‘
‘
‘
U.S. INSURED CATASTROPHE LOSSES
Actual/Best Estimate
High Estimate
Low Estimate
$125 B
$115 B
$105 B
Notable Events (Swiss Re/Aon figures)
03 - Atlantic Hurricanes ($93 B/$90 B)
Harvey, Irma and Maria
04 - California Wildfires ($7 B/$11 B)
Tubbs, Atlas and Mendocino Lake
02 - Colorado Thunderstorms ($2 B/$3 B)
Hail & Wind Event
$76.8 B
$36.3 B
$35.2 B
$30.3 B
$36.2 B
$37 B
$17.0 B
$6.4 B
$7.9 B
$10.8 B
$7.7 B
$15.7 B
$11.8 B
$13.4 B
$15.8 B
$15.4 B
$21 B
$125 B
$100 B
$75 B
$50 B
$25 B
$0.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Sources: Property Claims Service/ISO; Insurance Information Institute; Swiss Re Institute; Aon Benfield; KBRA analysis.
Figures stated are expressed in 2016 dollars, except for 2017 estimates.
A big reason for our profitability in 2017 is that we ceded over $400 million of losses to
our reinsurance partners, but only about $350 million of premium. In 2017, our reinsurance
partners in total lost money on their relationship with UPC. In the long run, though, it’s a
different story.
CUMULATIVE VALUE OF $100 INVESTMENT FROM 12/31/12 TO 12/31/17
$400.00
$350.00
$300.00
$250.00
We buy reinsurance differently than most companies, both quantitatively and qualitatively.
Quantitatively, we buy more first event limit than any regional company operating in Florida –
over $2.8 billion in 2017. I saw some statistics recently that suggest that makes us one of the
ten largest purchasers of U.S. property cat reinsurance in the world, alongside the likes
$150.00
$200.00
$100.00
$50.00
$-
UIHC
2012
$100.00
2013
$236.27
2014
$371.02
2015
$292.42
2016
$262.84
2017
$303.64
LETTER TO SHAREHOLDERS – 2
of AIG, Chubb, Travelers, Allstate, etc. No other regional company is on the list.
We structure our reinsurance in a way that makes it efficient for us and profitable for our
long-term partners. In the past six years, we have ceded about $1.5 billion in premium to
our reinsurance partners, but only about $500 million in losses. So, despite the adverse 2017
results, the 43 different reinsurers that have participated in our catastrophe programs in the
past six years are almost all in the black, while UPC has also been able to produce consistent
profitability and strong shareholder returns during that time. That’s a win-win-win partnership,
and that’s why, even in the face of the 2017 losses, our core reinsurance partners all sought to
maintain or expand their relationship with us in 2018, and at very fair pricing.
Buying all that reinsurance supports our goal of building a company that will endure – and
thrive – for generations, with the goal of long-term value creation and minimal tail risk. As a
theoretical matter, detailed financial modeling conducted by one of the premier risk modeling
firms in the world for our most recent catastrophe bond offering demonstrated what we have
told investors consistently – no historical event or storm season in total would erode more
than about half of our reinsurance limit. As a practical matter, the two CAT 4 hurricanes that
made U.S. landfall in 2017 – Harvey and Irma – did so in our two largest states, and, in the
case of Irma, charted a course directly through our area of largest policy concentration,
yet will use less than 20% of our reinsurance program. As Paul Phillips, our Assistant
General Counsel, said in our newly-produced video, “The UPC Story” (check it out at
upcinsurance.com/upcstory), “That’s what you’re supposed to do. That’s Financial Stability.”
Bolstering Financial Stability
In 2017, we also took action that directly or indirectly bolstered our future financial stability
while supporting continued profitable growth for our company. In particular, we:
1) Closed the merger with American Coastal. I wrote last year about our excitement for this
pending transaction, and the reality has exceeded expectations. American Coastal is the
market leader in providing admitted market commercial residential insurance in Florida,
having earned as much as 30% market share since its inception in 2017 and demonstrating
much higher profit margins and consistency of earnings than our personal lines business.
It’s no wonder that American Coastal has been so successful – it sources all business
through AmRisc, in my opinion the premier wind MGU in the country. Our exclusive
relationship with AmRisc, which is mostly owned by BB&T, has more than four years to
run, and we could not be more pleased with the relationship and the job they are doing.
Having American Coastal as part of the UPC family for three quarters in 2017 transformed
our organization, and we are just beginning to realize the potential benefits to future
growth and profitability.
2) Launched Skyway Re. As part of our ongoing effort to insource core functions, in 2017
we launched a new subsidiary called Skyway Re to lead our reinsurance structuring and
placement efforts. Hiring Chris Dittman and Pat Martin from TigerRisk Partners was easily
the best decision we made all year, and we are grateful to our friends at Tiger that we
will continue to have a meaningful partnership with that organization as we assume more
responsibility for our reinsurance programs. I have already highlighted the importance
of our reinsurance programs, so having an internal team dedicated to our efforts in this
regard makes sense. Chris and Pat are building a team that will also assume responsibility
for capital and exposure management for UPC in a holistic way. We are already seeing
tangible benefits from their efforts.
LETTER TO SHAREHOLDERS – 3
U.S. INSURED CATASTROPHE LOSSES
Actual/Best Estimate
High Estimate
Low Estimate
$125 B
3) Achieved an investment grade debt rating and raised capital. In December 2017, we received
Notable Events (Swiss Re/Aon figures)
$125 B
$115 B
03 - Atlantic Hurricanes ($93 B/$90 B)
Harvey, Irma and Maria
an investment grade debt rating from Kroll Bond Rating Agency and placed $150 million
$100 B
of ten-year senior notes at a fixed interest rate of 6.25% in a syndicated institutional debt
offering that was purchased by some of the largest fixed income investors in the U.S. We
$75 B
raised this capital not to pay hurricane losses – we already had plenty of cash to do that – but
rather to position ourselves to take advantage of future growth opportunities. Coming so
$50 B
soon after two major hurricanes impacted our book, we were pleased with this endorsement
of our model and strategy from a pretty discerning audience.
$25 B
02 - Colorado Thunderstorms ($2 B/$3 B)
Hail & Wind Event
04 - California Wildfires ($7 B/$11 B)
Tubbs, Atlas and Mendocino Lake
$76.8 B
$36.3 B
$35.2 B
$30.3 B
$36.2 B
$105 B
$37 B
$21 B
$17.0 B
$15.7 B
$13.4 B
$15.8 B
$15.4 B
$6.4 B
$7.9 B
$10.8 B
$7.7 B
$11.8 B
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Conclusion
$0.0
2017 was a year when our fundamental assumptions and financial model were tested. I’m
pleased with our exam performance, but not satisfied, and cognizant of my new friend’s advice
to heed the process and continue to try to improve the quality of decision-making. Overall,
though, it is nice to see a chart like this:
CUMULATIVE VALUE OF $100 INVESTMENT FROM 12/31/12 TO 12/31/17
$400.00
$350.00
$300.00
$250.00
$200.00
$150.00
$100.00
$50.00
$-
UIHC
RUSSELL 2000
NASDAQ Insr Index
2012
$100.00
$100.00
$100.00
2013
$236.27
$137.00
$128.78
2014
$371.02
$141.84
$139.79
2015
$292.42
$133.74
$148.81
2016
$262.84
$159.78
$172.07
2017
$303.64
$180.79
$177.55
Outperforming the Russell 2000 and NASDAQ Insurance Index by 70% over a five-year
period means the market agrees that we have made some good decisions during that time
frame. Please know that the entire UPC team is committed to continuing and strengthening the
process that led to those decisions. Thanks for your ongoing support in that pursuit.
KEEP MOVING FORWARD!
John Forney, CFA
President & Chief Executive Officer
United Insurance Holdings Corp.
LETTER TO SHAREHOLDERS – 4
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
Commission File Number 001-35761
United Insurance Holdings Corp.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
(State of Other Jurisdiction of Incorporation of Organization)
75-3241967
(IRS Employer Identification Number)
800 2nd Avenue S
St. Petersburg, Florida 33701
(Address of Principal Executive Officer, including Zip Code)
727-895-7737
(Telephone number, including area code)
COMMON STOCK, $0.0001 PAR VALUE PER SHARE
Nasdaq Stock Market LLC
Securities registered pursuant to Section 12(b) of the Act:
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes ‘ No Í
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes ‘ No Í
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 Í 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 Í No ‘
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ‘
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller
reporting company or an emerging growth company. See 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 ‘
Non-accelerated filer ‘
Í
Accelerated filer
Smaller reporting company ‘
Emerging growth company ‘
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes ‘ No Í
If an emerging growth company, indicate by check mark if the registrant has elected not 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. ‘
The aggregate market value of shares of the registrant’s common stock held by non–affiliates of the registrant was approximately
$373,372,597 as of June 30, 2017, calculated using the closing sales price reported for such date on the NASDAQ Stock Market.
For purposes of this disclosure, shares of common stock held by persons who hold more than 10% of the outstanding shares of
common stock and shares held by executive officers and directors of the registrant have been excluded because such persons may
be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
As of March 28, 2018, 42,745,937 shares of the registrant’s common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Form 10-K incorporates by reference certain information from the Proxy Statement for the 2018 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission within 120 days after the end of our fiscal year ended
December 31, 2017.
UNITED INSURANCE HOLDINGS CORP.
Forward-Looking Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3
Part I.
Item 1.
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2.
Item 3.
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 4. Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Part II.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 7A. Quantitative and Qualitative Disclosures about Market Risk . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 8.
Auditor’s Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Comprehensive Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Part III.
Item 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Security Ownership of Certain Beneficial Owners and Management and Related
Item 12.
Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 13. Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . .
Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 14.
5
16
27
28
28
28
29
33
35
52
55
55
56
57
58
59
60
110
110
112
116
116
116
116
116
Part IV.
Item 15. Exhibits and Financial Statement Schedules
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
117
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Form 10-K Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 16.
118
126
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
127
Throughout this Annual Report on Form 10-K (Form 10-K), we present amounts in all tables in
thousands, except for share amounts, per share amounts, policy and claim counts or where more specific
language or context indicates a different presentation. In the narrative sections of this Form 10-K, we show
full values rounded to the nearest thousand.
2
UNITED INSURANCE HOLDINGS CORP.
FORWARD-LOOKING STATEMENTS
Statements in this Form 10-K or in documents incorporated by reference contain or may contain “forward-
looking statements” within the meaning of the Private Securities Reform Litigation Act of 1995. These forward-
looking statements include statements about anticipated growth in revenues, gross written premium growth
expectations, earnings per share, estimated unpaid losses on insurance policies, investment returns,
diversification and expectations about our liquidity, and our ability to meet our investment objectives and to
manage and mitigate market risk with respect to our investments. Without limiting the generality of the
foregoing, words such as “may,” “will,” “expect,” “endeavor,” “project,” “believe,” “plan,” “anticipate,”
“intend,” “could,” “would,” “estimate,” or “continue” or the negative variations thereof or comparable
terminology are intended to identify forward-looking statements. These statements are based on current
expectations, estimates and projections about the industry and market in which we operate, and management’s
beliefs and assumptions. Forward-looking statements are not guarantees of future performance and involve
certain known and unknown risks and uncertainties that could cause actual results to differ materially from those
expressed or implied by such statements. The risks and uncertainties include, without limitation:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
our exposure to catastrophic events and severe weather conditions;
the regulatory, economic and weather conditions present in Florida, that state in which we are most
concentrated;
the effectiveness of our diversification strategy;
our ability to cultivate and maintain agent relationships, particularly our relationship with AmRisc,
LLC;
the possibility that actual claims incurred may exceed our loss reserves for claims;
assessments charged by various governmental agencies;
our ability to implement and maintain adequate internal controls over financial reporting;
our ability to maintain adequate technology, data security, and outsourcing relationships;
our reliance on key vendor relationships, and the ability of our vendors to protect the personal
information of our customers;
our ability to attract and retain the services of senior management;
risks and uncertainties relating to our acquisitions including our ability to successfully integrate the
acquired companies;
our ability to increase or maintain our market share;
changes in the regulatory environment present in the states in which we operate;
the impact of new federal or state regulations that affect the property and casualty insurance market;
the cost, viability and availability of reinsurance;
our ability to collect from our reinsurers on our reinsurance claims;
dependence on investment income and the composition of our investment portfolio and related market
risks;
the possibility of the pricing and terms for our products to decline due to the historically cyclical nature
of the property and casualty insurance and reinsurance industry;
the outcome of litigation pending against us, including the terms of any settlements;
3
UNITED INSURANCE HOLDINGS CORP.
•
•
•
•
•
downgrades in our financial strength ratings;
the impact of future sales of substantial amounts of our common stock by us to our existing
stockholders on our stock price;
our ability to pay dividends in the future;
the ability of R. Daniel Peed and his affiliates allows him to exert significant control over us due to
substantial ownership of our common stock, subject to certain restrictive covenants that may restrict
our ability to pursue certain opportunities; and
the ability of others to obtain control of us due to provisions in our charter documents.
We caution you to not place reliance on these forward-looking statements, which are valid only as of the
date they were made. Except as may be required by applicable law, we undertake no obligation to update or
revise any forward-looking statements to reflect new information, the occurrence of unanticipated events or
otherwise.
4
UNITED INSURANCE HOLDINGS CORP.
PART I
Item 1.
Business
INTRODUCTION
Company Overview
United Insurance Holdings Corp. (referred to in this Form 10-K as we, our, us, the Company or UPC
Insurance) is a holding company primarily engaged in the residential and commercial property and casualty
insurance business in the United States. Our lead insurance subsidiary is United Property & Casualty Insurance
Company (UPC), and we also write business through American Coastal Insurance Company (ACIC), Family
Security Insurance Company (FSIC), and Interboro Insurance Company (IIC). Our insurance subsidiaries provide
residential and commercial property and casualty insurance products that protect our policyholders against losses
due to damages to structures and their contents, as well as liability for accidents occurring in the structure or on
the property. Our non-insurance subsidiaries support our insurance and investment operations.
As of December 31, 2017, approximately 41.2 % of our policies in-force were written in Florida. We also
write in Connecticut, Georgia, Hawaii, Louisiana, Massachusetts, New Jersey, New York, North Carolina, Rhode
Island, South Carolina, and Texas. We are licensed to write, but have not commenced writing business in
Alabama, Delaware, Maryland, Mississippi, New Hampshire, and Virginia. A fundamental part of our strategy is
to diversify our operations outside of Florida and to write in multiple states where the perceived threat of natural
catastrophe has caused large national insurance carriers to reduce their concentration of policies. We believe an
opportunity exists for UPC Insurance to write profitable business in such areas.
We manage our risk of catastrophic loss primarily through sophisticated underwriting procedures and
pricing algorithms, avoidance of policy concentration, and the use of a comprehensive catastrophe reinsurance
program. UPC Insurance has been operating continuously 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.
On April 3, 2017, the Company acquired AmCo Holding Company (AmCo) and subsidiaries through a
series of mergers that ultimately resulted in the Company issuing 20,956,355 shares of its common stock as
merger consideration to the equity holders of RDX Holding, LLC, the former parent company of AmCo.
Financial strength ratings are important to insurance companies in establishing their competitive position
and may impact an insurance company’s ability to write policies. We are rated by both Demotech and Kroll Bond
Rating Agency (Kroll). Demotech maintains a letter-scale financial stability rating system ranging from A** (A
double prime) to L (licensed by insurance regulatory authorities). Kroll maintains a letter-scale financial rating
system for insurance companies ranging from AAA (extremely strong operations and no risk) to R (operating
under regulatory supervision). The financial stability ratings of our insurance company subsidiaries as of
December 31, 2017 are listed below. With these ratings, we expect our property insurance policies will be
acceptable to the secondary mortgage marketplace and mortgage lenders.
Subsidiary
Demotech Rating
Kroll Rating
UPC . . . . . . . . . . . . . . . . . . . . . . . . . .
ACIC . . . . . . . . . . . . . . . . . . . . . . . . .
FSIC . . . . . . . . . . . . . . . . . . . . . . . . . .
IIC . . . . . . . . . . . . . . . . . . . . . . . . . . .
A
A*
A
A
5
A-
A-
A-
A-
UNITED INSURANCE HOLDINGS CORP.
As of December 31, 2017, we had approximately 210 employees. We are not party to any collective
bargaining agreements and we have not experienced any work stoppages or strikes as a result of labor disputes.
We believe we have good working relationships with our employees.
Our Strategy
Our vision is to be the premier provider of property insurance in catastrophe exposed areas. Historically,
we have advanced our vision through strong organic growth complemented by strategic acquisitions. Going
forward, we plan to continue to diversify our exposure both by product and by geography.
Our emphasis on growing in areas with an ongoing threat of natural catastrophes exposes our company to
risk and volatility. We manage the inherent volatility associated with our risk profile in three primary ways:
strategically, financially and operationally.
Strategic Risk Management
UPC Insurance uses a strategic approach to manage inherent volatility through geographic and product
diversification. In 2017, we continued to grow our premium base in our existing states. Our gross written
premiums grew by 47% in 2017 compared to 2016. This growth primarily took place in Florida as a result of the
merger with AmCo in April 2017. We will continue to evaluate opportunities to expand our product offerings
into states where we can leverage existing distribution capabilities. Primary factors considered in the evaluation
of a potential new state include weather-related catastrophe history, the legal climate, and the competitive state of
the market. Refer to “Geographic Markets” below for further information on our geographic distribution.
Financial Risk Management
We take a financial approach to manage risk using robust reinsurance programs, financial leverage and a
conservative investment approach. UPC Insurance has several reinsurance programs in place including a quota
share program that was established in December 2016 and renewed in December 2017. During 2017, our excess-
of-loss reinsurance program covered all four of our insurance subsidiaries, gaining synergies in reinsurance costs
and increased our coverage limits for the June 1, 2017 to May 31, 2018 program year. Refer to Note 9 in our
Notes to Consolidated Financial Statements in Part II, Item 8 of this report for further details on our reinsurance
program.
We also limit our financial leverage. In December 2017, the Company issued $150,000,000 of senior notes,
the proceeds of which we plan to use to support our growth initiatives. We have a debt covenant in place which
requires us to maintain a financial leverage of less than 30%, and we believe that this is a conservative limit to
our leverage. Refer to Note 11 in our Notes to Consolidated Financial Statements in Part II, Item 8 of this report
for further details on our debt offerings.
We follow a conservative investment approach using two outside investment asset management companies.
Each manager has the authority and discretion to manage our investments, subject to the investment guidelines
established by the Investment Committee of our Board of Directors and the direction of management. Our
portfolio is primarily invested in short-term and intermediate-term, investment-grade fixed-income securities.
Our investment portfolio had a fair value of $854,531,000 at December 31, 2017, compared to $528,647,000 at
December 31, 2016. Refer to Note 3 in our Notes to Consolidated Financial Statements in Part II, Item 8 of this
report for further information on our investment policies.
Operational Risk Management
Finally, we use an operational approach to manage risk by in-sourcing key insurance functions and
establishing strong external distribution partnerships. During 2017, we focused on the development of our
6
UNITED INSURANCE HOLDINGS CORP.
internal claims department function. We created a robust “UPC University” training program for our incoming
claims adjusters, focused on providing world class service to our policyholders. In addition, we have leveraged
our investments in internally developed claims and policy administration systems and analytics to manage
exposure growth and improve profitability. We have also made investments in technology to improve efficiency
by further development of our online portal, which provides more extensive policy information for underwriting
and billing and makes it easier for agencies and their clients to do business with us.
In addition, we have taken two initiatives to monitor our risk management strategy related to loss activity.
We have a five-person actuarial department whose primary focus is to manage risk for our company. Also, at the
end of 2017, we formed a new entity, Skyway Reinsurance Services, LLC to insource our reinsurance
intermediary function as part of our risk management strategy.
We have also leveraged our current partnerships and added new strategic external partnerships to expand
distribution and service capabilities in all states in which we operate. Refer to “Products and Distribution”
below for further details on our external partnerships.
PRODUCTS AND DISTRIBUTION
In 2017, we continued to diversify our product mix through our merger with AmCo which resulted in an
increase in our commercial products from 3% of our product mix at December 31, 2016 to 23% of our product
mix at December 31, 2017.
2017 Product Mix
Personal Property: 75%
Commercial: 23%
Flood: 2%
2016 Product Mix
2016 Product Mix
2015 Product Mix
Personal Property: 95%
Personal Property: 95%
Commercial: 3%
Flood: 2%
Commercial: 2%
Flood: 3%
7
UNITED INSURANCE HOLDINGS CORP.
Personal Residential Products
Policies we issue under our homeowners’ program provide structure, content and liability coverage for
standard single-family homeowners, renters and condominium unit owners. Personal residential products are
offered in all states in which we write business.
In 2017, personal property policies (by which we mean both standard homeowners’, dwelling fire, renters
and condo owners’ policies) produced written premium of $781,012,000 and accounted for 75% of our total
gross written premium. Approximately 57% of the personal residential gross written premium were written
outside of Florida, which supports our diversification strategy.
We have developed a unique and proprietary homeowners’ product. This product uses a granular approach
to pricing for catastrophe perils. Our objective is to create specific geographic areas such that within each area or
“catastrophe band” the expected losses are within a specified range of error or approximation from a central
estimate. These areas may have millions of data points that help us create distance-to-coast factors that provide a
sophisticated market segmentation that is highly correlated to our risk exposure and reinsurance costs.
Loss and loss adjustment expenses related to our personal residential products tend to be higher during
periods of severe or inclement weather, which varies from state to state.
Commercial Residential Products
We provide commercial multi-peril property insurance, including wind, for residential condominium
associations in Florida. We include coverage to policyholders against third-party liability from accidents
occurring on their premises and coverage for loss or damage to buildings, inventory or equipment caused by
covered cause of loss such as fire, wind, hail, water, theft and vandalism.
In 2017, commercial residential policies produced written premium of $241,751,000 and accounted for 23%
of our total gross written premium.
Other Not-At-Risk Offerings
On our flood, equipment breakdown and identity theft policies, we earn a commission while retaining no
risk of loss, since all such risk is ceded to the federal government via the National Flood Insurance Program and
other private companies. We offer flood policies in all states in which we write business. Flood policies produced
written premium of $18,085,000 and accounted for 2% of our total gross written premium at December 31, 2017.
Underwriting
We price our product at levels that we project will generate an acceptable underwriting profit. We aim to be
granular in our approach, so that our price can accurately reflect the risk and profitability of each potential
customer. In our pricing algorithm, we consider insurance credit scores (where allowable) and historical
attritional loss costs for the rating territory in which the customer resides, as well as projected reinsurance costs
based on the specific geographic and structural characteristics of the home. In addition to the specific
characteristics of the policy being priced, we also evaluate the reinsurance costs of each incremental policy on
our portfolio as a whole. In this regard, we seek to optimize our portfolio by diversifying our geographic
exposure in order to limit our probable maximum loss, total insured value and average annual loss. As part of this
optimization process, we use the output from third-party modeling software to analyze our risk exposures,
including wind exposures, by zip code or street address.
8
UNITED INSURANCE HOLDINGS CORP.
We have established underwriting guidelines designed to provide a uniform approach to our risk selection
and designed to achieve underwriting profitability. Our underwriters review the property inspection report during
their risk evaluation and, if the policy does not meet our underwriting criteria, we have the right to cancel the
policy within 90 days in Florida and within 60 days in all other states in which we operate.
We measure our underwriting profitability by the combined ratio, which is a sum of the ratios of losses, loss
adjustment expenses, and underwriting expenses to either gross or net earned premiums. A combined ratio under
100% indicates an underwriting profit. Refer to Management’s Discussion and Analysis of Financial Condition
and Results of Operations in Part II, Item 7 of this report for further details on our combined ratio.
Distribution Channels
As of December 31, 2017, we market and distribute our policies to consumers through approximately
12,000 independent agents representing over 7,500 agencies, with no one agent or agency representing more than
10% of our revenue. UPC Insurance has focused on the independent agency distribution channel since its
inception, and we believe independent agents and agencies build relationships in their communities that can lead
to profitable business and policyholder satisfaction. We believe we have built significant credibility and loyalty
with the independent agent communities in the states in which we operate through (i) our extensive training for
full-service insurance agencies that distribute our products, (ii) periodic business reviews using established
benchmarks and goals for premium volume and profitability, and (iii) regular visits from the Company’s
executives to strengthen the personal relationships with our agents and agencies. Also, each state is assigned a
sales representative from UPC Insurance who lives in the community, recruits new agents and agencies, and
provides direct support for existing agents and agencies.
Typically, a full-service agency is small to medium in size and represents several insurance companies for
both personal and commercial product lines. We depend on our independent agents to produce new business for
us. We compensate our independent agents primarily with fixed-rate commissions that we believe are consistent
with those generally prevailing in the market. In 2018, we are expanding our commission program in order to
allow agents and brokers to be eligible for a bonus commission based on the overall profitability of policies they
place with UPC Insurance in a particular year.
In addition to our relationships with individual agencies, we have important partnerships with other
insurance companies and industry associations. The largest of these relationships are with Allstate and GEICO.
In Florida, Allstate’s Ivantage program refers Allstate auto insurance customers to our company and other partner
companies to provide homeowners’ insurance. We also partner with GEICO to underwrite homeowners’ policies
for certain of their auto customers. We also have a partnership with the Florida Association of Insurance Agents
(FAIA) to serve as a conduit between UPC Insurance and many smaller insurance agencies in Florida with whom
we do not have direct relationships.
GEOGRAPHIC MARKETS
The table below shows the geographic distribution of our policies in-force as of December 31, 2017, 2016
and 2015.
Policies In-Force By Region (1)
2017
2016
2015
Florida . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gulf . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Northeast . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Southeast . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
217,763
124,649
110,550
75,231
187,414
103,207
93,258
67,276
188,748
55,555
52,738
49,974
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
528,193
451,155
347,015
9
UNITED INSURANCE HOLDINGS CORP.
(1)
“Gulf” is comprised of Hawaii, Louisiana and Texas; “Northeast” is comprised of Connecticut, Massachusetts, New Jersey, New York
and Rhode Island; and “Southeast” is comprised of Georgia, North Carolina and South Carolina.
2017 Policies In-Force By Region
Northeast: 20.9%
Southeast: 14.3%
Gulf: 23.6%
Florida: 41.2%
2016 Policies In-Force By Region
2015 Policies In-Force By Region
Northeast: 20.7%
Southeast: 14.9%
Northeast: 15.2%
Southeast: 14.4%
Gulf: 22.9%
Florida: 41.5%
Gulf: 16.0%
Florida: 54.4%
The table below shows the geographic distribution of our total insured value (TIV) of all polices in-force as
of December 31, 2017, 2016, and 2015.
TIV By Region (1)
2017
2016
2015
Florida . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Northeast . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gulf . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Southeast
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$144,151,960
70,480,702
50,844,315
33,607,596
$ 80,444,296
61,327,280
40,411,989
31,931,399
$ 78,539,211
34,920,238
22,467,968
23,678,475
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$299,084,573
$214,114,964
$159,605,892
(1)
“Gulf” is comprised of Hawaii, Louisiana and Texas; “Northeast” is comprised of Connecticut, Massachusetts, New Jersey, New York
and Rhode Island; and “Southeast” is comprised of Georgia, North Carolina and South Carolina.
10
UNITED INSURANCE HOLDINGS CORP.
2017 TIV By Region
Northeast: 23.6%
Gulf: 17.0%
Southeast: 11.2%
Florida: 48.2%
2016 TIV By Region
2015 TIV By Region
Northeast: 28.6%
Northeast: 22.0%
Gulf: 18.9%
Gulf: 14.1%
Florida: 37.6%
Southeast: 14.9%
Florida: 49.1%
Southeast: 14.8%
11
UNITED INSURANCE HOLDINGS CORP.
COMPETITION
Our target market for homeowners’ insurance, our primary product offering, includes the 18 states in which
we are currently licensed plus the state of Maine, where we plan to obtain a license at some point in the future.
The following table summarizes the homeowners’ insurance market countrywide for the year ended
December 31, 2017, the date for which the most current data is available (dollars in thousands):
Countrywide Property Insurance Market—2017 Homeowners DWP *
2017 Rank Company Name
Direct Written
Premium
Market
Share
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
State Farm Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allstate Insurance Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liberty Mutual Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
USAA Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Farmers Insurance Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Travelers Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nationwide Corp. Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
American Family Insurance Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chubb Ltd. Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Erie Insurance Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Auto Owners Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
American International Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Metropolitan Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Progressive Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Hartford Fire & Casualty Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Universal Insurance Holdings Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CSAA Insurance Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Auto Club Enterprises Insurance Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amica Mutual Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
AmTrust, NGH Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
United Insurance Holdings Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Country Insurance & Financial Services Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tower Hill Insurance Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assurant, Inc. Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Hanover Insurance Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$17,556,871
7,957,403
6,471,114
5,703,741
5,617,990
3,547,478
3,290,890
3,045,589
2,776,827
1,596,490
1,416,698
1,122,614
1,105,350
1,092,184
1,037,570
982,378
898,846
891,966
847,665
741,814
711,695
673,431
611,604
609,113
589,009
18.9%
8.6%
7.0%
6.1%
6.1%
3.8%
3.5%
3.3%
3.0%
1.7%
1.5%
1.2%
1.2%
1.2%
1.1%
1.1%
1.0%
1.0%
0.9%
0.8%
0.8%
0.7%
0.7%
0.7%
0.6%
Total—Top 25 Insurers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total—All Insurers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
70,896,330
$92,839,375
76.5%
100.0%
* The information displayed in the table above is compiled and published by the National Association of Insurance Commissioners (NAIC)
as of December 31, 2017 based on information filings submitted annually by all licensed insurance companies. The information above is
presented on a consolidated or aggregated basis for each insurance company group. The amounts shown in the table above are also on a
statutory basis and exclude non-Homeowners lines of business that are included in the Company’s total direct written premium for 2017.
We compete primarily on the basis of product features, the strength of our distribution network, the quality
of our services to our agents and policyholders, and our long-term financial stability. Our long and successful
track record writing homeowners’ insurance in catastrophe-exposed areas has enabled us to develop sophisticated
pricing techniques that endeavor to accurately reflect the risk of loss while allowing us to be competitive in our
target markets. This pricing segmentation approach allows us to offer products in areas that have a high demand
for property insurance yet are under-served by the national carriers.
12
UNITED INSURANCE HOLDINGS CORP.
REGULATION
We are subject to extensive regulation in the jurisdictions in which our insurance company subsidiaries are
domiciled and licensed to transact business, primarily at the state level. UPC and ACIC are domiciled in Florida,
FSIC is domiciled in Hawaii, and IIC is domiciled in New York. UPC Insurance is also regulated by the NAIC.
In general, these regulations are designed to protect the interests of insurance policyholders.
Such regulations have a substantial effect on certain areas of our business, including:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
insurer solvency,
reserve adequacy,
insurance company licensing and examination,
agent and adjuster licensing,
rate setting,
investments,
assessments or other surcharges for guaranty funds,
transactions with affiliates,
the payment of dividends,
reinsurance,
personal information,
own risk solvency assessment and enterprise risk management,
cyber security,
statutory accounting methods, and
numerous requirements relating to other areas of insurance operations, including policy forms,
underwriting standards and claims practices.
Our insurance subsidiaries provide audited statutory financial statements to the various insurance regulatory
authorities. With regard to periodic examinations of an insurance company’s affairs, insurance regulatory
authorities, in general, defer to the insurance regulatory authority in the state in which an insurer is domiciled;
however, insurance regulatory authorities from any state in which we operate may conduct examinations at their
discretion. The Hawaii Insurance Division of the Department of Commerce and Consumer Affairs is currently
performing a regularly scheduled statutory examination of FSIC for the five years ended December 31, 2016.
For a discussion of statutory financial information and regulatory contingencies, see Note 14 to our Notes to
Consolidated Financial Statements in Part II, Item 8 of this report.
Risk-Based Capital Requirements
To enhance the regulation of insurer solvency, the NAIC has published risk-based capital (RBC) guidelines
for insurance companies designed to assess capital adequacy and to raise the level of protection statutory surplus
provides for policyholders. The guidelines measure three major areas of risk facing property and casualty
insurers: (i) underwriting risks, which encompass the risk of adverse loss developments and inadequate pricing;
(ii) declines in asset values arising from credit risk; and (iii) other business risks. Most states, including Florida,
13
UNITED INSURANCE HOLDINGS CORP.
Hawaii and New York, have enacted the NAIC guidelines as statutory requirements, and insurers having less
statutory surplus than required will be subject to varying degrees of regulatory action, depending on the level of
capital inadequacy.
The level of required risk-based capital is calculated and reported annually. At December 31, 2017, UPC’s,
ACIC’s, FSIC’s, and IIC’s RBC ratios were 308%, 633%, 504%, and 924% respectively, well in excess of
minimum requirements.
Underwriting and Marketing Restrictions
During the past several years, various regulatory and legislative bodies have adopted or proposed new laws
or regulations to address the cyclical nature of the insurance industry, catastrophic events and insurance capacity
and pricing. These regulations: (i) created “market assistance plans” under which insurers are induced to provide
certain coverage; (ii) restrict the ability of insurers to reject insurance coverage applications, to rescind or
otherwise cancel certain policies in mid-term, and to terminate agents; (iii) restrict certain policy non-renewals
and require advance notice on certain policy non-renewals; and (iv) limit rate increases or decrease rates
permitted to be charged.
Most states also have insurance laws requiring that rate schedules and other information be filed with the
insurance regulatory authority, either directly or through a rating organization with which the insurer is affiliated.
The insurance regulatory authority may disapprove a rate filing if it finds that the rates are inadequate, excessive
or unfairly discriminatory.
Most states require licensure or insurance regulatory authority approval prior to the marketing of new
insurance products. Typically, licensure review is comprehensive and includes a review of a company’s business
plan, solvency, reinsurance, rates, forms and other financial and non-financial aspects of a company, such as the
character of its officers and directors. The insurance regulatory authorities may prohibit entry into a new market
by not granting a license or by withholding approval.
Limitations on Dividends by Insurance Subsidiaries
As a holding company with no significant business operations of our own, we rely on payments from our
insurance subsidiaries as one of the principal sources of cash to pay dividends and meet our obligations. Our
insurance affiliates are regulated as property and casualty insurance companies and their ability to pay dividends
is restricted by Florida, Hawaii and New York law.
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 or adjusted net
investment income. 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 and the amount
of dividends or distributions that would require prior approval of the insurance regulatory authorities in those
states. Statutory risk-based capital requirements may further restrict our insurance subsidiaries’ ability to pay
dividends or make distributions if the amount of the intended dividend or distribution would cause statutory
surplus to fall below minimum risk-based capital requirements.
For additional information regarding those restrictions, see Part II, Item 5 and Part I, Item 1A of this report.
14
UNITED INSURANCE HOLDINGS CORP.
Insurance Holding Company Regulation
As a holding company of insurance subsidiaries, we are subject to laws governing insurance holding
companies in Florida, Hawaii and New York. These laws, among other things, (i) require us to file periodic
information with the insurance regulatory authority, including information concerning our capital structure,
ownership, financial condition and general business operations, (ii) regulate certain transactions between our
affiliates and us, including the amount of dividends and other distributions and the terms of surplus notes and
(iii) restrict the ability of any one person to acquire certain levels of our voting securities without prior regulatory
approval. Any purchaser of 5% or more of the outstanding shares of our common stock could be presumed to
have acquired control of us unless the insurance regulatory authority, upon application, determines otherwise.
Insurance holding company regulations also govern the amount any affiliate of the holding company may
charge our insurance affiliates for services (i.e., management fees and commissions). We have a long-term
management agreement among our managing company, United Insurance Management, UPC, ACIC and FSIC,
which presently provides for monthly management fees. The Florida Office of Insurance Regulation and the
Hawaii Insurance Division must approve any changes to this agreement.
AmRisc, LLC, a Managing General Underwriter, handles the underwriting, claims processing and premium
collection for AmCo for monthly management fees.
The New York Department of Financial Services does not permit the use of a managing general agent and
therefore we do not have a management agreement between IIC and any other company. Instead, UPC Insurance
allocates a portion of relevant expenses to IIC for statutory accounting purposes.
CORPORATE INFORMATION
United Insurance Holdings Corp. was incorporated in Delaware in 2012. Our principal executive offices are
located at 800 2nd Avenue S., St. Petersburg, FL 33701 and our telephone at that location is (727) 895-7737. We
are listed on the NASDAQ stock exchange under ticker symbol “UIHC.”
Segments
We conduct our operations under one business segment.
Available Information
We make available, free of charge through our website, www.upcinsurance.com, our Annual Reports on
Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports
filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as
reasonably practicable after we electronically file such materials with, or furnish them to, the SEC.
These reports may also be obtained at the SEC’s Public Reference Room at 100 F Street NE, Washington,
D.C. 20549. Information on the operation of the Public Reference Room is available by calling the SEC at
1-800-SEC-0330. You may also access this information at the SEC’s website (www.sec.gov). This site contains
reports, proxy and information statements and other information regarding issuers that file electronically with the
SEC.
15
UNITED INSURANCE HOLDINGS CORP.
Item 1A. Risk Factors
Many factors affect our business and results of operations, some of which are beyond our control. If any of
the following risks occur, our business, financial conditions or results of operations may be materially and
adversely affected. In that event, the trading price of our securities could decline, and our stockholders could
lose all or part of their investment in our securities. Additional risks and uncertainties we are unaware of, or we
currently deem immaterial, also may become important factors that affect us. Before making an investment in our
securities, investors should carefully consider the risk factors discussed below, together with the other
information in this report, including the section entitled Forward-looking Statements and Management’s
Discussion and Analysis of Financial Condition and Results of Operations, and the other reports and materials
filed by us with the SEC.
RISKS RELATED TO OUR BUSINESS
As a property and casualty insurer, we may experience significant losses, and our financial results may
vary from period to period, due to our exposure to catastrophic events and severe weather conditions, the
incidence and severity of which could be affected by climate change.
Our property and casualty insurance operations expose us to risks arising from catastrophes. Catastrophes
can be caused by various natural events, including but not limited to hurricanes, windstorms, earthquakes, hail,
sinkholes, severe winter weather and fires, or man-made events, such as terrorist attacks (including those
involving nuclear, biological, chemical or radiological events), cybercrimes or consequences of war or political
instability. We may incur catastrophe losses that exceed the amount of:
•
•
•
•
catastrophe losses that we experienced in prior years;
catastrophe losses that, using third-party catastrophe modeling software, we projected could be
incurred;
catastrophe loss estimates that we used to develop prices for our products; or
our current reinsurance coverage (which would cause us to have to pay such excess losses).
The incidence and severity of weather conditions are inherently unpredictable, but the frequency and
severity of property claims generally increase when severe weather conditions occur. Climate change, to the
extent that it may affect weather patterns, may cause an increase in the frequency and/or the severity of
catastrophic events or severe weather conditions which, in addition to the attendant increase in claims-related
costs, may also cause an increase in our reinsurance costs and/or negatively impact our ability to provide
insurance to our policyholders in the future. Governmental entities may also respond to climate change by
enacting laws and regulations that may increase our cost of providing insurance in the future, which could
adversely affect demand.
Catastrophes could be more frequent or severe than contemplated in our pricing and risk management
models, and may have a material adverse effect on our results of operations during any reporting period due to
increases in our loss and loss adjustment expense. Catastrophes may also reduce liquidity and could impair our
ability to raise capital on acceptable terms or at all. In addition to catastrophes, the accumulation of losses from
several smaller weather-related events in any reporting period may have a similar impact to our results of
operations and financial condition.
16
UNITED INSURANCE HOLDINGS CORP.
Because we conduct a significant portion of our business in Florida, our financial results substantially
depend on the regulatory, legal, economic, political, demographic, competitive and weather conditions
present in that state.
A significant portion of our policies in-force is concentrated in Florida. Therefore, the prevailing regulatory,
legal, economic, political, demographic, competitive, weather and other conditions in Florida will likely have a
more significant impact on our revenues and profitability compared to such conditions in other jurisdictions in
which we operate. Furthermore, changes in conditions in Florida could make doing business in Florida less
attractive for us, which could have a more pronounced effect on us than it would on other insurance companies
that are more geographically diversified.
In addition, due to Florida’s climate, we are subject to increased exposure to certain catastrophic events such
as hurricanes, tropical storms and tornadoes, as well as an increased risk of losses. The occurrence of one or more
catastrophic events or other conditions affecting losses in Florida may cause a disproportionately adverse effect
on our results of operations and financial condition.
Our diversification strategy may not be effective, which could adversely affect our business and financial
results.
Although we intend to continue focusing on Florida as a key market for our insurance products, we plan to
take advantage of prudent opportunities to expand our core business into other states where we believe the
potential for underwriting profit exists. However, we may not be successful in this diversification strategy due to
several factors, including but not limited to the difficulties of finding appropriate expansion opportunities and the
challenges of operating in new and unfamiliar markets. Such factors may increase our costs and potentially affect
the speed with which we are able to pursue new diversification opportunities. There can be no assurance that we
will be successful in expanding into a state or a combination of states. Failure to manage these risks successfully
could have a material adverse effect on our business, results of operations and financial condition.
Because we rely on insurance agents, the loss of these agent relationships, particularly our relationship
with AmRisc, LLC (“AmRisc”), or our ability to attract new agents could have an adverse impact on our
business.
We market our policies to a broad range of prospective policyholders through approximately 12,000
independent agents representing over 7,500 agencies as of December 31, 2017. Many of these agents are
independent insurance agents that own their customer relationships, and our agency contracts with them limit our
ability to directly solicit business from our existing policyholders. Independent agents commonly represent other
insurance companies, including our competitors, and we do not control their activities. As a result, we must
compete with other insurers for independent agents’ business. Historically, we have used marketing relationships
with national insurance companies and associations of independent insurance agents to attract and retain agents
and agency groups. The loss of these marketing relationships could adversely impact our ability to attract new
agents or retain our agency network and policies in force. Failure to grow or maintain our agency relationships, a
failure to attract new agents or the failure of agents to act as anticipated could adversely affect sales of our
insurance products.
Additionally, ACIC, has an exclusive managing agency contract (the MGA contract) with AmRisc, pursuant
to which AmRisc serves as ACIC’s exclusive managing general agent for binding and writing commercial
residential property lines for condominium, townhome and homeowners association insurance written in Florida
in accordance with ACIC’s underwriting guidelines. Under the MGA contract, AmRisc must produce a certain
volume of business for ACIC. Therefore, failure of AmRisc to produce the required volume of business could
cause us to lose substantial premiums and could require us to seek one or more alternative managing general
17
UNITED INSURANCE HOLDINGS CORP.
agents. If we were unable to find a replacement managing general agent (because of AmRisc’s failure to produce
the required volume of business or otherwise) or otherwise increase the production of premiums, our revenues
could decrease, which could have a material adverse effect on our business, financial condition and results of
operations. Given the concentration of ACIC’s business and operations with AmRisc, AmRisc may have
substantial leverage in negotiations with ACIC regarding the MGA contract, and amendments to the terms and
conditions of the MGA contract and other changes to the commercial relationship between ACIC and AmRisc
could have a material adverse effect on our business, financial condition and results of operations. Following the
termination or expiration of the MGA contract (set to occur in 2022), ACIC’s ability to compete for and solicit
renewals of business previously underwritten by AmRisc on its behalf may be limited by legal, commercial and
other impediments, including AmRisc’s relationship with other insurance producers that control the business.
Such impediments could have a material adverse effect on our financial condition and results of operations due to
the concentration of ACIC’s business with AmRisc.
Actual claims incurred may exceed our loss reserves for claims, which could adversely affect our results of
operations and financial condition.
Loss reserves represent our estimate of ultimate unpaid losses for claims that have been reported and claims
that have been incurred but not yet reported. Loss reserves do not represent an exact calculation of liability, but
instead represent our best estimate, generally utilizing actuarial expertise, historical information and projection
techniques at a given reporting date.
The process of estimating our loss reserves involves a high degree of judgment and is subject to a number of
variables. These variables can be affected by both internal and external events, such as changes in claims
handling procedures, economic inflation, legal trends, legislative changes, and varying judgments and viewpoints
of the individuals involved in the estimation process, among others. In addition, application of statistical and
actuarial methods in estimating our loss reserves may require the adjustment of overall reserves upward or
downward from time to time. Future loss experience, substantially in excess of our loss reserves, could
substantially harm our results of operations and financial condition.
Because of the inherent uncertainty in estimating loss reserves, including reserves for catastrophes,
additional liabilities resulting from one insured event, or an accumulation of insured events, may exceed our
existing loss reserves. If our reserves are inadequate, it may cause us to overstate our earnings for the periods
during which our reserves for expected losses was insufficient.
Our financial results may vary from period to period based on the timing of our collection of government-
levied assessments from our policyholders.
Our insurance subsidiaries are subject to assessments levied by various governmental and quasi-
governmental entities in the states in which we operate. While we may have the ability to recover these
assessments from policyholders through policy surcharges in some states in which we operate, our payment of
the assessments and our recoveries may not offset each other in the same reporting period in our financial
statements and may cause a material adverse effect on our results of operations in a particular reporting period.
Our failure to implement and maintain adequate internal controls over financial reporting in our business
could have a material adverse effect on our business, financial condition, results of operations and stock
price.
“Internal controls over financial reporting” refer to those procedures within a company that are designed to
reasonably ensure the accuracy of the company’s financial statements. Section 404 of the Sarbanes-Oxley Act of
2002 requires our management to annually assess the effectiveness of our internal controls over financial reporting.
18
UNITED INSURANCE HOLDINGS CORP.
If we fail to achieve and maintain adequate internal controls, or if we have material weaknesses in our
internal controls, in each case in accordance with applicable standards, we may be unable to conclude on an
ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404.
Because effective internal controls are necessary for us to produce reliable financial reports, our business,
financial condition and results of operations could be harmed, investors could lose confidence in our reported
financial information, and the market price for our stock could decline if our internal controls are ineffective or if
material weaknesses in our internal controls are identified.
If we experience difficulties with technology, data security and/or outsourcing relationships, our ability to
conduct our business could be negatively impacted, which could adversely affect our financial condition or
results of operations.
While technology can streamline many business processes and ultimately reduce the cost of operations,
technology initiatives present certain risks. Our business is highly dependent upon our information technology
systems and upon our contractors’ and third-party administrators’ ability to perform necessary business functions
in an efficient and uninterrupted fashion, such as the processing of policies and the adjusting of claims. Because
our information technology and telecommunications systems interface with and often depend on these third-party
systems, we could experience service denials if demand for such service exceeds capacity or a third-party system
fails or experiences an interruption. If sustained or repeated, such a business interruption, system failure or
service denial could result in a deterioration of our ability to write and process new and renewal business,
provide customer service, pay claims in a timely manner or perform other necessary business functions.
Despite our implementation of security measures, our information technology systems are vulnerable to
computer viruses, natural disasters, unauthorized access, cyber-attacks, system failures and similar disruptions. A
material breach in the security of our information technology systems and data could include the theft of our
confidential or proprietary information, including trade secrets and the personal information of our customers,
claimants and employees. From time to time, we have experienced threats to our data and information technology
systems, including malware and computer virus attacks, unauthorized access, system failures and disruptions. To
the extent that any disruptions or security breaches result in a loss or damage to our data or inappropriate
disclosure of proprietary or confidential information, it could cause significant damage to our reputation,
adversely affect our relationships with our customers, result in litigation, increased costs and/or regulatory
penalties, and ultimately harm our business. Third parties to whom we outsource certain of our functions are also
subject to the risks outlined above, any one of which may result in our incurring substantial costs and other
negative consequences, including a material adverse effect on our business, financial condition, results of
operations and liquidity.
Loss of key vendor relationships or failure of a vendor to protect personal information of our customers,
claimants or employees could affect our operations.
We rely on services and products provided by many third-party vendors. These include, for example,
vendors of computer hardware and software and vendors of services such as claim adjustment services and
human resource benefits management services. In the event that one or more of our vendors suffers a bankruptcy
or otherwise becomes unable to continue to provide products or services, or fails to protect personal information
of our customers, claimants or employees, we may suffer operational impairments and financial losses.
Moreover, in the event of a data breach involving any of our third-party vendors, our customers’ data and
personal information could also be put at risk. Any such data breach involving our third-party vendors could
result in significant mitigation or legal expenses for us, which could materially and adversely affect our results of
operations and financial condition.
19
UNITED INSURANCE HOLDINGS CORP.
Our success has been and will continue to be greatly influenced by our ability to attract and retain the
services of senior management, the loss of any of whom could have an adverse effect on our business,
financial condition, results of operations, cash flows and/or future prospects.
Our senior executive officers play an integral role in the development and management of our business. We
cannot guarantee that any such officers will continue their employment with us. Additionally, we do not maintain
any key person life insurance policies on any of our officers or employees. The loss of the services of any of our
senior executive officers could have an adverse effect on our business, financial condition, results of operations,
cash flows and/or future prospects.
Our acquisitions and other strategic transactions may not be as successful as we anticipate, and could be
difficult to integrate, divert management resources, result in unanticipated costs or dilute our existing
stockholders.
Part of our continuing business strategy is to evaluate opportunities to merge with and acquire companies
that complement our business model or make other strategic transactions that facilitate or expedite the
accomplishment of our business goals. We may be unable to identify suitable counterparties to such a
transaction. Even if we enter into an agreement in respect of a merger with or acquisition of another business, we
may not be able to finalize a transaction after significant investment of time and resources due to, among other
things, a lack of regulatory approval or imposition of a burdensome condition by the regulator.
In connection with an acquisition or merger, we could incur debt, amortization expenses related to
intangible assets, large and immediate write-offs, assume liabilities or issue stock that would dilute our current
stockholders’ percentage of ownership. As a result, there is a risk of transaction related litigation. Such strategic
transactions could pose numerous risks to our operations, including risks relating to:
•
•
•
•
•
•
incurring substantial unanticipated integration costs;
diverting significant management attention and financial resources from our other operations and
disrupting our ongoing business during the assimilations of such acquired businesses;
losing key employees, particularly those of the acquired operations;
retaining the acquired business’ customers;
failing to realize the strategic benefits or the potential cost savings or other financial benefits of the
acquisitions or mergers; and
incurring unanticipated liabilities or claims from the acquired businesses and contractually-based time
and monetary limitations on the seller’s obligation to indemnify us for such liabilities or claims.
We are also subject to a certain level of risk regarding the actual condition of the businesses that we acquire.
Until we actually assume operating control of such businesses and their assets and operations, we may not be
able to ascertain the actual value or understand the potential liabilities of the acquired entities and their
operations. As a result, we may not be able to complete acquisitions or mergers or integrate the operations,
products or personnel gained through any such acquisition or merger without a material adverse effect on our
business, financial condition and results of operations.
RISKS RELATED TO THE INSURANCE INDUSTRY
Because we are operating in a highly competitive market, we may lack the resources to increase or
maintain our market share, which could adversely impact our business and results of operations.
The property and casualty insurance industry is highly competitive, and we believe it will remain highly
competitive for the foreseeable future. The principal competitive factors in our industry are price, service,
20
UNITED INSURANCE HOLDINGS CORP.
coverage options, underwriting guidelines, commission structure and financial condition. We compete with other
property and casualty insurers that underwrite property and casualty insurance in the same geographic areas in
which we operate and some of those insurers have greater financial resources and have a longer operating history
than we do. In addition, our competitors may offer products for alternative forms of risk protection that we
presently do not offer or are not similarly regulated in the admitted market, which could adversely affect the sales
of our products. We also compete with new companies that continue to enter the insurance market. Competition
could limit our ability to retain existing business or to write new business at adequate rates, and such limitation
may cause a material adverse effect on our results of operations and financial position.
Changes in state regulation may adversely affect our results of operation and financial condition.
As a holding company with operating insurance company subsidiaries, we are subject to the laws and
regulations of the various states in which our insurance subsidiaries operate. From time to time, states pass
legislation, and regulators take action, that has the effect of limiting the ability of insurers to manage risk, such as
legislation prohibiting insurers from reducing exposures or withdrawing from catastrophe-prone areas, or
mandating that insurers participate in residual markets. In addition, legislative initiatives and court decisions can
seek to expand insurance coverage for insured losses beyond the original intent of the policies, which could cause
our actual loss and loss adjustment expense to exceed our estimates. Further, our ability to increase pricing to the
extent necessary to offset rising loss or operating costs requires approval of insurance regulatory authorities.
Our ability or willingness to manage our catastrophe exposure by raising prices, modifying underwriting
terms or reducing exposure to certain geographies may be limited due to considerations of public policy, the
evolving political environment and our ability to penetrate other geographic markets through our diversification
strategy, which may cause a material adverse effect on our results of operations, financial condition and cash
flows. We cannot predict whether and to what extent the adoption of new legislation and regulations would affect
our ability to manage our exposure to catastrophic events.
The insurance industry is heavily regulated and further restrictive regulation may reduce our profitability
and limit our growth.
The insurance industry is extensively regulated and supervised. Insurance regulatory authorities generally
design insurance rules and regulations to protect the interests of policyholders, and not necessarily the interests of
insurers, their stockholders, and other investors. We are subject to comprehensive regulation and supervision by
state insurance departments in all states in which our insurance subsidiaries are domiciled, as well as all states in
which they are licensed, sell insurance products, issue policies, or handle claims. The regulations of each state
are unique and complex and subject to change, and certain states may have regulations that conflict with the
regulations of other states in which we operate. As a result, we are subject to the risk that compliance with the
regulations in one state may not result in compliance with the regulations in another state.
State statutes and administrative rules generally require each insurance company to register with the
department of insurance in its state of domicile and to furnish information concerning the operations of the
companies within the holding company system and the failure to comply with such requirements may materially
affect the operations, management or financial condition of the insurers. As part of its registration, each insurance
company must identify material agreements, relationships and transactions with affiliates, including loans,
investments, asset transfers, transactions outside of the ordinary course of business, certain management, service,
and cost sharing agreements, reinsurance transactions, dividends, and other financial and non-financial components
of an insurer’s business. Some states impose restrictions or require prior regulatory approval of specific corporate
actions, which may adversely affect our ability to operate, innovate, obtain necessary rate adjustments in a timely
manner or grow our business profitably. Our ability to comply with these laws and regulations, and to obtain
necessary regulatory action in a timely manner is, and will continue to be, critical to our success.
21
UNITED INSURANCE HOLDINGS CORP.
Currently, the federal government’s role in regulating or dictating the policies of insurance companies is
limited. However, from time to time Congress has considered and may in the future consider proposals that
would increase the role of the federal government in insurance regulation, either in addition to or in lieu of state
regulation.
In recent years, the state insurance regulatory framework has come under increased federal scrutiny.
Changes in federal legislation, regulation and/or administrative policies in several areas, including changes in
financial services regulation and federal taxation, could negatively affect the insurance industry and us. In
addition, Congress and some federal agencies from time to time investigate the current condition of insurance
regulation in the United States to determine whether to impose federal or national regulation or to allow an
optional federal charter, similar to the option available to most banks. Further, the NAIC and state insurance
regulators continually reexamine existing laws and regulations, specifically focusing on modifications to holding
company regulations, interpretations of existing laws and the development of new laws and regulations. We
cannot predict what effect, if any, proposed or future legislation or NAIC initiatives may have on the manner in
which we conduct our business.
As part of potential, or future, industry-wide investigations, we may from time to time receive requests for
information from government agencies and authorities at the state or federal level. If we are subpoenaed for
information by government agencies and authorities, potential outcomes could include law enforcement
proceedings or settlements resulting in fines, penalties and/or changes in business practices that could cause a
material adverse effect on our results of operations. In addition, these investigations may result in changes to
laws and regulations affecting the industry.
Changes to insurance laws or regulations, or new insurance laws and regulations, may be more restrictive
than current laws or regulations and could significantly increase our compliance costs, which could have a
material adverse effect on our results of operations and our prospects for future growth. Additionally, our failure
to comply with certain provisions of applicable insurance laws and regulations could result in significant fines or
penalties being levied against us and may cause a material adverse effect on our results of operations or financial
condition.
Our inability to obtain reinsurance on acceptable terms would increase our loss exposure or limit our
ability to underwrite policies, which could adversely affect our results of operations and financial
condition.
We use, and we expect to continue to use, reinsurance to help manage our exposure to property risks.
Reinsurance is insurance for insurers and is fundamentally a promise by the reinsurer to pay possible future
claims in exchange for the payment of a premium by the insurance company seeking reinsurance. The
availability and cost of reinsurance are each subject to prevailing market conditions beyond our control, which
can affect business volume and profitability. We may be unable to maintain our current reinsurance coverage, to
obtain additional reinsurance coverage in the event our current reinsurance coverage is exhausted by a
catastrophic event, or to obtain other reinsurance coverage in adequate amounts or at acceptable rates. Similar
risks exist whether we are seeking to replace coverage terminated during the applicable coverage period or to
renew or replace coverage upon its expiration. Market conditions beyond our control determine the availability
and cost of reinsurance. For example, reinsurance may be more difficult or costly to obtain after a year with a
large number of major catastrophes. We provide no assurance that we can obtain sufficient reinsurance to cover
losses resulting from one or more storms or other events in the future, or that we can obtain such reinsurance in a
timely or cost-effective manner. If we are unable to renew our expiring coverage or to obtain new reinsurance
coverage, either our net exposure to risk would increase or, if we are unwilling to accept an increase in net risk
exposures, we would have to reduce the amount of risk we underwrite. Either increasing our net exposure to risk
22
UNITED INSURANCE HOLDINGS CORP.
or reducing the amount of risk we underwrite may cause a material adverse effect on our results of operations
and our financial condition.
Our inability to collect from our reinsurers on our reinsurance claims could cause a material adverse
effect on our results of operation and financial condition.
We use reinsurance as a tool to manage risks associated with our business. However, we remain primarily
liable as the direct insurer on all risks that we obtain reinsurance for. Our reinsurance agreements do not
eliminate our obligation to pay claims to insureds. As a result, we are subject to counterparty risk with respect to
our ability to recover amounts due from reinsurers. The risk could arise in two situations: (i) our reinsurers may
dispute some of our reinsurance claims based on contract terms, and we may ultimately receive partial or no
payment, or (ii) the amount of losses that reinsurers incur related to worldwide catastrophes may materially harm
the financial condition of our reinsurers and cause them to default on their obligations. Collectability of
reinsurance is subject to the solvency of the reinsurers, interpretation of contract language and other factors. A
reinsurer’s insolvency or inability to make payments under the terms of a reinsurance contract could have a
material adverse effect on our business, results of operations and financial condition.
Our efforts to manage these risks through underwriting guidelines, collateral requirements and other
oversight mechanisms may not be successful. As a result, our exposure to counterparty risk under our reinsurance
agreements may cause a material adverse effect on our results of operations, financial condition and cash flow.
Our investments are subject to market risks that may result in reduced returns or losses.
We invest a portion of the premiums we collect in various securities and expect returns from our
investments in these securities to contribute to our overall profitability. Accordingly, fluctuations in interest rates
or in the fixed maturity, equity or alternative-investment markets may cause a material adverse effect on our
results of operations.
Changes in the general interest rate environment will affect our returns on, and the fair value of, our fixed
maturity and short-term investments. A decline in interest rates reduces the interest rate payable on new fixed
income investments, thereby negatively impacting our net investment income. Conversely, rising interest rates
reduce the fair value of existing fixed maturities. In addition, defaults under, or impairments of, any of these
investments as a result of financial problems with the issuer and, where applicable, its guarantor could reduce our
net investment income and net realized investment gains or result in investment losses.
We are subject to risks associated with potential declines in credit quality related to specific issuers and a
general weakening in the economy. We may experience credit or default losses in our portfolio, including as a
result of the failure of the procedures we have implemented to monitor the credit risk of our invested assets,
which could adversely affect our results of operations and financial condition.
We may decide to invest an additional portion of our assets in equity securities or other investments, which
are subject to greater volatility than fixed maturity investments. General economic conditions, stock market
conditions and many other factors beyond our control can adversely affect the fair value of our equity securities
or other investments, and could adversely affect our realization of net investment income. As a result of these
factors, we may not realize an adequate return on our investments, we may incur losses on sales of our
investments and we may be required to write down the value of our investments, which could reduce our net
investment income and net realized investment gains or result in investment losses.
The fair value of our investment portfolio is also subject to valuation uncertainties. The valuation of
investments is more subjective when the markets for these investments are illiquid and may increase the risk that
23
UNITED INSURANCE HOLDINGS CORP.
the estimated fair value of our investment portfolio is not reflective of prices at which actual transactions would
occur.
Our determination of the amount of other-than-temporary impairment to record varies by investment type
and is based upon our periodic evaluation and assessment of known and inherent risks associated with the
respective investment type. We revise our evaluations and assessments as conditions change and new
information becomes available, and we reflect changes in other-than-temporary impairments in our Consolidated
Statements of Comprehensive Income. We base our assessment of whether other-than-temporary impairments
have occurred on our case-by-case evaluation of the underlying reasons for the decline in fair value. However,
we may not accurately assess whether the impairment of one or more of our investments is temporary or other-
than-temporary and the recorded amounts for other-than-temporary impairments in our financial statements may
be inadequate. Furthermore, historical trends may not be indicative of future impairments and additional
impairments may need to be recorded in the future.
Federal and/or state tax legislation could be enacted that would lessen or eliminate some or all of the tax
advantages we currently benefit from, including those governing received deductions and tax credits, which
could adversely affect the value of our investment portfolio.
The property and casualty insurance and reinsurance industry is historically cyclical and the pricing and
terms for our products may decline, which would adversely affect our profitability.
Historically, the financial performance of the property and casualty insurance and reinsurance industry has
been cyclical, characterized by periods of severe price competition and excess underwriting capacity, or “soft”
markets, followed by periods of high premium rates and shortages of underwriting capacity, or “hard” markets.
We cannot predict when such a period may occur or how long any given hard or soft market will last. Downturns
in the property and casualty market may cause a material adverse effect on our results of operations and our
financial condition.
Losses from legal actions may be material to our operating results, cash flows and financial condition.
Trends in the insurance industry regarding claims and coverage issues, such as increased litigation, the
willingness of courts to expand covered causes of loss, and the escalation of loss severity may contribute to
increased litigation costs and increase our loss exposure under the policies that we underwrite.
As industry practices and legal, judicial, social and other environmental conditions change, unexpected and
unintended issues related to claims and coverage may emerge. Examples of emerging claims and coverage issues
include, but are not limited to:
•
•
•
judicial expansion of policy coverage and the impact of new theories of liability;
plaintiffs targeting property and casualty insurers in purported class-action litigation relating to claims-
handling and other practices; and
adverse changes in loss cost trends, including inflationary pressures in home repair costs.
Loss severity in the property and casualty insurance industry may increase and may be driven by the effects
of these and other unforeseen emerging claims and coverage issues. Multiparty or class action claims may
present additional exposure to substantial economic, non-economic or punitive damage awards. The loss of even
one of these claims, if it resulted in a significant award or a judicial ruling that was otherwise detrimental, could
create a precedent in our industry that could have a material adverse effect on our results of operations and
financial condition. This risk of potential liability may make reasonable settlements of claims more difficult to
obtain.
24
UNITED INSURANCE HOLDINGS CORP.
We may be named a defendant in a number of legal actions relating to those emerging claim and coverage
issues. The propensity of policyholders and third-party claimants to litigate and the willingness of courts to
expand causes of loss and the size of awards may result in increased costs associated with litigation, render our
loss reserves inadequate, and may be material to our operating results and cash flows for a particular quarter or
annual period and to our financial condition. In addition, claims and coverage issues may not become apparent to
us for some time after our issuance of the affected insurance policies. As a result, we may not know the full
extent of liability under insurance policies we issue for many years after the policies are issued.
A downgrade in our financial strength ratings could adversely impact our business volume and our ability
to access additional debt or equity financing.
Financial strength ratings have become increasingly important to an insurer’s competitive position. Ratings
measure an insurance company’s ability to meet its obligation to contract holders and policyholders. High ratings
help maintain public confidence in a company’s products, facilitate marketing of products and enhance its
competitive position. Rating agencies review their ratings periodically, and our current ratings may not be
maintained in the future. A downgrade in our ratings could negatively impact our business volumes, as it is
possible demand for our products in certain markets may be reduced or our ratings could fall below minimum
levels required to maintain existing business. Additionally, we may find it more difficult to access the capital
markets and we may incur higher borrowing costs. If significant losses, such as those resulting from one or more
major catastrophes, or significant reserve additions were to cause our capital position to deteriorate significantly,
or if one or more rating agencies substantially increase their capital requirements, we may need to raise equity
capital in the future to maintain our ratings or limit the extent of a downgrade. For example, a trend of more
frequent and severe weather-related catastrophes may lead rating agencies to substantially increase their capital
requirements.
We cannot guarantee that our insurance affiliates, UPC, FSIC, IIC and ACIC will maintain their current A
(Exceptional) or higher ratings by Demotech and A- ratings by Kroll. Any downgrade of these ratings could
impact the acceptability of our products to mortgage lenders that require homeowners to buy insurance, reduce
our ability to retain and attract policyholders and agents and damage our ability to compete, which may cause a
material adverse effect on our results of operations and financial condition.
RISKS RELATED TO AN INVESTMENT IN OUR COMMON STOCK
Future sales of substantial amounts of our common stock by us or our existing stockholders could cause
our stock price to decrease.
As of December 31, 2017, we have registered up to $100,000,000 of our securities (including our common
stock) for sale from time to time in one or more offerings. Additional equity financings or other share issuances
by us could adversely affect the market price of our common stock. Additionally, we issued shares representing
approximately 49% of the issued and outstanding common stock of the combined company as consideration in
the merger with AmCo, resulting in substantial dilution to our then-existing shareholders. Future share issuances
in connection with merger transactions or other acquisitions could result in substantial additional dilution to our
shareholders.
Dividend payments on our common stock in the future are uncertain, and our ability to pay dividends may
be constrained by our holding company structure.
We have paid dividends on our common stock in the past. However, the declaration and payment of
dividends will be at the discretion of our Board of Directors and will be dependent upon our profits, financial
requirements and other factors, including legal and regulatory restrictions on the payment of dividends from our
subsidiaries (as we are a holding company and do not have any significant operations or assets other than our
25
UNITED INSURANCE HOLDINGS CORP.
ownership of the shares of our operating subsidiaries), general business conditions and such other factors as our
Board of Directors deems relevant. Therefore, investors who purchase our common stock may only realize a
return on their investment if the value of our common stock appreciates.
The ability of our subsidiaries to pay dividends may affect our liquidity and ability to meet our obligations.
The Company is a holding company with no significant operations. The principal assets are the stock of its
subsidiaries and the holding company’s directly held investment portfolio. State insurance regulatory authorities
limit the payment of dividends by insurance subsidiaries, as described in Note 14 of our Consolidated Financial
Statements. The limitations are based on statutory income and surplus. In addition, competitive pressures
generally require the subsidiaries to maintain insurance financial strength ratings. These restrictions and other
regulatory requirements affect the ability of the subsidiaries to make dividend payments. Limits on the ability of
the subsidiaries to pay dividends could adversely affect holding company liquidity, including our ability to pay
dividends to shareholders and service our debt in the timeframe expected.
Management views enterprise economic capital as a combination of statutory surplus and invested assets at
the parent holding company level. Deterioration in statutory surplus or earnings, from developments such as
catastrophe losses, or changes in market conditions or interest rates, could adversely affect holding company
liquidity by impacting the amount of dividends from our subsidiaries or the utilization of invested assets at the
holding company to increase statutory surplus or for other corporate purposes.
The substantial ownership of our common stock by R. Daniel Peed and his affiliates allows him to exert
significant control over us, and the Company and R. Daniel Peed are subject to certain restrictive
covenants that may restrict our ability to pursue certain opportunities.
R. Daniel Peed beneficially owns approximately 32% of our issued and outstanding common stock at
December 31, 2017. Mr. Peed also has a proxy from another member of RDX Holding, LLC (RDX), the former
parent company of AmCo, who beneficially owns approximately 8% of our issued and outstanding common
stock. As a result, Mr. Peed is able to exert substantial control over us. Moreover, Mr. Peed’s interests may
conflict with the interests of other holders of our common stock and he may take actions affecting us with which
other stockholders may disagree. Mr. Peed has the ability to exert significant influence over the following:
•
•
the nomination, election and removal of our Board of Directors;
the adoption of amendments to our charter documents;
• management and policies; and
•
the outcome of any corporate transaction or other matter submitted to our stockholders for approval,
including mergers, consolidations and the sale of all or substantially all of our assets.
Mr. Peed, AmCo and ACIC are also subject to restrictive covenant agreements that contain non-
competition, non-solicitation, confidentiality and other restrictive covenants that prohibit Mr. Peed, AmCo and
ACIC from engaging in certain activities, including activities customarily performed by managing general agents
and activities relating to segments of the commercial property insurance market for coastally exposed risks in the
United States. Additionally, in connection with our merger with AmCo, we agreed to be subject to a restrictive
covenant expiring on June 1, 2022 that will prohibit the formation, investment in or development, acquisition or
ownership of any managing general agent or entity that performs activities customarily performed by managing
general agents, or the engagement in customary managing general agent functions with respect to the commercial
property insurance business. These restrictive covenants may restrict us and Mr. Peed from pursuing
opportunities for expansion, including opportunities to act as or perform functions similar to a managing general
agent, and therefore may limit our overall growth potential.
26
UNITED INSURANCE HOLDINGS CORP.
Further, we entered into a stockholder’s agreement with Mr. Peed and certain affiliates of Mr. Peed, which
provides those stockholders with rights that our other stockholders do not have, including, subject to certain
conditions, the right to designate for nomination or appointment up to three of the current 10 members of our
Board of Directors. Although the stockholder’s agreement requires shares beneficially owned by Mr. Peed and
his affiliates to be voted in proportion to the votes cast by other stockholders on any proposal on which our
stockholders are entitled to vote, this restriction will terminate on the earlier of (i) April 3, 2022 and (ii) the date
that Mr. Peed and his affiliates beneficially own less than 25% of our voting securities.
Provisions in our charter documents may make it harder for others to obtain control of us even though
some stockholders might consider such a development to be favorable.
Our charter and bylaws contain provisions that may discourage unsolicited takeover proposals our
stockholders may consider to be in their best interests. Our Board of Directors is divided into two classes, each of
which will generally serve for a term of two years with only one class of directors being elected in each year. At
a given annual meeting, only a portion of our Board of Directors may be considered for election. Since our
“staggered board” may prevent our stockholders from replacing a majority of our Board of Directors at certain
annual meetings, it may entrench our management and discourage unsolicited stockholder proposals that may be
in the best interests of our stockholders.
Further, our Board of Directors has the ability to designate the terms of and issue one or more series of
preferred stock, which may discourage transactions that otherwise could involve payment of a premium over
prevailing market prices for our securities.
Item 1B. Unresolved Staff Comments
None.
27
UNITED INSURANCE HOLDINGS CORP.
Item 2.
Properties
All of our properties owned or leased are used for office space. We own two buildings located in St.
Petersburg, Florida. Our principal location contains approximately 40,000 square feet of commercial office space
and associated property for use as our principal executive offices. Our second building contains approximately
7,800 square feet of commercial office space and is currently unoccupied but is being renovated for future use.
We lease in total approximately 16,500 square feet of office space located in Florida, New York, and
Hawaii. These leases are generally short-term to medium-term leases of commercial office space.
Item 3.
Legal Proceedings
We are involved in claims-related legal actions arising in the ordinary course of business. We accrue
amounts resulting from claims-related legal actions in unpaid losses and loss adjustment expenses during the
period that we determine an unfavorable outcome becomes probable and we can estimate the amounts.
Management makes revisions to our estimates based on its analysis of subsequent information that we receive
regarding various factors, including: (i) per claim information; (ii) company and industry historical loss
experience; (iii) judicial decisions and legal developments in the awarding of damages; and (iv) trends in general
economic conditions, including the effects of inflation.
At December 31, 2017, we were not involved in any material non-claims-related legal actions.
Item 4. Mine Safety Disclosures
Not applicable.
28
UNITED INSURANCE HOLDINGS CORP.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
MARKET INFORMATION
Our common stock trades on the Nasdaq Capital Market (Nasdaq) under the symbol “UIHC”. The table
below sets forth, for the calendar quarter indicated, the high and low sales prices of our common stock as
reported on Nasdaq.
Sales Prices
Low
High
2017
2016
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
First Quarter
$17.41
16.77
17.41
17.81
$15.30
13.60
14.41
13.05
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
First Quarter
17.04
17.16
19.73
20.04
9.52
14.29
14.50
13.46
HOLDERS OF COMMON EQUITY
As of March 28, 2018, we had 3,880 holders of record of our common stock. The number of record holders
includes stockholders who are beneficial owners and shares held in street name by brokers and other nominees.
DIVIDENDS
We declared and paid dividends on our common stock each quarter during 2017 and 2016 as follows:
Per Share
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
First Quarter
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Dividends Paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017
2016
0.06
$
0.06
$
0.06
$
$
0.06
$8,991,000
0.05
$
0.06
$
0.06
$
$
0.06
$4,974,000
Any future dividend payments will be at the discretion of our Board of Directors and will depend upon our
profits, financial requirements and other factors, including legal and regulatory restrictions on the payment of
dividends, general business conditions and such other factors as our Board of Directors deems relevant.
29
UNITED INSURANCE HOLDINGS CORP.
Under Florida law, Florida-domiciled insurers such as UPC and 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.
b.
10% of the insurer’s capital surplus, or
100% of the insurer’s net income, not including realized capital gains, plus a two-year
carryforward
2.
10% of the insurer’s capital surplus with dividends payable constrained to unassigned funds minus
25% of unrealized capital gains, or
3.
the lesser of:
a.
b.
10% of the insurer’s capital surplus, or
100% of the insurer’s net investment income plus a three-year carryforward with dividends
payable constrained to unassigned funds minus 25% of unrealized capital gains.
Alternatively, UPC or ACIC 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.
b.
10% of the insurer’s surplus as to policyholders derived from realized net operating profits on its
business and net realized capital gains, or
The insurer’s entire net operating profits and realized net capital gains derived during the
immediately preceding calendar year, and:
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, Florida-domiciled insurers 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. As of December 31, 2017, we were in compliance with these requirements.
30
UNITED INSURANCE HOLDINGS CORP.
Under the insurance regulation of Hawaii, the maximum amount of dividends that a Hawaii-domiciled
insurer such as FSIC. may pay to its parent company without prior approval from the Hawaii Insurance
Commissioner is:
1.
the lesser of:
a.
b.
10% of the insurer’s surplus as of December 31 of the preceding year, or
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 immediately preceding calendar years. As of December 31, 2017, we were
in compliance with these requirements.
Under the insurance regulations of New York, a New York-domiciled insurer such as IIC may not 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.
10% of the insurer’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.
New York law 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 36 months
prior to the declaration or distribution of the current dividend and ending 12 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 of April 29, 2016. As of December 31, 2017, we were in
compliance with these requirements.
See Note 14 to our Notes to Consolidated Financial Statements for further discussion of restrictions on
future payments of dividends by our insurance affiliates.
31
UNITED INSURANCE HOLDINGS CORP.
PERFORMANCE GRAPH
Set forth below is a line graph comparing the dollar change in the cumulative total shareholder return on our
common stock from December 31, 2012 through December 31, 2017 as compared to the cumulative total return
of the Russell 2000 Index and the NASDAQ Insurance Index. The cumulative total shareholder return is a
concept used to compare the performance of a company’s stock over time and is the ratio of the stock price
change plus the cumulative amount of dividends over the specified time period (assuming dividend
reinvestment), to the stock price at the beginning of the time period. The chart depicts the value on each
December 31 from 2012 through 2017 of a $100 investment made on December 31, 2012 with all dividends
reinvested.
s
r
a
l
l
o
D
500
400
300
200
100
0
2012
2013
2014
2015
2016
2017
Year Ended December 31,
United Insurance Holdings Corp.
NASDAQ Insurance index
Russell 2000 index
United Insurance Holdings Corp.
. . . . . . . . . . . . .
Russell 2000 Index . . . . . . . . . . . . . . . . . . . . . . . .
NASDAQ Insurance Index . . . . . . . . . . . . . . . . . .
$100.00
100.00
100.00
$236.27
137.00
128.78
$371.02
141.84
139.79
$292.42
133.74
148.81
$262.84
159.78
172.07
$303.64
180.79
177.55
2012
2013
2014
2015
2016
2017
The foregoing performance graph and data shall not be deemed “filed” as part of this Form 10-K for
purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that
section and should not be deemed incorporated by reference into any other filing of the Company under the
Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent the Company specifically
incorporates it by reference into such filing.
RECENT SALES OF UNREGISTERED SECURITIES
During 2017, we did not have any unregistered sales of our equity securities.
REPURCHASES OF EQUITY SECURITIES
During 2017, we did not repurchase any of our equity securities.
32
UNITED INSURANCE HOLDINGS CORP.
Item 6. Selected Financial Data
The following selected consolidated financial data should be read in conjunction with Item 7—
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our
consolidated financial statements and the related notes appearing in Item 8—“Financial Statements and
Supplementary Data” of this Form 10-K. The consolidated statements of income data for the years ended
December 31, 2017, 2016 and 2015 and the consolidated balance sheet data at December 31, 2017 and 2016 are
derived from our audited financial statements appearing in Item 8 of this Form 10-K. The consolidated
statements of income data for the years ended December 31, 2014 and 2013 and the balance sheet data at
December 31, 2015, 2014 and 2013 are derived from our audited consolidated financial statements that are not
included in this Form 10-K. The historical results shown below are not necessarily indicative of the results to be
expected in any future period.
As of and for the Years Ended December 31,
2015
2014
2016
2017
2013
Income Statement Data:
Revenue:
Gross premiums written . . . . . . . . . . . . . . . . $1,040,848
986,023
Gross premiums earned . . . . . . . . . . . . . . . .
Net premiums earned . . . . . . . . . . . . . . . . . . $ 585,490
Net investment income and realized
gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other revenue . . . . . . . . . . . . . . . . . . . . . . . .
17,879
51,051
Total revenue . . . . . . . . . . . . . . . . . . . . $ 654,420
Expenses:
Loss and loss adjustment expenses . . . . . . .
Other operating expenses . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . .
365,535
284,881
3,247
Total expenses . . . . . . . . . . . . . . . . . . . $ 653,663
910
(9,235)
10,145
Income before income taxes . . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . $
$708,156
666,829
$456,931
$569,736
504,215
$335,958
$436,753
400,695
$264,850
$381,352
316,708
$197,378
11,226
18,960
$487,117
10,039
11,572
$357,569
6,775
8,605
$280,230
3,742
6,960
$208,080
298,353
181,138
723
$480,214
7,003
1,305
5,698
$
183,108
132,569
326
$316,003
41,860
14,502
$ 27,358
118,077
97,410
410
$215,897
64,410
23,397
$ 41,013
98,830
74,397
367
$173,594
34,487
14,145
$ 20,342
Earnings per share
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Cash dividends declared per share . . . . . . . . . . . . $
0.27
0.27
0.24
$
$
$
0.27
0.26
0.23
$
$
$
1.29
1.28
0.20
$
$
$
2.06
2.05
0.16
$
$
$
1.26
1.26
0.12
Other Data:
Return on average equity, trailing twelve
months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ceded ratio (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ratios to net premiums earned:
Loss and loss adjustment expenses . . . . . . .
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Combined Ratio . . . . . . . . . . . . . . . . . . . . . .
Effect of current year catastrophe
losses on combined ratio . . . . . . . . .
Effect of prior year (favorable)
development on combined ratio . . . .
Effect of ceding commission income
on combined ratio . . . . . . . . . . . . . . .
. . . . . . . . . .
Underlying Combined Ratio (2)
2.2%
40.6%
62.4%
48.7%
111.1%
2.4%
31.5%
65.3%
39.6%
104.9%
12.4%
33.4%
54.5%
39.5%
94.0%
27.2%
33.9%
44.6%
36.8%
81.4%
19.8%
12.2%
8.5%
0.3%
(0.4)%
3.7%
(0.7)%
(1.5)%
6.3%
85.4%
1.5%
87.5%
— %
86.2%
— %
82.6%
20.8%
37.7%
50.0%
37.7%
87.7%
1.8%
2.1%
— %
83.8%
(1) Calculated as ceded premiums earned divided by gross premiums earned.
33
UNITED INSURANCE HOLDINGS CORP.
(2) Underlying combined ratio, a measure that is not based on accounting principles generally accepted in the United States of America
(GAAP), is reconciled above to the combined ratio, the most directly comparable GAAP measure. Additional information regarding non-
GAAP financial measures presented in this Form 10-K is in the “Definitions of Non-GAAP Measures” in Part II Item 7 of this
Form 10-K.
As of and for the Years Ended December 31,
2015
2014
2016
2017
2013
Selected Balance Sheet Data:
Cash and invested assets . . . . . . . . . . . . . . . . . .
Prepaid reinsurance premiums . . . . . . . . . . . . .
Total Assets . . . . . . . . . . . . . . . . . . . . . . . .
$1,130,806
201,904
2,059,921
Unpaid loss and loss adjustment expenses . . . .
Unearned premiums . . . . . . . . . . . . . . . . . . . . .
Reinsurance payable . . . . . . . . . . . . . . . . . . . . .
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Liabilities . . . . . . . . . . . . . . . . . . . . .
Total Stockholders’ Equity . . . . . . . . . . . .
Statutory Surplus . . . . . . . . . . . . . . . . . . . . . . . .
$ 482,232
555,873
149,117
161,364
1,522,796
537,125
$ 389,384
$679,335
132,564
999,686
$140,855
372,223
99,891
54,175
758,359
241,327
$212,298
$537,500
79,399
740,021
$ 76,792
304,653
64,542
12,353
500,810
239,211
$150,860
$443,018
63,827
584,169
$ 54,436
229,486
45,254
13,529
380,406
203,763
$126,249
$326,548
55,268
441,230
$ 47,451
193,428
39,483
14,706
333,643
107,587
$ 78,362
34
UNITED INSURANCE HOLDINGS CORP.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in
conjunction with our consolidated financial statements and related notes appearing in Part II, Item 8 of this
Form 10-K. This discussion and analysis contains forward-looking statements that involve risks, uncertainties
and assumptions. Actual results may differ materially from those expressed or implied in these forward-looking
statements as a result of certain known and unknown risks and uncertainties. See “Forward-Looking
Statements.”
OVERVIEW
United Insurance Holding Corp. is a holding company primarily engaged in residential and commercial
property and casualty insurance in the United States. We conduct our business principally through four wholly-
owned insurance subsidiaries: UPC, ACIC, FSIC, and IIC. Collectively, we refer to the holding company and all
our subsidiaries, including non-insurance subsidiaries, as “UPC Insurance,” which is the preferred brand
identification for our Company.
Our Company’s primary source of revenue is generated from writing insurance in Connecticut, Florida,
Georgia, Hawaii, Louisiana, Massachusetts, New Jersey, New York, North Carolina, Rhode Island, South
Carolina and Texas. Our target market in such areas consists of states where the perceived threat of natural
catastrophe has caused large national insurance carriers to reduce their concentration of policies. We believe an
opportunity exists for UPC Insurance to write profitable business in such areas.
We have historically grown our business through strong organic growth complemented by strategic
acquisitions, including our acquisition of AmCo in April 2017, IIC in April 2016, and Family Security Holdings,
LLC (FSH) in February 2015. As a result of these acquisitions, along with organic growth of premium in states in
which we currently write premium, we have grown our policies in-force by 17.1% from 451,155 policies in-force
at December 31, 2016 to 528,193 policies in-force at December 31, 2017.
Our business is subject to the impact of weather-related catastrophes on our loss and loss adjustment
expenses. During the third quarter of 2017, Hurricane Harvey made landfall in Texas and Hurricane Irma made
landfall in Florida. During the fourth quarter of 2016, Hurricane Matthew impacted Florida and Georgia before
making landfall in South Carolina and also impacting North Carolina. In 2017, we retained $83,000,000 of pre-
tax catastrophe losses, net of reinsurance recoverable as a result of hurricanes.
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,
35
UNITED INSURANCE HOLDINGS CORP.
unrealized gains and losses, asset diversification and portfolio duration. To evaluate our financial condition, we
consider our: liquidity, financial strength, ratings, book value per share and return on equity.
Year Ended December 31,
2016
2017
2015
REVENUE:
Gross premiums written . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase in gross unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,040,848
(54,825)
$ 708,156
(41,327)
$ 569,736
(65,521)
Gross premiums earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ceded premiums earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
986,023
(400,533)
666,829
(209,898)
504,215
(168,257)
Net premiums earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
585,490
17,812
67
51,051
456,931
10,679
547
18,960
335,958
9,212
827
11,572
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
654,420
487,117
357,569
EXPENSES:
Losses and loss adjustment expenses . . . . . . . . . . . . . . . . . . . . . .
Policy acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative expenses . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Benefit) provision for income taxes . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income per diluted share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Book value per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Return on equity based on GAAP net income . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss ratio, net (1)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expense ratio, net (2)
Combined ratio (CR) (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of current year catastrophe losses on CR . . . . . . . . . . . . . . . . . .
Effect of prior year development on CR . . . . . . . . . . . . . . . . . . . . . . .
Effect of ceding commission income on CR . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Underlying combined ratio (4)(5)
$
$
$
365,535
175,444
27,675
81,762
3,247
653,663
757
153
910
(9,235)
10,145
0.27
12.56
$
$
$
2.2%
62.4%
48.7%
111.1%
19.8%
(0.4)%
6.3%
85.4%
298,353
117,658
20,524
42,956
723
480,214
6,903
100
7,003
1,305
183,108
87,401
15,316
29,852
326
316,003
41,566
294
41,860
14,502
5,698
$ 27,358
0.26 $
$
11.15
2.4%
65.3%
39.6%
104.9%
12.2%
3.7%
1.5%
87.5%
1.28
11.11
12.4%
54.5%
39.5%
94.0%
8.5%
(0.7)%
— %
86.2%
(1)
(2)
Loss ratio, net is calculated as losses and loss adjustment expenses (LAE) relative to net premiums earned.
Expense ratio, net 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 expense ratio, net.
(4) Underlying combined ratio, a measure that is not based on GAAP, is reconciled above to the combined ratio, the most directly
(5)
comparable GAAP measure. Additional information regarding non-GAAP financial measures presented in this Form 10-K can be found
in “Definitions of Non-GAAP Measures”, below.
Included in both the expense ratio and the combined ratio are $38,104,000, $11,108,000, and $1,675,000 for the years ended
December 31, 2017, 2016, and 2015, respectively, of merger professional fees and amortization expense predominately associated with
the AmCo, IIC, and FSH acquisitions. Excluding these additional expenses, the Company would have reported underlying combined
ratios of 78.9%, 85.1%, and 85.7% for the year ended December 31, 2017, 2016, and 2015 respectively.
36
UNITED INSURANCE HOLDINGS CORP.
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, and 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 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
reinsurance 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 the Company’s 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 Company believes it is useful for investors to evaluate these components separately and in the
aggregate when reviewing the Company’s performance. 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.
Operating Expenses 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 of intangibles. 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 operating
expenses. The underlying expense measure should not be considered a substitute for the 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 (core income) is a non-GAAP measure which is computed by adding merger
expenses, net of tax, and amortization, net of tax, to net income and subtracting realized gains (losses) on our
investment portfolio 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 mergers and therefore the expense does not arise through normal
operations. Investment portfolio gains (losses) vary independent of the Company’s operations. We believe it is
37
UNITED INSURANCE HOLDINGS CORP.
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 core income measure should not be
considered a substitute for net income and does not reflect the overall profitability of our business.
RESULTS OF OPERATIONS—2017 COMPARED TO 2016
Revenues
Net income for the year ended December 31, 2017 was $10,145,000, or $0.27 per diluted share, compared to
net income of $5,698,000, or $0.26 per diluted share, for the year ended December 31, 2016. The increase in net
income was primarily due to an increase in gross premiums earned and improvement in our underlying loss ratio,
as well as the favorable impact of U.S. Tax Reform.
Our total gross written premium increased by $332,692,000, or 47.0%, to $1,040,848,000 for the year ended
December 31, 2017 from $708,156,000 for the year ended December 31, 2016, primarily reflecting our merger
with AmCo on April 3, 2017, as well as strong organic growth in new and renewal business generated in our Gulf
and Northeast regions. The breakdown of the year-over-year changes in both direct written and assumed
premiums by region and gross written premium by line of business is shown in the table below.
Direct Written and Assumed Premium By Region (1)
2017
2016
Change
Florida . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gulf . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Northeast . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Southeast
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 540,796
201,475
154,502
92,753
$336,591
160,520
123,964
87,176
$204,205
40,955
30,538
5,577
Total direct written premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 989,526
$708,251
$281,275
Assumed premium (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
51,322
(95)
51,417
Total gross written premium by region . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,040,848
$708,156
$332,692
Gross Written Premium by Line of Business
Personal property (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 799,097
241,751
$685,402
22,754
$113,695
218,997
Total gross written premium by line of business . . . . . . . . . . . . . . . . . .
$1,040,848
$708,156
$332,692
(1)
“Gulf” is comprised of Hawaii, Louisiana and Texas; “Northeast” is comprised of Connecticut, Massachusetts, New Jersey, New York
and Rhode Island; and “Southeast” is comprised of Georgia, North Carolina and South Carolina.
(2) Assumed premium written for 2017 includes commercial property business assumed from an unaffiliated insurer and the Texas
Windstorm Insurance Association (TWIA) and 2016 premium assumed includes homeowners’ business from Citizens Property
Insurance Corporation (Citizens) and TWIA.
Includes gross written premium from flood policies.
(3)
New and Renewal Policies (1) By Region (2)
2017
2016
Change
Florida . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gulf . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Northeast . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Southeast . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
226,136
131,334
115,709
79,763
192,921
105,334
89,512
69,018
33,215
26,000
26,197
10,745
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
552,942
456,785
96,157
(1) Only includes new and renewal homeowner, commercial and dwelling fire policies written during the year.
(2)
“Gulf” is comprised of Hawaii, Louisiana and Texas; “Northeast” is comprised of Connecticut, Massachusetts, New Jersey, New York
and Rhode Island; and “Southeast” is comprised of Georgia, North Carolina and South Carolina.
38
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 year ended December 31, 2017 increased $173,449,000, or 36.1%, to $653,663,000 for the
year ended December 31, 2017 from $480,214,000 for the same period in 2016, primarily due to increased
losses, policy acquisition costs, operating costs and general and administrative expenses. The calculation of our
combined and underlying loss ratios is shown below.
($ in thousands)
Year Ended December 31,
2016
2017
Change
Loss and LAE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
% of Gross earned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
% of Net earned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$365,535
37.1%
62.4%
$298,353
$ 67,182
44.7% (7.6)pts
65.3% (2.9)pts
Less:
Current year catastrophe losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . .
Prior year reserve (favorable) unfavorable development
$116,424
(2,613)
$ 55,842
16,988
$ 60,582
(19,601)
Underlying Loss and LAE (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
% of Gross earned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
% of Net earned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$251,724
25.5%
43.0%
$225,523
$ 26,201
33.8% (8.3)pts
49.4% (6.4)pts
(1) Underlying Loss and LAE is a non-GAAP financial measure and is reconciled above to Loss and LAE, the most directly comparable
GAAP measure. Additional information regarding non-GAAP financial measures presented in this Form 10-K can be found in the
“Definitions of Non-GAAP Measures” section, above.
The calculations of the Company’s expense ratio and underlying expense ratios are shown below.
($ in thousands)
Policy acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating and underwriting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Operating Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
% of Gross earned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
% of Net earned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less:
Year Ended December 31,
2016
2017
Change
$175,444
27,675
81,762
$284,881
28.9%
48.7%
$117,658
20,524
42,956
$ 57,786
7,151
38,806
$181,138
$103,743
27.2% 1.7pts
39.6% 9.1pts
Ceding commission income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Merger expenses and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 37,175
38,104
$
6,882
11,108
$ 30,293
26,996
Underlying Expense (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
% of Gross earned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
% of Net earned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$209,602
21.3%
35.8%
$163,148
$ 46,454
24.5% (3.2)pts
35.7% 0.1pts
(1) Underlying Expense is a non-GAAP financial 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 Form 10-K can be found in the
“Definitions of Non-GAAP Measures” section, above.
Loss and LAE increased by $67,182,000, or 22.5%, to $365,535,000 for the year ended December 31, 2017
from $298,353,000 for the year ended December 31, 2016. Loss and LAE expense as a percentage of net earned
39
UNITED INSURANCE HOLDINGS CORP.
premiums decreased 2.9 points to 62.4% for the year, compared to 65.3% last year. Excluding catastrophe losses
and reserve development, our gross underlying loss and LAE ratio for the year was 25.5%, a decrease of 8.3
points from 33.8% during the year ended December 31, 2016.
During the third quarter of 2017, our catastrophe losses included claims from Hurricane Harvey, which
made landfall as a category 4 storm in Texas, and Hurricane Irma, which was also a category 4 storm making
landfall in Florida. Our catastrophe excess of loss reinsurance limits retained losses to $91,000,000 in total for
these two events, which was further reduced to $83,000,000 by our quota share reinsurance.
Policy acquisition costs increased by $57,786,000, or 49.1%, to $175,444,000 for the year ended
December 31, 2017 from $117,658,000 for the year ended December 31, 2016. The primary driver of the
increase in costs was the result of the managing general agent fees paid to AmRisc in relation to AmCo
commercial premium which was a cost increase anticipated with the acquisition of AmCo. The remaining change
was the result of policy acquisition costs varying 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 and underwriting expenses increased by $7,151,000, or 34.8%, to $27,675,000 for the year ended
December 31, 2017 from $20,524,000 for the year ended December 31, 2016, primarily due to increased costs
related to our ongoing growth, incurred expenses related to software improvements and costs related to the
increase in underwriting reports.
General and administrative expenses increased by $38,806,000, or 90.3%, to $81,762,000 for the year ended
December 31, 2017 from $42,956,000 for the year ended December 31, 2016, primarily due to amortization costs
related to the merger with AmCo.
We experienced favorable reserve development in the current year and its historical impact on our net loss
and net underlying loss ratios is outlined in the following table.
($ in thousands, except ratios)
Historical Reserve Development
2013
2014
2015
2016
2017
Prior year reserve favorable (unfavorable) development
. . . . . .
Development as a % of earnings before interest and taxes . . . . .
$(4,078) $4,037
$2,368
$(16,988) $2,613
11.7%
6.2%
5.7% 219.9% 62.9%
Consolidated net loss ratio (LR) . . . . . . . . . . . . . . . . . . . . . . . .
Prior year reserve unfavorable (favorable) development on
LR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current year catastrophe losses on LR . . . . . . . . . . . . . . . . . . . .
50.0% 44.6% 54.5% 65.3% 62.4%
2.1% (1.5)% (0.7)%
8.5%
0.3%
1.8%
3.7% (0.4)%
12.2% 19.8%
Underlying net loss ratio (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
46.1% 45.8% 46.7% 49.4% 43.0%
(1) Underlying Net Loss Ratio is a non-GAAP measure and is reconciled above to the Consolidated Net Loss Ratio, the most directly
comparable GAAP measure. Additional information regarding non-GAAP financial measures presented in this Form 10-K can be found
in the “Definitions of Non-GAAP Measures” section, above.
40
UNITED INSURANCE HOLDINGS CORP.
RESULTS OF OPERATIONS—2016 COMPARED TO 2015
Revenues
Net Income for the year ended December 31, 2016 was $5,698,000, or $0.26 per diluted share, compared to
$27,358,000, or $1.28 per diluted share, for the year ended December 31, 2015. The decrease in net income was
primarily due to increases in losses and LAE during 2016 as compared to 2015.
Our gross written premium increased by $138,420,000, or 24.3%, to $708,156,000 year ended December 31,
2016 from $569,736,000 the year ended December 31, 2015, primarily due to strong organic growth in new and
renewal business generated in our Gulf and Northeast regions. Increases in direct written premium of over
$159,335,000 were partially offset by reductions in assumed premium as we sharply curtailed our takeout
activity in 2016 compared to the prior year. The breakdown of the year–over–year changes in both direct written
and assumed premiums by region and gross written premium by line of business is shown in the following table:
Direct Written and Assumed Premium By Region (1)
2016
2015
Change
Florida . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gulf . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Northeast . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Southeast . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$336,591
160,520
123,964
87,176
$314,588
91,303
73,128
69,897
$ 22,003
69,217
50,836
17,279
Total direct written premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$708,251
$548,916
$159,335
Assumed premium (2)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(95)
20,820
(20,915)
Total gross written premium by region . . . . . . . . . . . . . . . . . . . . . . . . . . .
$708,156
$569,736
$138,420
Gross Written Premium by Line of Business
Personal property (3)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$685,402
22,754
$557,953
11,783
$127,449
10,971
Total gross written premium by line of business . . . . . . . . . . . . . . . . . . . . . . . .
$708,156
$569,736
$138,420
(1)
“Gulf” is comprised of Hawaii, Louisiana and Texas; “Northeast” is comprised of Connecticut, Massachusetts, New Jersey, New York
and Rhode Island; and “Southeast” is comprised of Georgia, North Carolina and South Carolina.
(2) Assumed premiums written includes $1,610,000 of homeowners’ premium assumed from Maidstone Insurance Company in conjunction
with the IIC acquisition in 2016, as well as premiums assumed from Citizens in 2015 and 2016 as well as TWIA in 2016.
Includes gross written premium from flood policies.
(3)
New and Renewal Policies (1) By Region (2)
2016
2015
Change
Florida . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gulf . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Northeast . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Southeast . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
192,921
105,334
89,512
69,018
175,284
58,752
54,172
52,522
17,637
46,582
35,340
16,496
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
456,785
340,730
116,055
(1) Only includes new and renewal homeowner, commercial and dwelling fire policies written during the year.
(2)
“Gulf” is comprised of Hawaii, Louisiana and Texas; “Northeast” is comprised of Connecticut, Massachusetts, New Jersey, New York
and Rhode Island; and “Southeast” is comprised of Georgia, North Carolina and South Carolina.
41
UNITED INSURANCE HOLDINGS CORP.
Expenses
Expenses for the year ended December 31, 2016 increased $164,211,000, or 52.0%, to $480,214,000 for the
year ended December 31, 2016 from $316,003,000 for 2015, primarily due to increased losses, policy acquisition
costs, operating costs and general and administrative expenses. The calculation of our combined and underlying
loss ratios is shown below:
($ in thousands)
Year Ended December 31,
2015
2016
Change
Loss and LAE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
% of Gross earned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
% of Net earned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$298,353
44.7%
65.3%
$183,108
$115,245
36.3% 8.4pts
54.5% 10.8pts
Less:
Current year catastrophe losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior year reserve (favorable) development . . . . . . . . . . . . . . . . . . . . . . . .
$ 55,842
16,988
$ 28,565
(2,368)
$ 27,277
19,356
Underlying Loss and LAE (1)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
% of Gross earned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
% of Net earned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$225,523
33.8%
49.4%
$156,911
$ 68,612
31.1% 2.7pts
46.7% 2.7pts
(1) Underlying Loss and LAE is a non-GAAP financial measure and is reconciled above to Loss and LAE, the most directly comparable
GAAP measure. Additional information regarding non-GAAP financial measures presented can be found in this Form 10-K is in the
“Definitions of Non-GAAP Measures” section, above.
The calculations of the Company’s expense ratio and underlying expense ratios are shown below.
($ in thousands)
Policy acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating and underwriting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Operating Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
% of Gross earned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
% of Net earned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less:
Year Ended December 31,
2015
2016
Change
$117,658
20,524
42,956
$181,138
27.2%
39.6%
$ 87,401
15,316
29,852
$ 30,257
5,208
13,104
$132,569
$ 48,569
26.3% 0.9pts
39.5% 0.1pts
Ceding commission income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Merger expenses and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
6,882
11,108
$ — $ 6,882
9,433
1,675
Underlying Expense (1)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
% of Gross earned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
% of Net earned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$163,148
24.5%
35.7%
$130,894
$ 32,254
26.0% (1.5)pts
39.0% (3.3)pts
(1) Underlying Expense is a non-GAAP financial 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 Form 10-K can be found in the
“Definitions of Non-GAAP Measures” section, above.
Loss and LAE increased $115,245,000, or 62.9%, to $298,353,000 for the year ended December 31, 2016
from $183,108,000 for the year ended December 31, 2015. Loss and LAE expense as a percentage of net earned
premiums increased 10.8 points to 65.3% for the year, compared to 54.5% for the prior year. Excluding
catastrophe losses and reserve development, our gross underlying loss and LAE ratio for the year was 33.8%, an
increase of 2.7 points from 31.1% during 2015, due primarily to an increase in fire and weather-related losses as
42
UNITED INSURANCE HOLDINGS CORP.
well as lower average premiums. Retained catastrophe losses of $55,842,000 during 2016 included losses from
spring storms in Florida and Texas, the August Louisiana storms, Hurricane Hermine, Tropical Storm Colin,
Hurricane Matthew, and certain other losses not covered by our reinsurance programs. Prior year loss reserve
development of $16,988,000 for the year was driven primarily by non-catastrophe claims in Florida for accident
year 2015.
Policy acquisition costs increased $30,257,000, or 34.6%, to $117,658,000 for the year ended December 31,
2016 from $87,401,000 for the year ended December 31, 2015. 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 by $5,208,000, or 34.0%, to $20,524,000 for the year ended December 31,
2016 from $15,316,000 for the year ended December 31, 2015, primarily due to increased costs related to our
ongoing growth and continuing expansion into new states.
General and administrative expenses increased $13,104,000, or 43.9%, to $42,956,000 for the year ended
December 31, 2016 from $29,852,000 for the year ended December 31, 2015, primarily due to increases in
personnel costs related to our continued growth and higher depreciation and amortization costs resulting from the
acquisition of IIC during the second quarter of 2016.
ANALYSIS OF FINANCIAL CONDITION—DECEMBER 31, 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 consolidated financial statements and related notes in Part II, Item 8 in this
Form 10-K.
Investments
With respect to our investments, we primarily attempt to preserve capital, maximize after-tax investment
income, maintain liquidity and minimize risk. To accomplish our goals, we purchase debt securities in sectors
that we believe represent the most attractive relative value, and we maintain a moderate equity exposure. We
must comply with applicable state insurance regulations that prescribe the type, quality and concentrations of
investments our insurance 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.
Our cash and investment portfolios totaled $1,130,806,000 at December 31, 2017 compared to
$679,335,000 at December 31, 2016. The increase is a result of the addition of the ACIC portfolio in April 2017
and net proceeds from the issuance of our $150,000,000 6.250% senior notes in December 2017.
43
22.1%
0.3%
24.9%
1.1%
24.1%
— %
0.2%
72.8%
— %
0.2%
3.6%
0.4%
4.2%
0.8%
— %
77.8%
22.2%
UNITED INSURANCE HOLDINGS CORP.
The following table summarizes our investments, by type:
December 31, 2017
December 31, 2016
Percent of
Total
Fair Value
Percent of
Total
U.S. government and agency securities . . . . . . . . . . . . . . . .
Foreign governments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
States, municipalities and political subdivisions . . . . . . . . .
Public utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Redeemable preferred stocks . . . . . . . . . . . . . . . . . . . . . . . .
Total fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . .
Mutual fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Public utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonredeemable preferred stocks . . . . . . . . . . . . . . . . . . . . .
Total equity securities . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term investments . . . . . . . . . . . . . . . . . . . .
Portfolio loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair Value
$ 235,891
2,036
201,512
20,257
287,562
14,905
692
762,855
31,924
1,702
27,902
1,767
63,295
8,381
20,000
20.9% $149,952
2,061
169,112
7,730
164,536
—
1,125
0.2%
17.8%
1.8%
25.4%
1.3%
0.1%
67.5%
2.8%
0.2%
2.5%
0.2%
5.7%
0.7%
1.8%
494,516
—
1,507
24,048
2,843
28,398
5,733
—
Total investments . . . . . . . . . . . . . . . . . . . . . . . . .
$ 854,531
75.7% $528,647
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 276,275
24.3% $150,688
Total cash and investments . . . . . . . . . . . . . . . . .
$1,130,806
100.0% $679,335
100.0%
We classify all of our investments as available-for-sale. Our investments at December 31, 2017 and 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 diversification. At December 31, 2017, approximately 86.5% of our fixed
maturities were U.S. Treasuries, or corporate bonds rated “A” or better, and 13.5% were corporate bonds rated
“BBB” or “BB”.
At December 31, 2017, there were 214 fixed maturity securities in an unrealized loss position for a period of
12 months or longer reflecting unrealized losses of $2,394,000 and no equity securities in an unrealized loss
position for a period of 12 months or longer. We currently have no plans to sell these 214 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 impairment charges at December 31, 2017. Similarly, we did not record impairment charges at
December 31, 2016.
Reinsurance
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
44
UNITED INSURANCE HOLDINGS CORP.
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 Florida Hurricane Catastrophe Fund. The private
agreements provide coverage against severe weather events such as hurricanes, tropical storms and tornadoes.
The cost for this program increased by $122,669,000 to $314,169,000 in 2017 as a result of increasing our
protection by 81.3% and including ACIC under the program.
Effective December 31, 2017, we replaced our 15% quota share agreement that expired on November 30,
2017 and our 5% quota share agreement that was set to renew on December 1, 2017 with a new quota share
reinsurance agreement with a term of 12 months and a cession rate of 20% for all subject business. Effective
January 1, 2018, we renewed the Aggregate Excess of Loss Treaty to provide coverage against accumulated
losses from specified catastrophe events, for a term of 12 months.
Excluding our flood business, for which we cede 100% of the risk of loss, reinsurance costs for 2017 were
38.6% of gross premiums earned compared to 28.7% of gross premiums earned for 2016. The increase in this
ratio was driven primarily by our quota share reinsurance program, which was in effect for eleven months during
2017, but for only one month during 2016.
See Note 9 in our Notes to 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 LAE. We establish reserves for
both reported and unreported unpaid losses that have occurred at or before the balance sheet date for amounts we
estimate we will be required to pay in the future, 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 LAE totaled $482,232,000 and $140,855,000 as of December 31, 2017 and December 31,
2016, respectively. The balance has increased year over year as a result of losses incurred from Hurricanes
Harvey and Irma during the second half of 2017, as well as from the merger with AmCo in the first half of 2017.
Since the process of estimating loss reserves requires significant judgment due to a number of variables,
such as fluctuations in inflation, judicial decisions, legislative changes and changes in claims handling
procedures, our ultimate liability will likely differ from these estimates. We revise our reserve for unpaid losses
as additional information becomes available, and reflect adjustments, if any, in our earnings in the periods in
which we determine the adjustments as necessary.
See Note 10 in our Notes to Unaudited Consolidated Financial Statements for additional information
regarding our losses and LAE.
45
UNITED INSURANCE HOLDINGS CORP.
LIQUIDITY AND CAPITAL RESOURCES
We generate cash through premium collections, reinsurance recoveries, investment income, the sale or
maturity of invested assets, the issuance of debt 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, acquire subsidiaries and pay associated costs, as well as to
repay debts and 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 subsidiaries to pay our general and administrative
expenses. Insurance regulatory authorities heavily regulate our insurance subsidiaries, including restricting any
dividends paid by our insurance subsidiaries and requiring approval of any management fees our insurance
subsidiaries pay to our management subsidiaries for services rendered; however, nothing restricts our non-
insurance company subsidiaries from paying us dividends other than state corporate laws regarding solvency.
Our management subsidiaries pay us dividends primarily using cash from the collection of management fees
from our insurance subsidiaries, pursuant to the management agreements in effect between those entities. In
accordance with state laws, our insurance subsidiaries 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 subsidiaries’ ability to pay dividends or
make distributions if the amount of the intended dividend or distribution would cause their respective surplus as
it regards policyholders to fall below minimum RBC guidelines. See Note 14 in our Notes to Consolidated
Financial Statements and Part II, Item 5 for additional information.
During the years ended December 31, 2017 and 2016 we contributed $30,000,000 and $41,000,000 of
capital to our insurance subsidiaries, respectively. We may make future contributions of capital to our insurance
subsidiaries as circumstances require.
On December 13, 2017, we issued $150,000,000 of senior notes that will mature on December 15, 2027 and
bear interest at a rate equal to 6.250% per annum payable semi-annually on each June 15 and December 15,
commencing June 15, 2018. The senior notes are senior unsecured obligations of the Company. We may redeem
the senior notes at our option, at any time and from time to time in whole or in part, at a redemption price equal
to the greater of (i) 100% of the principal amount of the senior notes to be redeemed and (ii) the sum of the
present values of the remaining scheduled payments of principal and interest thereon from the date of redemption
to the date that is three months prior to maturity. On and after that date, we may redeem the senior notes at par.
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 as merger consideration to the equity holders of RDX Holding, LLC, the former parent company
of AmCo. As a result of the mergers, AmCo merged with and into a wholly-owned subsidiary of the Company.
We incurred $7,000,000 of merger-related expenses. Please refer to Note 4 in the Notes to Consolidated
Financial Statements for additional information on the merger transaction.
On December 5, 2016, we issued $30,000,000 of senior notes to private investors at an interest rate of
5.75% in excess of the three-month LIBOR. The notes were redeemed at par value on December 13, 2017
without a pre-payment penalty. Please refer to Note 11 in the Notes to Consolidated Financial Statements for a
discussion of the additional terms associated with these notes.
On May 26, 2016, we issued a $5,200,000, 15-year term note payable to Branch Banking & Trust (BB&T)
with the intent to use the funds to renovate, furnish and equip our corporate headquarters. The note bears interest
at 1.65% in excess of the one-month LIBOR. The interest rate resets monthly and was 3.00% at December 31,
46
UNITED INSURANCE HOLDINGS CORP.
2017. Please refer to Note 11 in the Notes to Consolidated Financial Statements for a discussion of the additional
terms associated with this note.
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 Interboro, LLC, the former parent
company of IIC, which matured and was paid in October 2017. The purchase price also included the assumption
of an accrued liability of $3,471,000 which was paid during July 2016. We incurred $224,000 of merger-related
expenses. Please refer to Note 11 in the Notes to Consolidated Financial Statements for a discussion of the
additional terms associated with this note.
Financial Covenants
$150M Senior Notes Payable — Our senior notes provide that the Company and its subsidiaries shall not incur
any indebtedness unless no default exists and the Company’s leverage ratio as of the last day of any annual or
quarterly period (the “Balance Sheet Date”) immediately preceding the date on which such additional indebtedness
is incurred would have been no greater than 0.3:1, determined on a pro forma basis as if the additional indebtedness
and all other indebtedness incurred since the immediately preceding Balance Sheet Date had been incurred and the
proceeds therefrom applied as of such day. The Company and its subsidiaries also may not create, assume, incur or
permit to exist any indebtedness for borrowed money that is secured by a lien on the voting stock of any significant
subsidiary without selling the senior notes equally. The Company may not issue, sell, assign, transfer or otherwise
dispose of, directly or indirectly, any of the capital stock of the Company’s significant subsidiaries as of the issue
date of the notes (except to the Company or to one or more of the Company’s other subsidiaries, or for the purpose
of qualifying directors or as may be required by law or regulation), subject to certain exceptions. At December 31,
2017, we were in compliance with the covenants as specified in the senior notes.
Florida State Board of Administration (SBA) Note Payable (SBA Note)—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 (as defined in the SBA Note agreement) which was 2.33% at the end of 2017.
Any other writing ratio deficiencies result in an interest rate penalty of 25 basis points above the stated rate of the
note, which was 2.31% at the end of 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 December 31, 2017, we were in
compliance with the covenants as specified in the SBA Note.
BB&T Term Note Payable (BB&T Note)—The BB&T Note requires that at all times while there has been no
“Non-Recurring Losses”, the Company 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 our debt services. “Cash flow” is defined as
earnings before taxes, plus depreciation and amortization and interest. “Debt service” is defined as the 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 one-year period following a “Non-Recurring Loss”, UPC
Insurance is required to maintain a minimum Cash Flow Coverage ratio of 1.0:1. “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 (as defined in the BB&T Note) test
is failed, and is only available and effective for one (1) annual test period. Thereafter, the Non-Recurring Loss Cash
Flow Coverage Ratio (as defined in the BB&T Note) of 1.2:1 will immediately apply. At the time of the most recent
annual test period, December 31, 2017, we were in compliance with the covenants as specified in the BB&T Note.
47
UNITED INSURANCE HOLDINGS CORP.
In addition, the BB&T Note requires that we establish and maintain with BB&T a noninterest bearing
demand deposit 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 corporate headquarters, which has been pledged to the bank as security
for the loan. At December 31, 2017, we were in compliance with the covenants as specified in the BB&T Note.
Cash Flows for the Year Ended December 31, (in millions)
Investing
Operating
$98.3
$65.7
$14.3
Financing
$118.6
$49.9
$(7.3)
$(7.9)
$(49.8)
$(67.0)
2017
2016
2015
2017
2016
2015
2017
2016
2015
Operating Activities
The principal cash inflows from our operating activities come from premium collections, reinsurance
recoveries, and investment income. The principal cash outflows from our operating activities are the result of
claims and related costs, reinsurance premiums, policy acquisition costs, and salaries and employee benefits. A
primary liquidity concern with respect to these cash flows is the risk of large magnitude catastrophe events.
During the year ended December 31, 2017 and December 31, 2016, some changes in operating assets and
liabilities were significantly impacted by catastrophe losses associated with Hurricanes Harvey and Irma in 2017
and Hurricane Matthew in 2016. Unpaid losses and LAE increased significantly during the period and, as a
result, we expect a considerable increase in cash outflows related to the payment of catastrophe claims in the near
future. However, reinsurance recoverable on paid and unpaid losses also increased significantly during the
period. We expect that a considerable increase in cash inflows related to reinsurance recoveries in the near future
will largely offset the cash outflows from the payment of losses.
Investing Activities
The principal cash inflows from our investing activities come from repayments of principal, proceeds from
maturities and sales of investments. We closely monitor and manage these risks through our comprehensive investment
risk management process. The principal cash outflows relate to purchases of investments and cost of property,
equipment and capitalized software acquired. Additional cash outflows relate to purchases of subsidiaries. The primary
liquidity concerns with respect to these cash flows are the risk of default by debtors and market disruption.
Financing Activities
The principal cash inflows from our financing activities come from issuances of debt and other securities.
The principal cash outflows come from repayments of debt and payments of dividends. The primary liquidity
48
UNITED INSURANCE HOLDINGS CORP.
concern with respect to these cash flows is market disruption in the cost and availability of credit. We believe our
current capital resources, together with cash provided from our operations, are sufficient to meet currently
anticipated working capital requirements.
RECENT ACCOUNTING STANDARDS
Please refer to Note 2(r) in our Notes to Consolidated Financial Statements for a discussion of recent
accounting standards that may affect us.
APPLICATION OF CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with GAAP requires management to adopt accounting
policies and make estimates and assumptions that affect amounts reported in the consolidated financial
statements. The most critical estimates include those used in determining:
•
•
•
•
reserves for unpaid losses,
fair value of investments,
investment portfolio impairments, and
goodwill.
In making these determinations, management makes subjective and complex judgments that frequently
require estimates about matters that are inherently uncertain. Many of these policies, estimates and related
judgments are common in the insurance industry. It is reasonably likely that changes in these estimates could
occur from time to time and result in a material impact on our consolidated financial statements.
In addition, the preparation of our financial statements in accordance with GAAP 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.
Reserves for Unpaid Losses and LAE
Reserves for unpaid losses and LAE represent the most significant accounting estimate inherent in the
preparation of our financial statements. These reserves represent management’s best estimate of the amount we
will ultimately pay for losses and we base the amount upon the application of various actuarial reserve estimation
techniques as well as considering other material facts and circumstances known at the balance sheet date.
As discussed in Note 10 in our Notes to Consolidated Financial Statements, we determine our ultimate
losses by using multiple actuarial methods to determine an actuarial estimate within a relevant range of
indications that we calculate using generally accepted actuarial techniques. Our selection of the actuarial estimate
is influenced by the analysis of our historical loss and claims experience since inception. For each accident year,
we estimate the ultimate incurred losses for both reported and unreported claims. In establishing this estimate, we
reviewed the results of various actuarial methods discussed in Note 10 in our Notes to Consolidated Financial
Statements.
Fair Value of Investments
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date. We are responsible for the
49
UNITED INSURANCE HOLDINGS CORP.
determination of fair value of financial assets and the supporting assumptions and methodologies. We use quoted
prices from active markets and we use an independent third-party valuation service to assist us in determining
fair value. We obtain only one single quote or price for each financial instrument.
As discussed in Note 3 in our Notes to Consolidated Financial Statements, we value our investments at fair
value using quoted prices from active markets, to the extent available. For securities for which quoted prices in
active markets are unavailable, we use observable inputs such as quoted prices in inactive markets, quoted prices
in active markets for similar instruments, benchmark interest rates, broker quotes and other relevant inputs. We
have investments in limited partnerships that require us to use unobservable inputs.
Investment Portfolio Impairments
For investments classified as available for sale, the difference between fair value and cost or amortized cost
for fixed income securities and cost for equity securities is reported as a component of accumulated other
comprehensive income on our Consolidated Balance Sheet and is not reflected in our net income of any period
until reclassified to net income upon the consummation of a transaction with an unrelated third party or when a
write-down is recorded due to an other-than-temporary decline in fair value. We have a portfolio monitoring
process to identify and evaluate each fixed income and equity security whose carrying value may be other-than-
temporarily impaired.
For each fixed income security in an unrealized loss position, we assess whether management with the
appropriate authority, has made the decision to sell or whether it is more likely than not we will be required to
sell the security before recovery of the amortized cost basis for reasons such as liquidity, contractual or
regulatory purposes. If a security meets either of these criteria, the security’s decline in fair value is considered
other-than-temporary and is recorded in earnings.
If we have not made the decision to sell the fixed income security and it is not more likely than not we will
be required to sell the fixed income security before recovery of its amortized cost basis, we evaluate whether we
expect to receive cash flows sufficient to recover the entire amortized cost basis of the security. We use our best
estimate of future cash flows expected to be collected from the fixed income security, discounted at the security’s
original or current effective rate, as appropriate, to calculate a recovery value and determine whether a credit loss
exists. The determination of cash flow estimates is inherently subjective and methodologies may vary depending
on facts and circumstances specific to the security. All reasonably available information relevant to the
collectability of the security, including past events, current conditions, and reasonable and supportable
assumptions and forecasts, are considered when developing the estimate of cash flows expected to be collected.
That information generally includes, but is not limited to, the remaining payment terms of the security,
prepayment speeds, the financial condition and future earnings potential of the issue or issuer, expected defaults,
expected recoveries, the value of underlying collateral, vintage, geographic concentration, available reserves or
escrows, current subordination levels, third party guarantees and other credit enhancements. Other information,
such as industry analyst reports and forecasts, sector credit ratings, financial condition of the bond insurer for
insured fixed income securities, and other market data relevant to the realizability of contractual cash flows, may
also be considered. The estimated fair value of collateral will be used to estimate recovery value if we determine
that the security is dependent on the liquidation of collateral for ultimate settlement. If the estimated recovery
value is less than the amortized cost of the security, a credit loss exists and an other-than-temporary impairment
for the difference between the estimated recovery value and amortized cost is recorded in earnings. The portion
of the unrealized loss related to factors other than credit remains classified in accumulated other comprehensive
income. If we determine that the fixed income security does not have sufficient cash flow or other information to
estimate a recovery value for the security, we may conclude that the entire decline in fair value is deemed to be
credit related and the loss is recorded in earnings.
50
UNITED INSURANCE HOLDINGS CORP.
There are a number of assumptions and estimates inherent in evaluating impairments of equity securities
and determining if they are other-than-temporary, including: (1) our ability and intent to hold the investment for a
period of time sufficient to allow for an anticipated recovery in value; (2) the length of time and extent to which
the fair value has been less than cost; (3) the financial condition, near-term and long-term prospects of the issue
or issuer, including relevant industry specific market conditions and trends, geographic location and implications
of rating agency actions and offering prices; and (4) the specific reasons that a security is in an unrealized loss
position, including overall market conditions which could affect liquidity.
Once assumptions and estimates are made, any number of changes in facts and circumstances could cause us
to subsequently determine that a fixed income or equity security is other-than-temporarily impaired, including:
(1) general economic conditions that are worse than previously forecasted or that have a greater adverse effect on
a particular issuer or industry sector than originally estimated; (2) changes in the facts and circumstances related
to a particular issue or issuer’s ability to meet all of its contractual obligations; and (3) changes in facts and
circumstances that result in changes to management’s intent to sell or result in our assessment that it is more
likely than not we will be required to sell before recovery of the amortized cost basis of a fixed income security
or cause a change in our ability or intent to hold an equity security until it recovers in value. Changes in
assumptions, facts and circumstances could result in additional charges to earnings in future periods to the extent
that losses are realized. The charge to earnings, while potentially significant to net income, would not have a
significant effect on stockholders’ equity, since our securities are designated as available for sale and carried at
fair value and as a result, any related unrealized loss, net of taxes would already be reflected as a component of
accumulated other comprehensive income in stockholders’ equity.
The determination of the amount of other-than-temporary impairment is an inherently subjective process
based on periodic evaluations of the factors described above. Such evaluations and assessments are revised as
conditions change and new information becomes available. We update our evaluations quarterly and reflect
changes in other-than-temporary impairments in results of operations as such evaluations are revised. The use of
different methodologies and assumptions in the determination of the amount of other-than-temporary
impairments may have a material effect on the amounts presented within the consolidated financial statements.
See Note 2(b) in our Notes to Consolidated Financial Statements for further information regarding our
impairment testing.
Measurement of Goodwill and Related Impairment
Goodwill is the excess of cost over the estimated fair value of net assets acquired. Goodwill is not amortized
but is tested for impairment at least annually or more frequently if events or circumstances, such as adverse
changes in the business climate, indicate that there may be justification for conducting an interim test. We test
goodwill for impairment by either performing a qualitative assessment or a two-step quantitative test and
goodwill is impaired when it is determined that carrying value of a reporting unit is in excess of the fair value of
that reporting unit. The valuation methodologies utilized are subject to key judgments and assumptions that are
sensitive to change. Estimates of fair value are inherently uncertain and represent only management’s reasonable
expectation regarding future developments.
As discussed in Note 2(p) in our Notes to Consolidated Financial Statements, the qualitative assessment is
an assessment of historical information and relevant events and circumstances to determine whether it is more
likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. We may
elect not to perform the qualitative assessment and perform a two-step quantitative impairment test.
51
UNITED INSURANCE HOLDINGS CORP.
OFF-BALANCE SHEET ARRANGEMENTS
At December 31, 2017, we had no off-balance-sheet arrangements.
CONTRACTUAL OBLIGATIONS
The following table summarizes our expected payments for contractual obligations at December 31, 2017:
Leases (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service agreements (2)
. . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . .
Employment agreements (4)
. . . . . .
Unpaid loss and loss adjustment expenses (5)
Payment Due by Period
4-5
1-3
Years
Years
Less than
1 Year
$
457
7,483
1,167
1,000
265,640
$
518
7,914
2,336
2,000
154,869
$
238
4,845
2,338
1,333
46,270
More than
5 Years
$
98
2,215
155,523
—
15,453
Total
$
1,311
22,457
161,364
4,333
482,232
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$671,697
$275,747
$167,637
$55,024
$173,289
(1) Represents operating and capital leases for our subsidiaries.
(2) Represents agreements entered into to purchase goods and services in the normal course of business.
(3) Represents repayment of $150,000,000 senior notes payable on December 15, 2027, principal payments totaling $10,000,000 over the
remaining life of the SBA Note debt, and principal payments totaling $4,651,000 over the remaining life of the term note payable to
BB&T. All future payments are shown net of amortization of debt issuance costs. 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 December 31, 2017, UPC, FSIC, IIC, ACIC and Blue Line had unpaid loss and LAE of $482,232,000. 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 18 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.
RELATED PARTY TRANSACTIONS
See Note 16 in our Notes to Consolidated Financial Statements for a discussion of our related party
transactions.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Our investment objective is to preserve capital, maximize after-tax investment income, maintain liquidity
and minimize risk. Our current investment policy limits investment in non-investment grade debt securities, and
limits total investments in preferred stock, common stock and mortgage notes receivables. We also comply with
applicable laws and regulations that further restrict the type, quality and concentration of our investments. In
general, these laws and regulations permit investments, within specified limits and subject to certain
qualifications, in federal, state and municipal obligations, corporate bonds, and preferred and common equity
securities.
Our investment policy was established by the Investment Committee of our Board of Directors and is
reviewed and updated regularly. Pursuant to this investment policy, our entire portfolio is classified as available
for sale and we report any unrealized gains or losses, net of deferred income taxes, as a component of other
comprehensive income within our stockholders’ equity. We do not hold any securities that are classified as held
52
UNITED INSURANCE HOLDINGS CORP.
to maturity and we do not hold any securities for trading or speculation. We do not utilize any swaps, options,
futures or forward contracts to hedge or enhance our investment portfolio.
INTEREST RATE RISK
Fixed-maturity securities 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 maturity securities at December 31, 2017:
Hypothetical Change in Interest Rates
300 basis point increase . . . . . . . . . . . . . . . . . . . . .
200 basis point increase . . . . . . . . . . . . . . . . . . . . .
100 basis point increase . . . . . . . . . . . . . . . . . . . . .
Fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100 basis point decrease . . . . . . . . . . . . . . . . . . . . .
200 basis point decrease . . . . . . . . . . . . . . . . . . . . .
300 basis point decrease . . . . . . . . . . . . . . . . . . . . .
Estimated
Fair Value
$674,862
$704,201
$733,534
$762,855
$792,182
$820,638
$837,840
Change in
Estimated
Fair Value
$(87,993)
$(58,654)
$(29,321)
$ —
$ 29,327
$ 57,783
$ 74,985
Percentage
Increase
(Decrease) in
Estimated
Fair Value
(11.5)%
(7.7)%
(3.8)%
— %
3.8%
7.6%
9.8%
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 considered
indicative of future results. Based on our analysis, a 300-basis point decrease or increase in interest rates from the
December 31, 2017 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-maturity securities. We mitigate this risk by generally investing in investment
grade securities 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 security portfolio by rating at
December 31, 2017:
Comparable Rating
AAA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
AA+, AA, AA- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
A+, A, A- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
BBB+, BBB, BBB- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
BB+, BB, BB- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortized
Cost
$127,722
366,056
167,123
101,237
1,296
% of Total
Amortized
Cost
Fair
Value
% of Total
Fair Value
16.7% $127,980
364,753
47.9
167,093
21.9
101,736
13.3
1,293
0.2
16.8%
47.8
21.9
13.3
0.2
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$763,434
100.0% $762,855
100.0%
53
UNITED INSURANCE HOLDINGS CORP.
In addition, we are exposed to credit risk through our reinsurance program. Reinsurance contracts do not
relieve us from our obligations to policyholders. Failure of reinsurers to honor their obligations could result in
losses to us. We evaluate the financial condition of our reinsurers and monitor concentrations of credit risk to
minimize our exposure to significant losses from reinsurer insolvencies.
EQUITY PRICE RISK
Our equity investment portfolio at December 31, 2017 consisted of common stocks 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 December 31, 2017:
Stocks by Sector
Fair Value
% of Total
Fair Value
Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer, Non-cyclical . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer, Cyclical
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Energy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Communications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$31,924
7,349
6,493
4,708
4,570
3,249
2,017
1,030
1,012
943
50.4%
11.7
10.3
7.4
7.2
5.1
3.2
1.6
1.6
1.5
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$63,295
100.0%
54
UNITED INSURANCE HOLDINGS CORP.
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors
United Insurance Holdings Corp.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of United Insurance Holdings Corp. and its
subsidiaries (the Company) as of December 31, 2017 and 2016, the related consolidated statements of
comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended
December 31, 2017, and the related notes to the consolidated financial statements and schedules (collectively, the
financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial
position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2017, in conformity with accounting principles
generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of
December 31, 2017, based on criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission in 2013. Our report dated March 28,
2018, expressed an opinion that the Company had not maintained effective internal control over financial
reporting as of December 31, 2017, based on criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express
an opinion on the Company’s financial statements based on our audits. We are a public accounting firm
registered with the PCAOB and are required to be independent with respect to the Company in accordance with
U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission
and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the financial statements. Our audits also included evaluating the accounting principles used and
significant estimates made by management, as well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company’s auditor since 2009.
/s/ RSM US LLP
Omaha, Nebraska
March 28, 2018
55
UNITED INSURANCE HOLDINGS CORP.
Consolidated Balance Sheets
December 31,
2017
2016
ASSETS
Investments available for sale, at fair value:
Fixed maturities (amortized cost of $763,434 and $497,616, respectively) . . .
Equity securities (adjusted cost of $50,996 and $24,074, respectively) . . . . . .
Other investments (amortized cost of $8,057 and $5,493, respectively) . . . . . .
Portfolio loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 762,855
63,295
8,381
20,000
$494,516
28,398
5,733
—
Total investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premiums receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reinsurance recoverable on paid and unpaid losses . . . . . . . . . . . . . . . . .
Prepaid reinsurance premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred policy acquisition costs, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
854,531
276,275
5,577
17,291
75,275
395,774
201,904
73,045
103,882
45,271
11,096
528,647
150,688
3,735
17,860
38,883
24,028
132,564
14,254
65,473
12,371
11,183
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,059,921
$999,686
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Unpaid losses and loss adjustment expenses . . . . . . . . . . . . . . . . . . . . . . .
Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reinsurance payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes payable, net
$ 482,232
555,873
149,117
41,786
46,594
85,830
161,364
$140,855
372,223
99,891
21,933
26,124
43,158
54,175
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,522,796
758,359
Commitments and contingencies (Note 12) . . . . . . . . . . . . . . . . . . . . . . . .
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;
42,965,137 and 21,858,697 issued; 42,753,054 and 21,646,614
outstanding, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury shares, at cost; 212,083 shares . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4
387,145
(431)
9,221
141,186
2
99,353
(431)
822
141,581
Total Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
537,125
241,327
Total Liabilities and Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,059,921
$999,686
See accompanying notes to consolidated financial statements.
56
UNITED INSURANCE HOLDINGS CORP.
Consolidated Statements of Comprehensive Income
Year Ended December 31,
2016
2015
2017
REVENUE:
Gross premiums written . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase in gross unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,040,848
(54,825)
$
708,156
(41,327)
$
569,736
(65,521)
Gross premiums earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ceded premiums earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
986,023
(400,533)
666,829
(209,898)
504,215
(168,257)
Net premiums earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
EXPENSES:
Losses and loss adjustment expenses . . . . . . . . . . . . . . . . .
Policy acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative expenses . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
585,490
17,812
67
51,051
654,420
365,535
175,444
27,675
81,762
3,247
653,663
757
153
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision (benefit) for income taxes . . . . . . . . . . . . . . . . . .
910
(9,235)
456,931
10,679
547
18,960
487,117
298,353
117,658
20,524
42,956
723
480,214
6,903
100
7,003
1,305
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
10,145
$
5,698
$
OTHER COMPREHENSIVE INCOME:
Change in net unrealized gain (loss) on investments . . . . .
Reclassification adjustment for net realized investment
10,647
gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(67)
Income tax benefit (expense) related to items of other
comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . .
(2,181)
(629)
(547)
378
335,958
9,212
827
11,572
357,569
183,108
87,401
15,316
29,852
326
316,003
41,566
294
41,860
14,502
27,358
(3,070)
(827)
1,506
Total comprehensive income . . . . . . . . . . . . . . . . . . .
$
18,544
$
4,900
$
24,967
Weighted average shares outstanding
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
37,152,768
21,417,486
21,218,233
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
37,375,340
21,614,443
21,452,540
Earnings per share
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends declared per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
0.27
0.27
0.24
$
$
$
0.27
0.26
0.23
$
$
$
1.29
1.28
0.20
See accompanying notes to consolidated financial statements.
57
UNITED INSURANCE HOLDINGS CORP.
Consolidated Statements of Stockholders’ Equity
Common Stock
Shares
Amount
Additional
Paid-in
Capital
December 31, 2014 . . . . . . . . 20,904,414 $ 2
$ 82,380
Net income . . . . . . . . . .
Other comprehensive
income . . . . . . . . . . . .
Restricted stock
— —
— —
—
—
award . . . . . . . . . . . . .
116,077 —
1,789
Issuance of common
stock, net of costs . . .
503,857 —
12,994
Cash dividends on
common stock . . . . . .
— —
December 31, 2015 . . . . . . . . 21,524,348
2
—
97,163
—
— —
— —
—
Net income . . . . . . . . . .
Other comprehensive
income . . . . . . . . . . . .
Restricted stock
award . . . . . . . . . . . . .
89,323 —
1,677
Issuance of common
stock, net of costs . . .
32,943 —
Cash dividends on
common stock . . . . . .
— —
513
—
—
—
—
—
(431)
—
—
—
—
—
Accumulated
Other
Comprehensive
Income (loss)
Retained
Earnings
Total
Stockholders’
Equity
$ 4,011
—
$117,801
27,358
$203,763
27,358
Treasury
Stock
$(431)
—
(2,391)
—
—
—
1,620
—
(798)
—
—
—
822
—
—
—
—
(2,391)
1,789
12,994
(4,302)
(4,302)
140,857
5,698
239,211
5,698
—
—
—
(798)
1,677
513
(4,974)
(4,974)
141,581
10,145
241,327
10,145
December 31, 2016 . . . . . . . . 21,646,614
2
Net income . . . . . . . . . .
Other comprehensive
income . . . . . . . . . . . .
Reclassification due to
adoption of ASU
2018-02 . . . . . . . . . . .
Restricted stock
— —
— —
— —
99,353
—
(431)
—
—
—
award . . . . . . . . . . . . .
150,085 —
2,326
Issuance of common
stock . . . . . . . . . . . . . 20,956,355
2
285,466
Cash dividends on
common stock . . . . . .
— —
—
—
—
—
—
—
6,850
—
6,850
1,549
(1,549)
—
—
—
—
—
—
2,326
285,468
(8,991)
(8,991)
December 31, 2017 . . . . . . . . 42,753,054 $ 4
$387,145
$(431)
$ 9,221
$141,186
$537,125
See accompanying notes to consolidated financial statements.
58
UNITED INSURANCE HOLDINGS CORP.
Consolidated Statements of Cash Flows
OPERATING ACTIVITIES
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bond amortization and accretion . . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized (gains) losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for uncollectible premiums . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in operating assets and liabilities: . . . . . . . . . . . . . . . . . .
Accrued investment income . . . . . . . . . . . . . . . . . . . . . . . . . .
Premiums receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reinsurance recoverable on paid and unpaid losses . . . . . . .
Prepaid reinsurance premiums . . . . . . . . . . . . . . . . . . . . . . . .
Deferred policy acquisition costs, net
. . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unpaid losses and loss adjustment expenses . . . . . . . . . . . . .
Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reinsurance payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in payments outstanding . . . . . . . . . . . . . . . . . . . . . .
Change in accounts payable and accrued expenses . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . .
INVESTING ACTIVITIES
Proceeds from sales and maturities of investments available for
sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of investments available for sale . . . . . . . . . . . . . . . . . . . . . .
Purchase of portfolio loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of subsidiary, net of cash acquired . . . . . . . . . . . . . . . . . . . . .
Cost of property, equipment and capitalized software acquired . . . . . .
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FINANCING ACTIVITIES
Tax withholding payment related to net settlement of equity
awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayments of borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments of debt issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding checks in excess of funds on deposit . . . . . . . . . . . . . . . . .
Net cash provided by (used in) financing activities . . . . . . . . . . . . . . . . . . . .
Increase in cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended December 31,
2015
2016
2017
$ 10,145
$
5,698
$ 27,358
37,532
5,073
(67)
494
(8,584)
2,613
(531)
(5,447)
(351,516)
(46,796)
(38,409)
4,051
280,848
54,825
26,820
(1,386)
15,905
28,739
14,309
11,713
3,677
(547)
64
2,210
1,947
(172)
5,409
(18,459)
(53,165)
(18,741)
(11,006)
39,096
41,327
36,391
—
8,005
12,300
65,747
3,328
1,997
(827)
272
2,305
1,974
(676)
(8,577)
(893)
(15,572)
(14,807)
(3,897)
19,966
65,521
18,290
(218)
(1,837)
4,612
98,319
128,329
(205,720)
(20,000)
95,284
—
(5,237)
(7,344)
187,522
(201,234)
—
—
(32,896)
(3,149)
(49,757)
199,575
(270,141)
—
14,467
—
(10,916)
(67,015)
(287)
(40,075)
150,000
(3,264)
(8,991)
21,239
118,622
125,587
150,688
$ 276,275
(270)
(1,379)
35,200
(596)
(4,974)
21,931
49,912
65,902
84,786
$ 150,688
(185)
(3,422)
—
—
(4,302)
—
(7,909)
23,395
61,391
$ 84,786
Supplemental Cash Flows Information
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-cash transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of common stock in connection with acquisition . . . . . . . . . .
$
$
3,407
3,896
$ 285,468
$
$
$
285
7,194
$
296
$ 13,223
— $
—
See accompanying notes to consolidated financial statements.
59
UNITED INSURANCE HOLDINGS CORP.
Notes to Consolidated Financial Statements
December 31, 2017
1) ORGANIZATION, CONSOLIDATION AND PRESENTATION
(a) Business
United Insurance Holdings Corp. 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 three insurance subsidiaries are Family Security Insurance Company (FSIC), acquired via merger on
February 3, 2015, Interboro Insurance Company (IIC), acquired via merger on April 29, 2016, and American
Coastal Insurance Company (ACIC), acquired via merger on April 3, 2017. See Note 4 in our Notes to
Consolidated Financial Statements for additional information regarding these acquisitions.
Our other subsidiaries include United Insurance Management L.C. (UIM), the managing general agent that
manages substantially all aspects of UPC’s business; Skyway Claims Services, LLC (our claims adjusting
subsidiary) that provides services to our insurance subsidiaries; AmCo Holding Company (AmCo) and Family
Security Holdings (FSH) (holding company subsidiaries) that consolidate their respective insurance companies;
BlueLine Cayman Holdings (a reinsurance subsidiary) that reinsurers a portfolio of E&S policies; UPC Re (a
reinsurance subsidiary) that provides a portion of the reinsurance protection purchased by our insurance
subsidiaries; and Skyway Reinsurance Services (a reinsurance brokerage subsidiary) that provides reinsurance
brokerage services for our insurance companies.
Our primary product is homeowners’ 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 consolidated 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,
investments and goodwill. Except for the captions on our Consolidated Balance Sheets and 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 consolidated financial statements, eliminating intercompany
balances and transactions during consolidation.
We reclassified certain amounts in the 2016 and 2015 financial statements to conform to the 2016
presentation. These reclassifications had no impact on our results of operations or stockholders’ equity, as
previously reported.
60
UNITED INSURANCE HOLDINGS CORP.
Notes to Consolidated Financial Statements
December 31, 2017
2)
SIGNIFICANT ACCOUNTING POLICIES
(a) Cash and cash equivalents
Our cash and cash equivalents include demand deposits with financial institutions and short-term, highly
liquid instruments with original maturities of three months or less when purchased.
(b)
Investments
We currently classify all of our investments in fixed maturities, equity securities, other investments and
short-term investments as available-for-sale, and report them at fair value. Subsequent to our acquisition of
available-for-sale securities, we record changes in value through the date of disposition as unrealized holding
gains and losses, net of tax effects, and include them as a component of comprehensive income. We include
realized gains and losses, which we calculate using the specific-identification method for determining the cost of
securities sold, in net income. We amortize any premium or discount on fixed maturities over the remaining
maturity period of the related securities using the effective interest method, and we report the amortization in net
investment income. We recognize dividends and interest income when earned.
Quarterly, we perform an assessment of our investments to determine if any are other-than-temporarily
impaired. An investment is impaired when the fair value of the investment declines to an amount less than the
cost or amortized cost of that investment. As part of our assessment process, we determine whether the
impairment is temporary or other-than-temporary. We base our assessment on both quantitative criteria and
qualitative information, considering a number of factors including, but not limited to: how long the security has
been impaired; the amount of the impairment; whether, in the case of equity securities, we intend to hold, and
have the ability to hold, the security for a period sufficient for us to recover our cost basis, or whether, in the case
of debt securities, we intend to sell the security or it is more likely than not that we will have to sell the security
before we recover the amortized cost; the financial condition and near-term prospects of the issuer; whether the
issuer is current on contractually-obligated interest and principal payments; key corporate events pertaining to the
issuer and whether the market decline was affected by macroeconomic conditions.
If we determine that an equity security has incurred an other-than-temporary impairment, we permanently
reduce the cost of the security to fair value and recognize an impairment charge in net income. If a debt security
is impaired and we either intend to sell the security or it is more likely than not that we will have to sell the
security before we are able to recover the amortized cost, then we record the full amount of the impairment in net
income. If we determine that an impairment of a debt security is other-than-temporary and we neither intend to
sell the security nor it is more likely than not that we will have to sell the security before we are able to recover
its cost or amortized cost, then we separate the impairment into (a) the amount of impairment related to credit
loss and (b) the amount of impairment related to all other factors. We record the amount of the impairment
related to the credit loss as an impairment charge in net income, and we record the amount of the impairment
related to all other factors in accumulated other comprehensive income.
A large portion of our investment portfolio consists of fixed maturities, which may be adversely affected by
changes in interest rates as a result of governmental monetary policies, domestic and international economic and
political conditions and other factors beyond our control. A rise in interest rates would decrease the net
unrealized holding gains of our investment portfolio, offset by our ability to earn higher rates of return on funds
reinvested. Conversely, a decline in interest rates would increase the net unrealized holding gains of our
investment portfolio, offset by lower rates of return on funds reinvested.
61
UNITED INSURANCE HOLDINGS CORP.
Notes to Consolidated Financial Statements
December 31, 2017
(c) Fair Value
See Note 3 in our Notes to Consolidated Financial Statements for a discussion regarding the fair value
measurement of our investments at December 31, 2017.
(d) Premiums
We recognize premiums as revenue, net of ceded reinsurance amounts, on a daily pro rata basis over the
contract period of the related policies that are in force. For any portion of premiums not earned at the end of the
reporting period, we record an unearned premium liability.
Premiums receivable represents amounts due from our policyholders for billed premiums and related policy
fees. We perform a policy-level evaluation to determine the extent to which the balance of premium receivable
exceeds the balance of unearned premium. We then age any resulting exposure based on the last date the policy
was billed to the policyholder, and we establish an allowance for credit losses for any amounts outstanding for
more than 90 days. When we receive payments on amounts previously charged off, we credit bad debt expense in
the period we receive the payment. The balances of our allowance for uncollectible premiums totaled $384,000
and $144,000 at December 31, 2017 and 2016, respectively.
When we receive premium payments from policyholders prior to the effective date of the related policy, we
record an advance premiums liability. On the policy effective date, we reduce the advance premium liability and
record the premiums as described above.
(e) Policy Acquisition Costs
We incur policy acquisition costs that vary with, and are directly related to, the production of new business.
We capitalize policy acquisition costs to the extent recoverable, then we amortize those costs over the contract
period of the related policy.
At each reporting date, we determine whether we have a premium deficiency. A premium deficiency would
result if the sum of our expected losses, deferred policy acquisition costs, and policy maintenance costs (such as
costs to store records and costs incurred to collect premiums and pay commissions) exceeded our related
unearned premiums plus investment income. Should we determine that a premium deficiency exists, we would
write off the unrecoverable portion of deferred policy acquisition costs and record a liability to the extent the
deficiency exceeded the deferred policy acquisition costs. We did not have a premium deficiency at
December 31, 2017 and December 31, 2016.
(f) Debt Issuance Costs
We record our debt issuance costs associated with a recognized debt liability as a direct deduction from the
carrying amount of the corresponding debt liability. These costs are then amortized over the life of the liability
using the effective interest method.
(g) Long-lived Assets
i)
Property and Equipment
We record our property and equipment at cost less accumulated depreciation and amortization. We use the
straight-line method of calculating depreciation over the estimated useful lives of the assets. We periodically
62
UNITED INSURANCE HOLDINGS CORP.
Notes to Consolidated Financial Statements
December 31, 2017
review estimated useful lives and, where appropriate, we make changes prospectively. We charge maintenance
and repair costs to expense as incurred.
ii) Capitalized Software
We capitalize certain direct development costs associated with internal-use software. We expect to amortize
the capitalized software costs related to our data warehouse and policy administration system over its expected
seven-year useful life.
See Note 7 in our Notes to Consolidated Financial Statements for a discussion of our property, equipment
and capitalized software that were held during 2017 and 2016.
iii)
Impairment of Long-lived Assets
We annually review our long-lived assets, including intangible assets, to determine if their carrying amounts
are recoverable. If the non-discounted future cash flows expected to result from the use and eventual disposition
of the assets are less than their carrying amounts, we reduce their carrying amounts to fair value and recognize an
impairment loss.
(h) Unpaid Losses and Loss Adjustment Expenses
Our reserves for unpaid losses represent the estimated ultimate cost of settling all reported claims plus all
claims we incurred related to insured events that have occurred as of the reporting date, but that policyholders
have not yet reported to us.
We estimate our reserves for unpaid losses using individual case-basis estimates for reported claims and
actuarial estimates for incurred but not reported (IBNR) claims, and we continually review and adjust our
estimated losses as necessary based on our historical experience and as we obtain new information. If our unpaid
loss reserves prove to be deficient or redundant, we increase or decrease the liability in the period in which we
identify the difference, thereby impacting net income. Though our estimate of the ultimate cost of settling all
reported and unreported claims may change at any point in the future, a reasonable possibility exists that our
estimate may vary significantly in the near term from the estimated amounts included in our consolidated
financial statements.
On our Consolidated Balance Sheets, we report our reserves for unpaid losses gross of the amounts related
to unpaid losses recoverable from reinsurers. On our Consolidated Statements of Comprehensive Income, we
report losses net of amounts ceded to reinsurers. We do not discount our loss reserves for financial statement
purposes.
(i) Managing General Agent Fees and Policy Fees
Our policy fees consist of the managing general agent (MGA) fee and a pay-plan fee. We defer MGA fees
as unearned revenue and recognize revenue on a pro rata basis over the term of the underlying policies. We
record pay-plan fees, which are charged to all policyholders that pay premium in more than one installment, as
income when collected. We report all policy-related fees as other revenue on our Consolidated Statements of
Comprehensive Income.
63
UNITED INSURANCE HOLDINGS CORP.
Notes to Consolidated Financial Statements
December 31, 2017
(j) Reinsurance
We follow industry practice of reinsuring a portion of our risks. Reinsurance involves transferring, or
“ceding”, all or a portion of the risk exposure on policies we write to another insurer, known as a reinsurer. To
the extent that our reinsurers are unable to meet the obligations they assume under our reinsurance agreements,
we remain liable for the entire insured loss.
Our reinsurance agreements are short-term, prospective contracts. We record an asset, prepaid reinsurance
premiums, and a liability, reinsurance payable, for the entire contract amount upon commencement of our new
reinsurance agreements. We amortize our prepaid reinsurance premiums over the 12-month contract period.
We also earn ceding commission on our quota share reinsurance contract, which is presented as other
income with any excess unearned ceding commission recognized as unearned revenue in other liabilities. Ceding
commission income is amortized over the contract period consistent with our deferred policy acquisition costs.
We record amounts recoverable from our reinsurers on paid losses plus an estimate of amounts recoverable
on unpaid losses. The estimate of amounts recoverable on unpaid losses is a function of our liability for unpaid
losses associated with the reinsured policies; therefore, the amount changes in conjunction with any changes to
our estimate of unpaid losses. Though our estimate of amounts recoverable from reinsurers on unpaid losses may
change at any point in the future because of its relation to our reserves for unpaid losses, a reasonable possibility
exists that our estimate may change significantly in the near term from the amounts included in our consolidated
financial statements.
We estimate uncollectible amounts receivable from reinsurers based on an assessment of factors including
the creditworthiness of the reinsurers and the adequacy of collateral obtained, where applicable. We recorded no
bad debt expense related to reinsurance during the years ended December 31, 2017, 2016 or 2015.
(k) Assessments
We record guaranty fund and other insurance-related assessments imposed upon us as an expense in the
period the regulatory agency imposes the assessment. To recover Florida Insurance Guaranty Association (FIGA)
assessments, we calculate and begin collecting a policy surcharge that will allow us to collect the entire
assessment over a 12-month period, based on our estimate of the number of policies we expect to write. We then
submit an information only filing, pursuant to Florida Statute 631.57(3)(h), to the insurance regulatory authority
requesting formal approval of the policy FIGA surcharge. The process may be repeated in successive 12-month
periods until we collect the entire assessment. We record the recoveries as revenue in the period that we collect
the cash. While current regulations allow us to recover from policyholders the amount of assessments imposed
upon us, our payment of the assessments and our recoveries may not offset each other in the same fiscal period in
our consolidated financial statements.
Where permitted by law or regulatory authority, we collect assessments imposed upon policyholders as a
policy surcharge and we record the amounts collected as a liability until we remit the amounts to the regulatory
agency that imposed the assessment. During 2017, we did not receive any significant assessments from
regulatory authorities in the states in which our insurance subsidiaries operate.
(l)
Income Taxes
We recognize deferred tax assets and liabilities for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.
64
UNITED INSURANCE HOLDINGS CORP.
Notes to Consolidated Financial Statements
December 31, 2017
We measure deferred tax assets and liabilities using enacted tax rates expected to apply to taxable income in the
years in which we expect to recover or settle those temporary differences. Should a change in tax rates occur, we
recognize the effect on deferred tax assets and liabilities in operations in the period that includes the enactment
date. For example, we reflected the impact of the Tax Cuts and Jobs Act (2017 Tax Act) in the fourth quarter of
2017, the period when the legislation was enacted. Refer to Note 13 for additional information. Realization of our
deferred income tax assets depends upon our generation of sufficient future taxable income.
We recognize the financial statement benefit of a tax position only after determining that the relevant tax
authority would more likely than not sustain the position following an audit. For tax positions meeting the more
likely than not threshold, the amount recognized in the consolidated financial statements is the largest benefit that
has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant taxing authority.
We record any income tax penalties and income-tax-related interest as income tax expense in the period
incurred. We did not incur any material tax penalties or income-tax-related interest during the years ended
December 31, 2017, 2016 or 2015.
(m) Advertising Costs
We expense all advertising costs when we incur those costs. For the years ended December 31, 2017, 2016
and 2015, we incurred advertising costs of $1,013,000, $907,000, and $2,630,000, respectively.
(n) Earnings Per Share
We report both basic earnings per share and diluted earnings per share. To calculate basic earnings per
share, we divide net income attributable to common stockholders by the weighted-average number of shares of
common stock outstanding during the period. We calculate diluted earnings per share by dividing net income
attributable to common stockholders by the weighted-average number of shares of common stock, common stock
equivalents, and restricted shares outstanding during the period.
(o) Concentrations of Risk
Our current operations subject us to the following concentrations of risk:
•
•
•
•
a concentration of revenue because we write primarily homeowners policies;
a geographic concentration resulting from the fact that, though we now operate in 12 states, we still
wrote approximately 52% of our gross written premium in Florida
a group concentration of credit risk with regard to our reinsurance recoverable, since all of our
reinsurers engage in similar activities and have similar economic characteristics that could cause their
ability to repay us to be similarly affected by changes in economic or other conditions; and
a concentration of credit risk with regard to our cash, because we choose to deposit all our cash at six
financial institutions.
We mitigate our geographic and group concentrations of risk by entering into reinsurance contracts with
financially-stable reinsurers, and by securing irrevocable letters of credit from reinsurers when necessary.
With regard to our cash balances held at financial institutions, we had $314,147,000 and $159,288,000 in
excess of Federal Deposit Insurance Corporation (FDIC) insurance limits at December 31, 2017 and 2016,
65
UNITED INSURANCE HOLDINGS CORP.
Notes to Consolidated Financial Statements
December 31, 2017
respectively. The $154,859,000 increase in excess of FDIC insurance limits was the result of holding more cash
and at the end of 2017 than we did in 2016.
(p) Goodwill
Goodwill is the excess of cost over the estimated fair value of net assets acquired. We attribute all goodwill
associated with our acquisitions to one reporting unit.
Goodwill is not amortized but is tested for impairment at least annually or more frequently if events or
circumstances, such as adverse changes in the business climate, indicate that there may be justification for
conducting an interim test. The goodwill impairment process requires a comparison of the estimated fair value of
a reporting unit to its carrying value. We test goodwill for impairment by either performing a qualitative
assessment or a two-step quantitative test. The qualitative assessment is an assessment of historical information
and relevant events and circumstances to determine whether it is more likely than not that the fair value of the
reporting unit is less than its carrying amount, including goodwill. We may elect not to perform the qualitative
assessment for our reporting unit and perform a two-step quantitative impairment test. In performing the two-step
quantitative impairment test, we may use a market multiple valuation approach and a discounted cash flow
valuation approach.
The market multiple valuation approach utilizes market multiples of companies with similar businesses and
the projected operating earnings of the reporting unit. The discounted cash flow valuation approach requires
judgments about revenues, operating earnings projections, capital market assumptions and discount rates. The
key inputs, judgments and assumptions necessary in determining estimated fair value of the reporting units
include projected operating earnings, current book value, the level of economic capital required to support the
mix of business, long-term growth rates, comparative market multiples, control premium, the account value of
in-force business, projections of new and renewal business, as well as margins on such business, the level of
interest rates, credit spreads, equity market levels, and the discount rate that we believe is appropriate for the
respective reporting unit.
When testing goodwill for impairment, we also consider our market capitalization in relation to the
aggregate estimated fair value of our reporting unit. We apply significant judgment when determining the
estimated fair value of our reporting unit and when assessing the relationship of market capitalization to the
aggregate estimated fair value of our reporting unit.
The valuation methodologies utilized are subject to key judgments and assumptions that are sensitive to
change. Estimates of fair value are inherently uncertain and represent only management’s reasonable expectation
regarding future developments. These estimates and the judgments and assumptions upon which the estimates are
based will, in all likelihood, differ in some respects from actual future results. Declines in the estimated fair value
of our reporting unit could result in goodwill impairments in future periods which could materially adversely
affect our results of operations or financial position.
For the 2017 annual goodwill impairment test, we utilized the qualitative assessment and determined it was
not more likely than not that the fair value of the reporting units tested using the qualitative assessment was less
than their carrying amount and, therefore no further testing was needed for the reporting units. We determined
that the fair values of the reporting units were in excess of the carrying value and, therefore goodwill was not
impaired.
66
UNITED INSURANCE HOLDINGS CORP.
Notes to Consolidated Financial Statements
December 31, 2017
(q)
Intangible Assets
Identifiable intangible assets that are amortized generally represent the cost of client relationships, trade
names and agency agreements acquired. In valuing these assets, we make assumptions regarding useful lives and
projected growth rates, and significant judgment is required. We periodically review identifiable intangibles for
impairment as events or changes in circumstances indicate that the carrying amount of such assets may not be
recoverable. If the carrying amounts of the assets exceed their respective fair values, additional impairment tests
are performed to measure the amount of the impairment loss, if any.
Non-amortizing intangible assets generally represent the cost of insurance licenses acquired. Non-
amortizing intangible assets are tested for impairment in the fourth quarter of each fiscal year by comparing the
fair value of the licenses acquired to their carrying values. We established fair value for purposes of impairment
testing using the income approach. If the carrying value of a license acquired exceeds its fair value, an
impairment loss is recognized equal to that excess. For 2017, we determined that the fair values of the intangible
assets were not impaired.
(r) Portfolio Loans
Loan receivables that management has the intent and ability to hold for the foreseeable future or until
maturity or pay-off are reported at the principal balance outstanding, net of the allowance for loan losses.
(s) Accounting Pronouncements
Recently Adopted Policies
In February 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update
(ASU) No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,
Topic 220 (ASU 2018-02), which amends ASC Topic 220 and ASC Topic 740 by addressing the stranded
amounts of AOCI which may result from the enactment of the 2017 Tax Act. Though AOCI is presented on a
net-of-tax basis, ASC Topic 740 requires that the effects of new tax laws on items in AOCI be recognized
without a corresponding adjustment to AOCI and instead recorded to income tax expense. ASU 2018-02 permits
stranded amounts of AOCI specifically resulting from the 2017 Tax Act to be removed from AOCI and
reclassified to retained earnings, if elected. ASU 2018-02 is effective for fiscal years beginning after
December 15, 2018, including interim periods therein, and early adoption is permitted. We adopted the guidance
as of year end and elected to recognize a $1,549,000 reclassification from retained earnings to AOCI in the
consolidated financial statements for the year ended December 31, 2017, related to a revaluation of deferred
income tax assets and liabilities for items in AOCI at the 2017 Tax Act federal tax rate which changed from 35%
to 21%.
In March 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation (Topic 718):
Improvements to Employee Share-Based Payment Accounting (ASU 2016-09). This update was intended to
simplify several aspects of the accounting for share-based payment transactions, including the income tax
consequences, classification of awards as either equity or liabilities, and classification on the statement of cash
flows. ASU 2016-09 became effective for annual periods beginning after December 15, 2016. The new guidance
did not impact the way in which we account for share-based payment transactions, and therefore the adoption as
of January 1, 2017 had no impact on our results of operations or financial position.
67
UNITED INSURANCE HOLDINGS CORP.
Notes to Consolidated Financial Statements
December 31, 2017
Pending Policies
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 issued 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 did not 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 issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350):
Simplifying the Test for Goodwill Impairment (ASU 2017-04). This update simplifies the manner in which an
entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. ASU
2017-07 is effective for annual periods beginning after December 15, 2019, including interim periods within
those annual periods, with early adoption permitted for certain requirements. We do not intend to early adopt and
are assessing the impact of adopting this new accounting standard on our consolidated financial statements and
related disclosures.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09).
Insurance contracts are excluded from the scope of this guidance. Under the standard, guidance is provided on
revenue recognition for entities that enter into contracts with customers to transfer goods or services or enter into
contracts for the transfer of nonfinancial assets. The transaction price is attributed to underlying performance
obligations in the contract and revenue is recognized as the entity satisfies the performance obligation and
transfers control of the good or service to the customer. ASU 2014-09 is effective for us beginning in the first
quarter of 2018, with early adoption permitted. We do not intend to early adopt and note that the standard is not
applicable to our insurance contracts or other revenue streams. The adoption of this new accounting standard
does not have a material impact on our consolidated financial statements and related disclosures.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (ASU 2016-02). This update is
intended to replace existing lease guidance by requiring a lessee to recognize substantially all leases (whether
operating or finance leases) on the balance sheet as a right-of-use asset and an associated least liability. Short-
term leases of 12 months or less are excluded from this amendment. ASU 2016-02 is effective for fiscal years
beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption
permitted. We do not intend to early adopt and are assessing the impact of adopting this new accounting standard
on our consolidated financial statements and related disclosures.
In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets
and Financial Liabilities (ASU 2016-01). This update substantially revises standards for the recognition,
measurement and presentation of financial instruments. This standard revises an entity’s accounting related to
(1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair
value changes for financial liabilities measured at fair value. It also amends certain disclosure requirements
associated with the fair value of financial instruments. ASU 2016-01 is effective for annual periods beginning
after December 15, 2017, including interim periods within those annual periods, with early adoption permitted
for certain requirements. We are assessing the impact of adopting this new accounting standard on our
consolidated financial statements and related disclosures.
68
UNITED INSURANCE HOLDINGS CORP.
Notes to Consolidated Financial Statements
December 31, 2017
3)
INVESTMENTS
The following table details fixed maturity and equity securities available for sale, by major investment
category, at December 31, 2017 and 2016:
Cost or
Adjusted/
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
December 31, 2017
U.S. government and agency securities . . . . . . . . . . . .
Foreign governments . . . . . . . . . . . . . . . . . . . . . . . . . .
States, municipalities and political subdivisions . . . . .
Public utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate securities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset-backed securities . . . . . . . . . . . . . . . . . . . . . . . . .
Redeemable preferred stocks . . . . . . . . . . . . . . . . . . . .
$237,809
2,022
200,706
20,215
287,025
14,902
755
$
275
14
1,929
127
1,746
23
11
Total fixed maturities . . . . . . . . . . . . . . . . . . . . . .
$763,434
$ 4,125
Mutual funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Public utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other common stocks . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonredeemable preferred stocks . . . . . . . . . . . . . . . . .
29,079
1,343
18,856
1,718
2,845
359
9,093
53
$2,193
—
1,123
85
1,209
20
74
$4,704
—
—
47
4
$235,891
2,036
201,512
20,257
287,562
14,905
692
$762,855
31,924
1,702
27,902
1,767
Total equity securities . . . . . . . . . . . . . . . . . . . . . .
$ 50,996
$12,350
$
51
$ 63,295
December 31, 2016
U.S. government and agency securities . . . . . . . . . . . .
Foreign government
. . . . . . . . . . . . . . . . . . . . . . . . . . .
States, municipalities and political subdivisions . . . . .
Public utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate securities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Redeemable preferred stocks . . . . . . . . . . . . . . . . . . . .
$151,656
2,031
170,636
7,687
164,424
1,182
$
189
30
1,027
116
1,238
5
Total fixed maturities . . . . . . . . . . . . . . . . . . . . . .
$497,616
$ 2,605
Public utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other common stocks . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonredeemable preferred stocks . . . . . . . . . . . . . . . . .
1,343
19,815
2,916
164
4,552
10
$1,893
—
2,551
73
1,126
62
$5,705
—
319
83
$149,952
2,061
169,112
7,730
164,536
1,125
$494,516
1,507
24,048
2,843
Total equity securities . . . . . . . . . . . . . . . . . . . . . .
$ 24,074
$ 4,726
$ 402
$ 28,398
69
UNITED INSURANCE HOLDINGS CORP.
Notes to Consolidated Financial Statements
December 31, 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 tables detail our
realized gains (losses) by major investment category for the years ended December 31, 2017, 2016 and 2015:
2017
2016
2015
Gains
(Losses)
Fair Value
at Sale
Gains
(Losses)
Fair Value
at Sale
Gains
(Losses)
Fair Value
at Sale
Fixed maturities . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . .
$
268
847
$35,248
2,209
$ 1,811
64
$ 56,484
13,253
$
727
1,895
$ 87,141
7,790
Total realized gains . . . . . . . . . . .
1,115
Fixed maturities . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . .
(890)
(158)
Total realized losses . . . . . . . . . .
(1,048)
37,457
53,194
1,749
54,943
1,875
(1,136)
(192)
(1,328)
69,737
24,464
37,790
62,254
2,622
(595)
(1,200)
(1,795)
94,931
38,485
4,172
42,657
Net realized investment gains
(losses)
. . . . . . . . . . . . . . . . . . . . . .
$
67
$92,400
$
547
$131,991
$
827
$137,588
The table below summarizes our fixed maturities at year end by contractual maturity periods. Actual results
may differ as issuers may have the right to call or prepay obligations, with or without penalties, prior to the
contractual maturity of those obligations.
Due in one year or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due after one year through five years . . . . . . . . . . . . . . . . . . .
Due after five years through ten years . . . . . . . . . . . . . . . . . .
Due after ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset and mortgage-backed securities . . . . . . . . . . . . . . . . . .
December 31, 2017
Cost or
Amortized
Cost
$ 66,969
392,256
260,758
28,549
14,902
Percent of
Total
Fair
Value
Percent of
Total
8.8% $ 66,739
390,907
51.3%
261,919
34.2%
28,385
3.7%
14,905
2.0%
8.7%
51.3%
34.3%
3.7%
2.0%
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$763,434
100.0% $762,855
100.0%
The following table summarizes our net investment income by major investment category:
Year Ended December 31,
2015
2016
2017
Fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$14,942
1,277
626
937
30
$ 9,170
996
141
352
20
$8,092
859
25
222
14
Investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$17,812
(686)
$10,679
(587)
$9,212
(267)
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$17,126
$10,092
$8,945
70
UNITED INSURANCE HOLDINGS CORP.
Notes to Consolidated Financial Statements
December 31, 2017
Investment 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 not more likely than not that we
will be required to sell the fixed income security before recovery of its amortized cost basis, we evaluate whether
we expect the security to receive cash flows sufficient to recover the entire cost or amortized cost basis of the
security. We calculate the estimated recovery value by discounting the best estimate of future cash flows at the
security’s original or current effective rate, as appropriate, and compare this to the cost or amortized cost of the
security. If we do not expect to receive cash flows sufficient to recover the entire cost or amortized cost basis of
the fixed income security, the credit loss component of the impairment is recorded in earnings, with the
remaining amount of the unrealized loss related to other factors recognized in other comprehensive income.
For equity securities, we consider various factors, including whether we have the intent and ability to hold
the equity security for a period of time sufficient to recover its cost basis. If we lack the intent and ability to hold
to recovery, or if we believe the recovery period is extended, the equity security’s decline in fair value is
considered other-than-temporary and is recorded in earnings.
Our portfolio monitoring process includes a quarterly review of all securities to identify instances where the
fair value of a security compared to its cost or amortized cost (for fixed income securities) or cost (for equity
securities) is below established thresholds. The process also includes the monitoring of other impairment
indicators such as ratings, ratings downgrades and payment defaults. The securities identified, in addition to other
securities for which we may have a concern, are evaluated for potential other-than-temporary impairment using
all reasonably available information relevant to the collectability or recovery of the security. Inherent in our
evaluation of other-than-temporary impairment for these fixed income and equity securities are assumptions and
estimates about the financial condition and future earnings potential of the issue or issuer. Some of the factors
that may be considered in evaluating whether a decline in fair value is other-than-temporary are: (1) the financial
condition, near-term and long-term prospects of the issue or issuer, including relevant industry specific market
conditions and trends, geographic location and implications of rating agency actions and offering prices; (2) the
specific reasons that a security is in an unrealized loss position, including overall market conditions which could
affect liquidity; and (3) the length of time and extent to which the fair value has been less than amortized cost or
cost.
71
UNITED INSURANCE HOLDINGS CORP.
Notes to Consolidated Financial Statements
December 31, 2017
The following table presents an aging of our unrealized investment losses by investment class:
Less Than Twelve Months
Gross
Unrealized
Losses
Number of
Securities*
Fair
Value
Twelve Months or More
Gross
Unrealized
Losses
Number of
Securities*
Fair
Value
December 31, 2017
U.S. government and agency
securities . . . . . . . . . . . . . . . . . . .
States, municipalities and political
subdivisions . . . . . . . . . . . . . . . .
Public utilities . . . . . . . . . . . . . . . . .
Corporate securities . . . . . . . . . . . .
Asset backed securities . . . . . . . . . .
Redeemable preferred stocks . . . . .
Total fixed maturities . . . . . . .
Mutual Funds . . . . . . . . . . . . . . . . .
Other common stocks . . . . . . . . . . .
Nonredeemable preferred stocks . .
Total equity securities . . . . . . .
Total . . . . . . . . . . . . . . . .
December 31, 2016
U.S. government and agency
securities . . . . . . . . . . . . . . . . . . .
States, municipalities and political
subdivisions . . . . . . . . . . . . . . . .
Public utilities . . . . . . . . . . . . . . . . .
Corporate securities . . . . . . . . . . . .
Redeemable preferred stocks . . . . .
Total fixed maturities . . . . . . .
Other common stocks . . . . . . . . . . .
Nonredeemable preferred stocks . .
Total equity securities . . . . . . .
Other investments . . . . . . . . . .
129
106
16
263
18
—
532
1
5
4
10
542
186
201
8
215
7
617
16
12
28
1
$ 641
$103,328
734
44
871
20
—
2,310
—
47
4
51
91,245
7,052
134,755
11,682
—
348,062
131
748
87
966
123
31
5
52
—
3
214
—
—
—
—
$1,552
$ 74,190
389
41
338
—
74
19,718
1,016
16,476
—
303
2,394
111,703
—
—
—
—
—
—
—
—
$2,361
$349,028
214
$2,394
$111,703
$1,893
$111,216
2,551
73
1,100
62
5,679
140
52
192
136,360
2,222
88,605
764
339,167
2,450
1,830
4,280
—
—
—
—
1
1
17
7
24
$ — $ —
—
—
26
—
26
179
31
210
—
—
1,021
—
1,021
1,732
369
2,101
$
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 or limited partnership investments that reflected an unrealized loss
position were other-than-temporarily impaired. The issuers of debt securities held by us 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
72
UNITED INSURANCE HOLDINGS CORP.
Notes to Consolidated Financial Statements
December 31, 2017
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. The limited partnership was in an unrealized loss position at
December 31, 2016, but was continuing to make interest payments on a timely basis and we did not intend to sell
at that time. The investment was liquidated in 2017 and we recovered our amortized cost.
During the years ended December 31, 2017, 2016 and 2015, we recorded no other-than-temporary
impairment charges.
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 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 December 31, 2017 and 2016.
Changes in interest rates subsequent to December 31, 2017 may affect the fair value of our investments.
The fair value for our fixed-maturities is initially calculated by a third-party pricing service. Valuation
service providers typically obtain data about market transactions and other key valuation model inputs from
multiple sources, and through the use of proprietary models, produce valuation information in the form of a
single fair value for individual fixed income and other securities for which a fair value has been requested. The
inputs used by the valuation service providers include, but are not limited to, market prices from recently
completed transactions and transactions of comparable securities, interest rate yield curves, credit spreads,
liquidity spreads, currency rates, and other information, as applicable. Credit and liquidity spreads are typically
implied from completed transactions and transactions of comparable securities. Valuation service providers also
use proprietary discounted cash flow models that are widely accepted in the financial services industry and
73
UNITED INSURANCE HOLDINGS CORP.
Notes to Consolidated Financial Statements
December 31, 2017
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.
Any change in the estimated fair value of our securities would impact the amount of unrealized gain or loss
we have recorded, which could change the amount we have recorded for our investments and other
comprehensive income on our Consolidated Balance Sheets.
The carrying amounts for the following financial instrument categories approximate their fair values at
December 31, 2017 and 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 our $150,000,000 senior notes payable approximate fair value as the interest
rates are variable.
74
UNITED INSURANCE HOLDINGS CORP.
Notes to Consolidated Financial Statements
December 31, 2017
The following table presents the fair value of our financial instruments measured on a recurring basis by
level at December 31, 2017 and December 31, 2016:
Total
Level 1
Level 2
Level 3
December 31, 2017
U.S. government and agency securities . . . . . . . . . . . . . . . . . . . . . . . .
Foreign governments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
States, municipalities and political subdivisions . . . . . . . . . . . . . . . . .
Public utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Redeemable preferred stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$235,891
2,036
201,512
20,257
287,562
14,905
692
$ — $235,891
2,036
201,512
20,257
287,562
14,905
—
—
—
—
—
—
692
$ —
—
—
—
—
—
—
Total fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
762,855
692
762,163
Mutual Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Public utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other common stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonredeemable preferred stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
31,924
1,702
27,902
1,767
31,924
1,702
27,902
1,767
Total equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
63,295
63,295
—
—
—
—
—
—
—
—
—
—
—
Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,381
300
7,447
634
Total recurring investments . . . . . . . . . . . . . . . . . . . . . . . . .
$834,531
$64,287
$769,610
$ 634
December 31, 2016
U.S. government and agency securities . . . . . . . . . . . . . . . . . . . . . . . .
Foreign governments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
States, municipalities and political subdivisions . . . . . . . . . . . . . . . . .
Public utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Redeemable preferred stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$149,952
2,061
169,112
7,730
164,536
1,125
$ — $149,952
2,061
169,112
7,730
164,536
—
—
—
—
—
1,125
$ —
—
—
—
—
—
Total fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
494,516
1,125
493,391
Public utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other common stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonredeemable preferred stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,507
24,048
2,843
1,507
24,048
2,843
Total equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
28,398
28,398
—
—
—
—
—
—
—
—
—
Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,733
300
3,735
1,698
Total recurring investments . . . . . . . . . . . . . . . . . . . . . . . . .
$528,647
$29,823
$497,126
$1,698
Certain financial assets and financial liabilities are measured at fair value on a non-recurring basis; this is,
the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in
certain circumstances (for example, when there is evidence of impairment). The following table presents the fair
value of our financial instruments measured on a non-recurring basis by level at December 31, 2017:
December 31, 2017
Portfolio loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$20,000
$—
$20,000
$—
Total
Level 1 Level 2 Level 3
75
UNITED INSURANCE HOLDINGS CORP.
Notes to Consolidated Financial Statements
December 31, 2017
The table below presents the rollforward of our Level 3 investments held at fair value during the year ended
December 31, 2017:
December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfers in . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfer out . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Partnership income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Return of capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gains in accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other
Investments
$1,698
—
(990)
42
(200)
84
$ 634
We are responsible for the determination of fair value and the supporting assumptions and methodologies.
We gain assurance on the overall reasonableness and consistent application of valuation methodologies and
inputs and compliance with accounting standards through the execution of various processes and controls
designed to provide assurance that our assets and liabilities are appropriately valued. For fair values received
from third parties, our processes are designed to provide assurance that the valuation methodologies and inputs
are appropriate and consistently applied, the assumptions are reasonable and consistent with the objective of
determining fair value, and the fair values are accurately recorded.
At the end of each quarter, we determine whether we need to transfer the fair values of any securities
between levels of the fair value hierarchy and, if so, we report the transfer as of the end of the quarter. During
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.
Other investments
We acquired investments in limited partnerships, recorded in the other investments line of our 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 $8,081,000. We have fully
funded two investments and are still obligated to fund an additional $1,365,000 for the remaining three
investments.
76
UNITED INSURANCE HOLDINGS CORP.
Notes to Consolidated Financial Statements
December 31, 2017
The information presented in the table below is as of December 31, 2017.
Limited partnership investments . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certificates of deposit
Book
Value
$7,757
300
Total other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$8,057
Unrealized
Gain
Unrealized
Loss
$324
—
$324
$—
—
$—
Fair
Value
$8,081
300
$8,381
The following table summarizes the quantitative impact that the significant unobservable inputs used to
estimate the fair value of our Level 3 investments has on the estimated fair value of our investments shown in the
tables above. Those limited partnership investments being carried at cost are excluded from the table below. Our
investment in DCR Mortgage Partners VI, L.P. (DCR VI) was valued using a duration of 60 months for both
periods presented below. Our investment in RCH Mortgage Fund VI Investors, L.P. was valued using a duration
of 60 months when held at December 31, 2016.
Fair
Value
Impact
Valuation
Technique
Unobservable Input
Rate
Adjustment
$ (37) Discounted cash flow Discount rate based on D&B paydex scale
2.35%
$ (56) Discounted cash flow Discount rate based on D&B paydex scale
$(341) Discounted cash flow Discount rate based on D&B paydex scale
2.35%
7.35%
December 31, 2017
DCR VI . . . . . . . . .
December 31, 2016
DCR VI . . . . . . . . .
RCH . . . . . . . . . . . .
Portfolio Loans
At December 31, 2017, we held commercial portfolio loans of $20,000,000. We believe that making sound
loans is a necessary and desirable means of employing funds available for investment. Recognizing our
obligation to our stockholders, management is expected to seek to develop and make sound, profitable loans that
resources permit and that opportunity affords. These are short-term collateralized loans (less than one year),
which we expect to be repaid primarily from cash flows of the borrowers.
We have not calculated an allowance for a loan loss at December 31, 2017. The allowance would represent
an estimate of the amount of probable losses believed to be inherent in our portfolio. Due to the short-term nature
of the loans, the projects being substantially complete and the fact that all loans are current with respect to their
scheduled payments, we determined that an allowance for loan losses was not necessary, and therefore the related
disclosures on the allowance for loan losses and past due loans have been omitted. We expect our loans to be
repaid in full upon completion of the projects in March 2018.
4) ACQUISITIONS
We account for business acquisitions in accordance with the acquisition method of accounting, which
requires, among other things, that most assets acquired, liabilities assumed, and earn-out consideration be
recognized at their fair values as of the acquisition date. Measurement period adjustments to provisional purchase
price allocations are recognized in the period in which they are determined as if the accounting had been
competed on the acquisition date.
77
UNITED INSURANCE HOLDINGS CORP.
Notes to Consolidated Financial Statements
December 31, 2017
AmCo Holding Company
On April 3, 2017, the Company completed its acquisition of 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 as
merger consideration to the equity holders of RDX Holding, LLC, the former parent company of AmCo. As a
result of the mergers, AmCo merged with and into a wholly-owned subsidiary of the Company. The acquisition
of AmCo supported the Company’s growth strategy and further strengthened the Company’s overall position in
the commercial property and casualty insurance market. Goodwill recorded in the transaction, which reflected the
synergies expected from the acquisition and enhanced reinsurance opportunities, is not tax deductible.
For the year ended December 31, 2017, AmCo recorded $134,386,000 of revenues and $12,579,000 of pre-
tax net income. These amounts are included in our results of operations for the year ended December 31, 2017.
The operations of AmCo are included in our 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 final purchase price allocation was as follows:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premium and agents’ receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reinsurance recoverable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid reinsurance premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Insurance contract asset
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unpaid losses and loss adjustment expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reinsurance payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 95,284
222,920
31,439
20,230
22,544
30,286
33,812
59,475
4,591
(60,529)
(128,824)
(22,406)
(17,093)
(6,261)
Total purchase price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 285,468
The unaudited pro forma financial information below has been prepared as if the AmCo merger had taken
place on January 1, 2016. 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, 2016, and the unaudited pro
forma information does not purport to be indicative of future financial operating results.
Year Ended December 31,
As
Reported
2017
Pro Forma
Adjustments
Pro
Forma
As
Reported
2016
Pro Forma
Adjustments
Pro
Forma
Revenues . . . . . . . . . . . . . . . . . .
$654,420
$38,096
$692,516
$487,117
$175,032
$662,149
Net income (loss) . . . . . . . . . . . .
$ 10,145
$ 6,712
$ 16,857
Diluted earnings per share . . . . .
$
0.27
$ —
$
0.39
$
$
5,698
$ 31,960
$ 37,658
0.26
$ —
$
0.88
78
UNITED INSURANCE HOLDINGS CORP.
Notes to Consolidated Financial Statements
December 31, 2017
As of April 3, 2017, the fair value of AmCo’s premium and agents’ receivables and reinsurance
recoverables were $31,439,000 and $20,230,000, respectively. The cash flows not expected to be collected of
these acquired receivables were not material.
In connection with the acquisition, we paid an investment advisory fee of $7,000,000. This amount was
included in general and administrative expenses on the Company’s Consolidated Statements of Operations during
the year ended December 31, 2017.
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 that matured during October 2017 and an accrued liability for
$3,471,000 paid during July 2016. The acquisition of IIC supported 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.
For the year ended December 31, 2016, IIC recorded $28,573,000 of revenues and $14,202,000 of pre-tax
net income. These amounts are included in our results of operations for the year ended December 31, 2016.
The operations of IIC are included in our Consolidated Statements of Comprehensive Income effective
April 29, 2016. The final purchase price allocation is as follows:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premium and agents’ receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reinsurance receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Insurance contract asset
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unpaid losses and loss adjustment expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Advanced premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 15,554
66,527
3,186
1,042
5,877
8,334
10,157
3,980
575
(24,967)
(26,243)
(1,472)
(2,079)
Total purchase price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 60,471
The unaudited pro forma financial information for 2016 has been prepared as if the IIC acquisition had
taken place on January 1, 2016. The unaudited pro forma information is not necessarily indicative of the results
79
UNITED INSURANCE HOLDINGS CORP.
Notes to Consolidated Financial Statements
December 31, 2017
that we would have achieved had the transaction taken place on January 1, 2016, and the unaudited pro forma
information does not purport to be indicative of future financial operating results.
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$487,117
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
5,698
0.26
(1) Adjustments are for the period from January 1, 2016 through April 29, 2016.
For the Year Ended December 31, 2016
Pro Forma
As
Reported
Adjustments (1) Pro Forma
$18,963
$ 8,187
$
0.38
$506,080
$ 13,885
$
0.64
As of April 26, 2016, the fair value of IIC’s premium and agents’ receivables and reinsurance receivables
were $3,186,000 and $1,042,000, respectively. The cash flows not expected to be collected of these acquired
receivables were not material.
In connection with the acquisition, we paid an investment advisory fee of $224,000. This amount was
included in general and administrative expenses on the Company’s Consolidated Statements of Operations during
the year ended December 31, 2016.
80
UNITED INSURANCE HOLDINGS CORP.
Notes to Consolidated Financial Statements
December 31, 2017
5) EARNINGS PER SHARE
Basic earnings per share (EPS) is based on the weighted average number of shares of common stock
outstanding for the period, excluding any dilutive common stock 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 years ended December 31, 2017, 2016 and 2015:
Year Ended December 31,
2016
2015
2017
Numerator:
Net income (loss) attributable to common stockholders . . . . . . .
$
10,145
$
5,698
$
27,358
Denominator:
Weighted-average shares outstanding . . . . . . . . . . . . . . . . . . . . .
Effect of dilutive securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
37,152,768
222,572
21,417,486
196,957
21,218,233
234,307
Weighted-average diluted shares . . . . . . . . . . . . . . . . . . . . . . . .
37,375,340
21,614,443
21,452,540
Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
0.27
0.27
$
$
0.27
0.26
$
$
1.29
1.28
See Note 20 for additional information on the stock grants related to dilutive securities.
6) DEFERRED POLICY ACQUISITION COSTS
We anticipate that our deferred policy acquisition costs will be fully recoverable in the near term. The table
below depicts the activity with regard to deferred policy acquisition costs:
Balance at January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Policy acquisition costs deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 65,473
210,324
(171,915)
$ 46,732
134,588
(115,847)
Balance at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 103,882
$ 65,473
2017
2016
81
UNITED INSURANCE HOLDINGS CORP.
Notes to Consolidated Financial Statements
December 31, 2017
7) PROPERTY AND EQUIPMENT, NET
Property and equipment, net consists of the following:
Year Ended
December 31,
2016
2017
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Building and building improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Computer hardware and software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Office furniture and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2,114
5,695
18,985
3,413
$ 2,114
5,502
14,699
2,652
Total, at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
30,207
(12,916)
24,967
(7,107)
Property and equipment, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 17,291
$17,860
Depreciation and amortization expense under property and equipment was $5,806,000, $2,424,000 and
$1,803,000, respectively, for the years ended December 31, 2017, 2016 and 2015. During the year ended
December 31, 2017, we incurred non-cash capitalized software impairment charges as a result of our decision to
discontinue one of our software development projects.
8) GOODWILL AND INTANGIBLE ASSETS
Goodwill
The changes in the carrying amount of goodwill for the years ended December 31, 2017 and 2016 are as
follows:
December 31,
2016
2017
Balance at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustment to finalize purchase price allocation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$14,254
59,475
(684)
—
$ 3,413
10,841
—
—
Balance at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$73,045
$14,254
We completed our most recent goodwill impairment testing during the fourth quarter of 2017 and
determined that there was no impairment in the value of our assets as of December 31, 2017.
No impairment loss in the value of goodwill was recognized during the years ended December 31, 2017 and
2016. Additionally, there was no accumulated impairment related to goodwill at December 31, 2017 or 2016.
82
UNITED INSURANCE HOLDINGS CORP.
Notes to Consolidated Financial Statements
December 31, 2017
Intangible Assets
The following is a summary of intangible assets excluding goodwill recorded as other assets at
December 31, 2017 and December 31, 2016:
Intangible assets subject to amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Indefinite-lived intangible assets (1)
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2017
December 31,
2016
$41,715
3,556
$45,271
$ 9,064
3,307
$12,371
(1)
Indefinite-lived intangible assets are comprised of state insurance and agent licenses, as well as perpetual software licenses.
Intangible assets subject to amortization consisted of the following:
Weighted-average
remaining
amortization
period (in years)
Gross carrying
amount
Accumulated
amortization
Net carrying
amount
2017
Amortizing intangible assets
Value of Business Acquired . . . . . .
Agency agreements acquired . . . . .
Trade names acquired . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . .
2016
Amortizing intangible assets
Value of Business Acquired . . . . . .
Agency agreements acquired . . . . .
Trade names acquired . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . .
0.3
8.0
6.0
0.3
3.8
2.1
$42,788
34,661
6,381
$83,830
$ 8,975
10,284
720
$19,979
$(34,335)
(6,669)
(1,111)
$(42,115)
$ (7,867)
(2,784)
(264)
$(10,915)
$ 8,453
27,992
5,270
$41,715
$ 1,108
7,500
456
$ 9,064
No impairment in the value of amortizing or non-amortizing intangible assets was recognized during the
years ended December 31, 2017 and 2016.
Amortization expense of our intangible assets was $31,200,000, $10,910,000 and $3,090,000 for the years
ended December 31, 2017, 2016 and 2015, respectively. The large increase in amortization expense in 2017 was
primarily due to the amortization of intangible assets and Value of Business Acquired acquired as part of the
AmCo acquisition.
83
UNITED INSURANCE HOLDINGS CORP.
Notes to Consolidated Financial Statements
December 31, 2017
Estimated amortization expense to be recognized by the Company over the next five years is as follows:
Year ending December 31,
Estimated Amortization Expense
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$13,920
5,355
4,267
3,555
3,246
9) REINSURANCE
Our reinsurance program is designed, utilizing our risk management methodology, to address our exposure
to catastrophes. According to the Insurance Service Office (ISO), a catastrophe loss is defined as a single
unpredictable incident or series of closely related incidents that result in $25,000,000 or more in U.S. industry-
wide direct insured losses to property and that affect a significant number of policyholders and insurers (ISO
catastrophes). In addition to ISO catastrophes, we also include as catastrophes those events (non-ISO
catastrophes), which may include losses, that we believe are, or will be, material to our operations, either in
amount or in number of claims made.
Our program provides reinsurance protection for catastrophes including hurricanes, tropical storms, and
tornadoes. These reinsurance agreements are part of our catastrophe management strategy, which is intended to
provide our stockholders an acceptable return on the risks assumed in our property business, and to reduce
variability of earnings, while providing protection to our policyholders.
Effective June 1, 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
Insurance operates except for the FHCF agreement, which only provides coverage in Florida against storms that
the National Hurricane Center designates as hurricanes.
Highlights of the coverage embedded in these contracts include:
• More frequency and severity protection than in any prior year, with an overall program exhaustion
point of $2,747,500,000;
•
•
Sufficient coverage for a single 1-in-400-year event (AIR Touchstone v3.1 Standard Event Set);
Sufficient coverage for a 1-in-100-year event followed by a 1-in-50-year event in the same season;
• Group retention of $55,000,000 for a first event and $30,000,000 for a second and subsequent events
including a $5,000,000 retention related to our captive reinsurer BlueLine Cayman Holding, which
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 AmCo 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, with carriers providing uncollateralized limit have minimum A.M. Best financial
strength ratings of A-;
84
UNITED INSURANCE HOLDINGS CORP.
Notes to Consolidated Financial Statements
December 31, 2017
• 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.
UPC Insurance renewed our quota share reinsurance agreement (the “quota share agreement”) and our
aggregate excess of loss reinsurance agreement (the “aggregate excess of loss agreement”) 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, IIC, and FSIC. These new reinsurance programs are designed to work in conjunction with our
catastrophe excess of loss reinsurance program to provide the Company broad risk transfer protection and to
lessen financial volatility.
Effective December 31, 2017, UPC Insurance, through our wholly-owned insurance subsidiary UPC,
replaced our 15% quota share agreement that expired on November 30, 2017 and our 5% quota share agreement
that was set to renew on December 1, 2017 with the quota share agreement with private reinsurers. The quota
share agreement has a term of 12 months and a cession rate of 20% for all subject business. The quota share
agreement provides coverage for all catastrophe perils and attritional losses. For all catastrophe perils, the quota
share agreement provides ground-up protection effectively reducing our retention for catastrophe losses. Quota
share reinsurers’ participation in paying attritional losses is subject to an attritional loss ratio cap.
Effective January 1, 2018, UPC Insurance, through its wholly-owned insurance subsidiaries UPC, ACIC,
IIC and FSIC, renewed the aggregate excess of loss agreement with a private reinsurer. The treaty provides
coverage for all catastrophe perils other than hurricanes, tropical storms, tropical depressions and earthquakes.
Under this agreement, we will retain, in the aggregate, 100% of those losses up to 4.75% of the covered
companies’ gross earned premium. The reinsurer will then be liable for all losses in excess of 4.75% of the
covered companies’ gross earned premium in the aggregate not to exceed $20,000,000 over the term of the
treaty. Recoveries under this treaty will be calculated quarterly based on the cumulative gross earned premium.
85
UNITED INSURANCE HOLDINGS CORP.
Notes to Consolidated Financial Statements
December 31, 2017
We amortize our prepaid reinsurance premiums over the annual agreement period, and we record that
amortization in ceded premiums earned on our 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:
Year Ended December 31,
2015
2016
2017
Excess-of-loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equipment & identity theft . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Novation of Auto Policies (1)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Flood . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ceded premiums written . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase in ceded unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . .
$(419,668) $(235,236) $(163,106)
(6,169)
—
(14,533)
(9,576)
—
(18,085)
(8,313)
(2,396)
(16,395)
$(447,329) $(262,340) $(183,808)
15,551
52,442
46,796
Ceded premiums earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(400,533) $(209,898) $(168,257)
(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 IIC transaction.
86
UNITED INSURANCE HOLDINGS CORP.
Notes to Consolidated Financial Statements
December 31, 2017
Current year catastrophe losses by the event magnitude are shown in the following table.
Number
of
Events
Incurred Loss
and
Loss adjustment
expense (LAE) (1)
Combined
Ratio
Impact
December 31, 2017
Current period catastrophe losses incurred
Named and numbered storms . . . . . . . . . . . . . . . . . . . . . .
All other catastrophe loss events . . . . . . . . . . . . . . . . . . . .
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2016
Current period catastrophe losses incurred
Named and numbered storms . . . . . . . . . . . . . . . . . . . . . .
All other catastrophe loss events . . . . . . . . . . . . . . . . . . . .
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2015
Current period catastrophe losses incurred
Named and numbered storms . . . . . . . . . . . . . . . . . . . . . .
All other catastrophe loss events . . . . . . . . . . . . . . . . . . . .
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6
16
22
4
15
19
2
12
14
$ 84,226
32,198
$116,424
$ 33,817
22,025
$ 55,842
$
1,167
27,398
$ 28,565
14.4%
5.5%
19.9%
7.4%
4.8%
12.2%
0.3%
8.2%
8.5%
(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 and number of events includes the current year development on storms during the year
in which it occurred.
87
UNITED INSURANCE HOLDINGS CORP.
Notes to Consolidated Financial Statements
December 31, 2017
Reinsurance recoverable at the balance sheet dates consists of the following:
December 31,
2016
2017
Reinsurance recoverable on unpaid losses and LAE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reinsurance recoverable on paid losses and LAE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reinsurance recoverable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$305,673
90,101
$395,774
$18,724
5,304
$24,028
During the years ended December 31, 2017 and December 31, 2016, we realized recoveries under our reinsurance
agreements totaling $186,104,000 and $18,412,000, respectively. These recoveries were primarily related to losses
from Hurricane Irma and Hurricane Harvey in 2017 and to Hurricane Matthew, Hurricane Hermine, Winter Storm
Olympia, Tropical Storm Colin, tornadoes, thunderstorms, hail storms, and flooding in 2016.
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 $1,255,000, $1,056,000,
and $959,000 for the years ended December 31, 2017, 2016, and 2015, respectively.
The following table depicts written premiums, earned premiums and losses, showing the effects that our
reinsurance transactions have on these components of our Consolidated Statements of Comprehensive Income:
Year ended December 31,
2016
2015
2017
Premium written:
Direct
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ceded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net premium written . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in unearned premiums:
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Direct
Assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ceded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net decrease (increase)
Premiums earned:
Direct
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ceded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net premiums earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 989,525
51,323
(447,329)
$ 593,519
$ 708,252
(96)
(262,340)
$ 445,816
$ 548,916
20,820
(183,808)
$ 385,928
$ (49,386) $ (57,759) $ (65,300)
(221)
15,551
$ (49,970)
16,432
(5,439)
46,796
52,442
(8,029) $ 11,115
$
$ 940,139
45,884
(400,533)
$ 585,490
$ 650,493
16,336
(209,898)
$ 456,931
$ 483,616
20,599
(168,257)
$ 335,958
Losses and LAE incurred:
Direct
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ceded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net losses and LAE incurred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 863,928
60,836
(559,229)
$ 365,535
$ 335,542
3,747
(40,936)
$ 298,353
$ 188,270
7,861
(13,023)
$ 183,108
88
UNITED INSURANCE HOLDINGS CORP.
Notes to Consolidated Financial Statements
December 31, 2017
Ceded losses incurred increased by $518,293,000 during the year ended December 31, 2017, compared to
the year ended December 31, 2016, primarily because we incurred more ceded losses in 2017 than in 2016 as a
result of Hurricanes Harvey and Irma which occurred during 2017. A portion of the losses we incurred in 2017,
2016 and 2015 exceeded our retained loss thresholds; therefore, we received reinsurance recoveries for losses
that we incurred on these storms and expect to receive additional recoveries during 2018.
The following table highlights the effects that our reinsurance transactions have on unpaid losses and loss
adjustment expenses and unearned premiums in our Consolidated Balance Sheets:
December 31,
2016
2017
2015
Unpaid losses and LAE:
Direct . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 441,355
40,877
$ 138,345
2,510
$ 72,373
4,419
Gross unpaid losses and LAE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ceded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
482,232
(305,673)
140,855
(18,724)
76,792
(2,114)
Net unpaid losses and LAE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 176,559
$ 122,131
$ 74,678
Unearned premiums:
Direct . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 528,419
27,454
$ 371,149
1,074
$287,148
17,506
Gross unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ceded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
555,873
(201,904)
372,223
(132,564)
304,654
(79,400)
Net unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 353,969
$ 239,659
$225,254
10) LIABILITY FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSE (LAE)
We generally use the term loss(es) to collectively refer to both loss and LAE. We establish reserves for both
reported and unreported unpaid losses that have occurred at or before the balance sheet date for amounts we
estimate we will be required to pay in the future. Our policy is to establish these loss reserves after considering
all information known to us at each reporting period. At any given point in time, our loss reserve represents our
best estimate of the ultimate settlement and administration cost of our insured claims incurred and unpaid. Since
the process of estimating loss reserves requires significant judgment due to a number of variables, such as
fluctuations in inflation, judicial decisions, legislative changes and changes in claims handling procedures, our
ultimate liability will likely differ from these estimates. We revise our reserve for unpaid losses as additional
information becomes available, and reflect adjustments, if any, in our earnings in the periods in which we
determine the adjustments are necessary.
General Discussion of the Loss Reserving Process
Reserves for unpaid losses fall into two categories: case reserves and reserves for claims incurred but not reported.
• Case reserves — When a claim is exported, we establish an automatic minimum case reserve for that
claim type that represents our initial estimate of the losses that will ultimately be paid on the reported
claim. Our initial estimate for each claim is based upon averages of loss payments for our prior closed
claims made for that claim type. Then, our claims personnel perform an evaluation of the type of claim
89
UNITED INSURANCE HOLDINGS CORP.
Notes to Consolidated Financial Statements
December 31, 2017
involved, the circumstances surrounding each claim and the policy provisions relating to the loss and
adjust the reserve as necessary. As claims mature, we increase or decrease the reserve estimates as
deemed necessary by our claims department based upon additional information we receive regarding
the loss, the results of on-site reviews and any other information we gather while reviewing the claims.
• Reserves for losses incurred but not reported (IBNR reserves) — Our IBNR reserves include true
IBNR reserves plus “bulk” reserves. Bulk reserves represent additional amounts that cannot be
allocated to particular claims, but which are necessary to estimate ultimate losses on reported and
unreported claims. We estimate our IBNR reserves by projecting the ultimate losses using the methods
discussed below and then deducting actual loss payments and case reserves from the projected ultimate
losses. We review and adjust our IBNR reserves on a quarterly basis based on information available to
us at the balance sheet date.
When we establish our reserves, we analyze various factors such as our historical loss experience and that of
the insurance industry, claims frequency and severity, our business mix, our claims processing procedures,
legislative enactments, judicial decisions and legal developments in imposition of damages, and general economic
conditions, including inflation. A change in any of these factors from the assumptions implicit in our estimates will
cause our ultimate loss experience to be better or worse than indicated by our reserves, and the difference could be
material. Due to the interaction of the aforementioned factors, there is no precise method for evaluating the impact
of any one specific factor in isolation, and an element of judgment is ultimately required. Due to the uncertain
nature of any projection of the future, the ultimate amount we will pay for losses will be different from the reserves
we record. However, in our judgment, we employ techniques and assumptions that are appropriate, and the resulting
reserve estimates are reasonable, given the information available at the balance sheet date.
We determine our ultimate losses by using multiple actuarial methods to determine an actuarial estimate
within a relevant range of indications that we calculate using generally accepted actuarial techniques. Our
selection of the actuarial estimate is influenced by the analysis of our historical loss and claim experience. For
each accident year, we estimate the ultimate incurred losses for both reported and unreported claims. In
establishing this estimate, we review the results of various actuarial methods discussed below.
Estimation of the Reserves for Unpaid Losses and Allocated LAE
We calculate our estimate of ultimate losses by using the following actuarial methods. We separately
calculate the methods using paid loss data and incurred loss data. In the versions of these methods based on
incurred loss data, the incurred losses are defined as paid losses plus case reserves. For this discussion of our loss
reserving process, the word “segment” refers to a subgrouping of our claims data, such as by geographic area
and/or by particular line of business; it does not refer to operating segments.
•
Incurred Development Method — The incurred development method is based upon the assumption
that the relative change in a given year’s incurred loss estimates from one evaluation point to the next
is similar to the relative change in prior years’ reported loss estimates at similar evaluation points. In
utilizing this method, actual annual historical incurred loss data is evaluated. Successive years can be
arranged to form a triangle of data. Loss development factors (LDFs) are calculated to measure the
change in cumulative incurred costs from one evaluation point to the next. These historical LDFs and
comparable industry benchmark factors form the basis for selecting the LDFs used in projecting the
current valuation of losses to an ultimate basis. This method’s implicit assumption is that the relative
adequacy of case reserves has been consistent over time, and that there have been no material changes
in the rate at which claims have been reported. The paid development method is similar to the incurred
development method. While the paid development method has the disadvantage of not recognizing the
90
UNITED INSURANCE HOLDINGS CORP.
Notes to Consolidated Financial Statements
December 31, 2017
information by current case reserves, it has the advantage of avoiding potential distortions in the data
due to changes in case reserving methodology. The paid development method’s implicit assumption is
that the rate of payment of claims has been relatively consistent over time.
• Expected Loss Method — In the expected loss method, ultimate loss projections are based upon some
prior measure of the anticipated losses, usually relative to some measure of exposure (e.g., earned
house years). An expected loss cost is applied to the measure of exposure to determine estimated
ultimate losses for each year. Actual losses are not considered in this calculation. This method has the
advantage of stability over time, because the ultimate loss estimates do not change unless the exposures
or loss costs change. However, this advantage of stability is offset by a lack of responsiveness, since
this method does not consider actual loss experience as it emerges. This method is based on the
assumption that the loss cost per unit of exposure is a good indication of ultimate losses. It can be
entirely dependent on pricing assumptions (e.g., historical experience adjusted for loss trend).
• Bornhuetter-Ferguson Method — The incurred Bornhuetter-Ferguson (B-F) method is essentially a
blend of two other methods. The first method is the loss development method whereby actual incurred
losses are multiplied by an expected LDF. For slow reporting coverages, the loss development method
can lead to erratic and unreliable projections because a relatively small swing in early reporting can
result in a large swing in ultimate projections. The second method is the expected loss method whereby
the IBNR estimate equals the difference between a predetermined estimate of expected losses and
actual incurred losses. The incurred B-F method combines these two methods by setting ultimate losses
equal to actual incurred losses plus expected unreported losses. As an experience year matures and
expected unreported losses become smaller, the initial expected loss assumption becomes gradually
less important. Two parameters are needed to apply the B-F method: the initial expected loss cost and
the expected reporting pattern. This method is often used for long-tail lines and in situations where the
incurred loss experience is relatively immature or lacks sufficient credibility for the application of other
methods. The paid B-F method is analogous to the incurred B-F method using paid losses and
development patterns in place of incurred losses and patterns.
• Paid-to-Paid Development Method — In addition to the aforementioned methods, we also rely upon the
paid-to-paid development method to project ultimate unallocated loss adjustment expense (ULAE). Ratios
of paid ULAE to paid loss and allocated loss adjustment expense (ALAE) are compiled by calendar year and
a paid-to-paid ratio selection is made. The selected ratio is applied to the estimated IBNR amounts and one
half of this ratio is applied to case reserves. This method is derived from rule of thumb that half of ULAE is
incurred when a claim is opened and the other half is incurred over the remaining life of the claim.
Reliance and Selection of Methods
The various methods we use have strengths and weaknesses that depend upon the circumstances of the
segment and the age of the claims experience we analyze. The nature of our book of business allows us to place
substantial, but not exclusive, reliance on the loss development methods, and the selected LDFs, represent the
most critical aspect of our loss reserving process. We use the same set of LDFs in the methods during our loss
reserving process that we also use to calculate the premium necessary to pay expected ultimate losses.
Reasonably-Likely Changes in Variables
As previously noted, we evaluate several factors when exercising our judgment in the selection of the LDFs
that ultimately drive the determination of our loss reserves. The process of establishing our reserves is complex
and necessarily imprecise, as it involves using judgment that is affected by many variables. We believe a
91
UNITED INSURANCE HOLDINGS CORP.
Notes to Consolidated Financial Statements
December 31, 2017
reasonably-likely change in almost any of these aforementioned factors could have an impact on our reported
results, financial condition and liquidity. However, we do not believe any reasonably likely changes in the
frequency or severity of claims would have a material impact on us.
On an annual basis, our consulting actuary issues a statement of actuarial opinion that documents the
actuary’s evaluation of the adequacy of our unpaid loss obligations under the terms of our policies. We review
the analysis underlying the actuary’s opinion and compare the projected ultimate losses per the actuary’s analysis
to our own projection of ultimate losses to ensure that our reserve for unpaid losses recorded at each annual
balance sheet date is based upon our analysis of all internal and external factors related to known and unknown
claims against us and to ensure our reserve is within guidelines promulgated by the National Association of
Insurance Commissioners (NAIC).
We maintain an in-house claims staff that monitors and directs all aspects of our claims process. We assign the
fieldwork to our wholly-owned claims subsidiary, or to third-party claims adjusting companies, none of whom have
the authority to settle or pay any claims on our behalf. The third-party claims adjusting companies conduct inspection
of the damaged property and prepare initial estimates. We review the inspection reports and initial estimates to
determine the amounts to be paid to the policyholder in accordance with the terms and conditions of the policy in effect
at the time that the policyholder incurs the loss. We maintain strategic relationships with multiple claims adjusting
companies that we can engage should we need additional non-catastrophe claims servicing capacity. We believe the
combination of our internal resources and relationships with external claims servicing companies provide an adequate
level of claims servicing in the event catastrophes affect our policyholders.
The following is information about incurred claims development and paid claims development as of
December 31, 2017, net of reinsurance, as well as cumulative claim frequency and the total of IBNR liability plus
expected development on reported claims included within the net incurred claims amounts. The incurred claims
development and paid claims development data reflect the acquisitions of FSIC, IIC, and AmCo in February
2015, April 2016, and April 2017, respectively, on a retrospective basis (includes FSIC, IIC and AmCo data for years
prior to our acquisition of the insurance affiliates). The information about incurred claims development and paid claims
development for the years ended December 31, 2008 to 2015 is presented as supplementary information.
Personal Homeowners’ Insurance
$ In thousands (except number of reported claims)
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
Unaudited
Audited
2008
2010
2015
2011
2009
2013
2016
2014
2012
Accident Year
2008 . . . . . . . . $30,073 $28,126 $27,174 $27,161 $27,358 $27,597 $ 27,564 $ 27,468 $ 27,453 $
2009 . . . . . . . .
2010 . . . . . . . .
2011 . . . . . . . .
2012 . . . . . . . .
2013 . . . . . . . .
2014 . . . . . . . .
2015 . . . . . . . .
2016 . . . . . . . .
2017 . . . . . . . .
— 46,952 46,089 45,515 45,583 45,316
— 51,144 51,292 51,862 52,239
—
— 53,878 56,840 57,670
—
—
— 65,112 69,438
—
—
—
— 98,461
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
44,996
51,674
60,215
69,000
92,702
— 130,090 130,488 131,402
— 181,609 195,902
—
— 249,276
—
—
—
—
—
—
45,116
51,685
58,047
68,923
94,755
44,959
51,841
59,517
68,388
93,041
2017
27,463
44,617
51,836
60,288
69,064
92,792
132,096
195,864
250,774
208,537
As of December 31, 2017
Total of IBNR
Liabilities
Plus Expected
Development
on Reported
Claims
$ —
40
4
(47)
18
385
1,427
3,359
10,112
44,937
Cumulative
Number of
Reported
Claims
3,220
4,150
5,090
6,217
11,025
8,331
12,750
18,914
29,705
55,410
Total $1,133,331
92
UNITED INSURANCE HOLDINGS CORP.
Notes to Consolidated Financial Statements
December 31, 2017
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
Unaudited
Accident Year
2008 . . . . . . . . . . . . . . .
2009 . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . .
2008
$17,915
—
—
—
—
—
—
—
—
—
2009
$23,806
31,525
—
—
—
—
—
—
—
—
2010
$25,264
41,134
32,993
—
—
—
—
—
—
—
2011
$26,360
43,149
43,932
36,419
—
—
—
—
—
—
2012
$27,044
44,114
46,711
48,558
42,699
—
—
—
—
—
2013
$27,358
44,413
49,256
52,412
60,640
63,732
—
—
—
—
2014
$27,390
44,737
50,215
55,532
64,675
85,346
88,375
—
—
—
2015
$ 27,445
44,898
50,704
58,069
66,739
89,068
119,612
123,888
—
—
Audited
2016
$ 27,451
44,966
51,163
59,461
68,337
90,627
125,951
174,993
170,527
—
$
2017
27,461
44,577
51,435
59,806
68,655
91,789
129,636
188,199
232,266
138,112
Total
All outstanding liabilities before 2008, net of reinsurance
$1,031,936
149
Liabilities for claims and claim adjustment expenses, net of reinsurance
$ 101,544
The following is supplementary information about average historical claims duration as of December 31,
2017.
Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
Unaudited
Years
1
2
3
4
5
6
7
8
9
10
65.2% 22.8% 5.1% 3.4% 2.1% 1.1% 0.5% 0.3% (0.4)% —%
Commercial Residential Insurance
$ In thousands (except number of reported claims)
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
Unaudited
Audited
2009
2008
2011
2012
2010
2014
2015
2013
Accident Year
2008 . . . . . . . . . $12,428 $ 3,844 $ 1,939 $ 2,137 $ 2,051 $ 2,045 $ 1,906 $ 1,905 $ 1,902 $
4,054
2009 . . . . . . . . .
5,603
2010 . . . . . . . . .
— 12,702
2011 . . . . . . . . .
—
2012 . . . . . . . . .
—
2013 . . . . . . . . .
—
2014 . . . . . . . . .
—
2015 . . . . . . . . .
—
2016 . . . . . . . . .
—
2017 . . . . . . . . .
3,459
4,291
8,972
9,690
6,420
— 15,845
—
—
—
— 11,323
—
—
—
—
—
—
—
—
3,489
4,112
9,030
8,671
8,382
16,311
20,434
— 38,632
—
—
3,853
5,374
11,280
— 11,404
—
—
—
—
—
—
—
—
—
—
5,233
— 12,134
—
—
—
—
—
—
—
3,490
4,160
9,142
9,771
11,826
15,752
— 16,554
—
—
4,182
5,489
10,197
9,540
8,359
2016
2017
1,899
3,486
4,112
8,985
12,615
7,573
16,816
24,568
25,599
76,910
As of December 31, 2017
Total of IBNR
Liabilities Plus
Expected
Development
on Reported
Claims
$ —
—
—
52
40
319
1,762
2,168
6,249
12,074
Cumulative
Number of
Reported
Claims
261
383
580
758
803
742
681
849
1,223
3,949
Total $182,563
93
UNITED INSURANCE HOLDINGS CORP.
Notes to Consolidated Financial Statements
December 31, 2017
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
Unaudited
Audited
Accident Year
2008
$700
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . —
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . —
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . —
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . —
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . —
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . —
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . —
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . —
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . —
2009
$1,619
1,639
—
—
—
—
—
—
—
—
2010
$1,678
3,616
1,968
—
—
—
—
—
—
—
2011
$1,665
3,410
3,127
3,541
—
—
—
—
—
—
2012
$1,897
3,415
3,461
6,241
4,583
—
—
—
—
—
2013
$1,927
3,920
3,966
7,605
6,942
2,958
—
—
—
—
2014
$1,902
3,446
3,909
7,846
6,893
5,127
6,379
—
—
—
2015
$ 1,902
3,471
3,909
8,825
7,543
5,317
9,452
10,188
—
—
2016
$ 1,900
3,485
4,112
8,851
8,552
7,248
13,212
17,139
10,917
—
$
2017
1,899
3,484
4,112
8,933
12,575
7,254
14,420
20,645
16,687
42,744
Total
All outstanding liabilities before 2008, net of reinsurance
$132,753
—
Liabilities for claims and claim adjustment expenses, net of reinsurance
$ 49,810
The following is supplementary information about average historical claims duration as of December 31,
2017.
Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
Unaudited
Years
1
2
3
4
5
6
7
8
9
10
42.0% 30.7% 7.0% 7.5% 7.4% 4.0% 1.3% 0.1% (0.1)% (0.1)%
Remaining Product Lines
$ In thousands (except number of reported claims)
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
Unaudited
Audited
2012
2011
2008
2015
2013
2014
2009
2010
10,135
9,911
Accident Year
2008 . . . . . . . . . $13,504 $12,871 $12,324 $11,833 $11,877 $12,661 $12,761 $12,885 $12,884 $ 12,883
10,007
2009 . . . . . . . . .
11,072
2010 . . . . . . . . .
10,741
2011 . . . . . . . . .
9,138
2012 . . . . . . . . .
5,857
2013 . . . . . . . . .
7,956
2014 . . . . . . . . .
19,352
2015 . . . . . . . . .
17,898
2016 . . . . . . . . .
46,892
2017 . . . . . . . . .
9,837
11,105
10,575
9,412
5,401
7,927
— 19,669
—
—
10,093
11,042
— 11,126
—
—
—
—
—
—
10,026
10,733
11,022
— 10,760
—
—
—
—
—
—
—
—
—
—
— 10,610
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
10,009
11,072
10,740
9,147
5,736
8,016
19,723
— 17,053
—
—
9,902
11,126
10,896
9,651
6,657
—
—
—
—
9,844
11,020
10,630
9,350
5,817
9,073
2017
2016
As of December 31, 2017
Total of IBNR
Liabilities Plus
Expected
Development
on Reported
Claims
$ —
—
—
—
12
16
54
151
564
3,455
Cumulative
Number of
Reported
Claims
1,173
1,097
1,161
1,217
1,063
554
687
1,382
84
13
Total $151,796
94
UNITED INSURANCE HOLDINGS CORP.
Notes to Consolidated Financial Statements
December 31, 2017
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
Accident Year
2008 . . . . . . . . . . . . . . . . . . . . .
2009 . . . . . . . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . .
2008
$6,169
—
—
—
—
—
—
—
—
—
2009
$9,309
4,807
—
—
—
—
—
—
—
—
2010
$10,647
7,507
4,346
—
—
—
—
—
—
—
Unaudited
2011
$11,104
8,470
8,128
4,587
—
—
—
—
—
—
2012
$11,404
9,062
9,036
8,013
5,112
—
—
—
—
—
2013
$12,360
9,471
10,182
9,444
7,631
2,925
—
—
—
—
2014
$12,403
9,570
10,242
9,837
8,242
4,496
4,008
—
—
—
2015
$12,557
9,688
10,327
10,128
8,626
4,811
6,237
11,104
—
—
2016
$12,884
10,009
11,073
10,740
9,124
5,566
7,868
18,129
12,432
—
Total
All outstanding liabilities before 2008, net of reinsurance
Audited
2017
$ 12,883
10,007
11,072
10,741
9,126
5,626
7,898
18,817
16,116
37,127
$139,413
1
Liabilities for claims and claim adjustment expenses, net of reinsurance
$ 12,384
The following is supplementary information about average historical claims duration as of December 31,
2017.
Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
Unaudited
Years
1
2
3
4
5
6
7
8
9
10
51.0% 25.8% 6.9% 5.9% 2.7% 3.0% 2.1% 1.5% 1.3% —%
The reconciliation of the net incurred and paid claims development tables to the liability for claims and
claim adjustment expenses in the consolidated statement of financial position is as follows.
December 31,
2017
2016
Net outstanding liabilities
Personal Homeowners’ Only . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial Residential Only . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other lines of business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$101,544
49,810
12,384
$109,320
566
6,031
Liabilities for unpaid claims and claim adjustment expenses, net of
reinsurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$163,738
$115,917
Reinsurance recoverable on unpaid claims
Personal Homeowners’ Only . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial Residential Only . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other lines of business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$131,581
165,313
8,779
$ 14,223
—
4,501
Total reinsurance recoverable on unpaid claims . . . . . . . . . . . . . . . . . . . . . . . . . .
$305,673
$ 18,724
Unallocated claims adjustment expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12,821
6,214
Total gross liability for unpaid claims and claims adjustment expense . . . . . . . . . . . . . . . .
$482,232
$140,855
95
UNITED INSURANCE HOLDINGS CORP.
Notes to Consolidated Financial Statements
December 31, 2017
The table below shows the analysis of our reserve for unpaid losses for each of our last three fiscal years on
a GAAP basis:
2017
2016
2015
Balance at January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: reinsurance recoverable on unpaid losses . . . . . . . . . . . . . . . . . . . . . . . . .
$140,855
18,724
$ 76,792
2,114
$ 54,436
1,252
Net balance at January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$122,131
$ 74,678
$ 53,184
Acquired reserves, net of recoverables (1)
Incurred related to:
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
40,299
22,576
2,390
Current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
368,148
(2,613)
281,365
16,988
185,476
(2,368)
Total incurred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$365,535
$298,353
$183,108
Paid related to:
Current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
256,134
95,272
210,970
62,506
127,306
36,698
Total paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$351,406
$273,476
$164,004
Net balance at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Plus: reinsurance recoverable on unpaid losses . . . . . . . . . . . . . . . . . . . . . . . . .
$176,559
305,673
$122,131
18,724
$ 74,678
2,114
Balance at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$482,232
$140,855
$ 76,792
Composition of reserve for unpaid losses and LAE:
Case reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
IBNR reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$236,253
245,979
$ 83,447
57,408
$ 45,502
31,290
Balance at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$482,232
$140,855
$ 76,792
(1) Acquired reserves, net of recoverables for 2017, 2016, and 2015 relate to our merges with AmCo, IIC, and FSH, respectively.
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 and
the favorable development in 2015 was primarily the result of losses related to the 2014 and 2013 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.
96
UNITED INSURANCE HOLDINGS CORP.
Notes to Consolidated Financial Statements
December 31, 2017
11) LONG-TERM DEBT
Long-Term Debt
The table below presents all long-term debt outstanding as of December 31, 2017 and December 31, 2016:
Maturity
$150M Senior Notes Payable . . . . . . . . . . . . . December 15, 2027
Florida State Board of Administration Note
Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . .
BB&T Term Note Payable . . . . . . . . . . . . . . .
$30M Senior Notes Payable . . . . . . . . . . . . . . December 5, 2026
October 29, 2017
Interboro, LLC Promissory Note Payable . . .
July 1, 2026
May 26, 2031
Effective
Interest
Rate
Carrying Value at
December 31,
2017
December 31,
2016
6.25%
$150,000
$ —
2.31%
3.00%
7.26%
6.00%
10,000
4,651
—
—
11,176
4,998
30,000
8,550
Total long-term debt
. . . . . . . . . . . . . . .
$164,651
$54,724
At December 31, 2017, the annual maturities of our long-term debt were as follows:
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amount
$
1,523
1,523
1,523
1,523
1,523
157,036
Total debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$164,651
$150M Senior Notes Payable
On December 13, 2017, we issued $150,000,000 of senior notes that will mature in 10 years and bear
interest at a rate equal to 6.25% per annum payable semi-annually on each June 15 and December 15,
commencing June 15, 2018. The notes are senior unsecured obligations of the Company. We may redeem the
notes at our option, at any time and from time to time in whole or in part, at a redemption price equal to the
greater of (i) 100% of the principal amount of the notes to be redeemed and (ii) the sum of the present values of
the remaining scheduled payments of principal and interest thereon from the date of redemption to September 15,
2027. Thereafter, we may redeem the notes at par.
$30M Senior Notes Payable
On December 5, 2016, we issued $30,000,000 of senior notes to private investors pursuant to an Indenture
dated as of December 5, 2016, by and between the Company and the trustee. The notes bore interest at a floating
rate equal to the three-month LIBOR plus 5.75% per annum, with interest payable quarterly in arrears. The notes
were redeemed at par value on December 13, 2017 without a pre-payment penalty.
97
UNITED INSURANCE HOLDINGS CORP.
Notes to Consolidated Financial Statements
December 31, 2017
Florida State Board of Administration Note Payable
On September 22, 2006, we issued a $20,000,000, 20-year note payable to the Florida State Board of
Administration (SBA note). For the first three years of the SBA note we were required to pay interest only. On
October 1, 2009, we began to repay the principal in addition to interest. The SBA note bears an annual interest
rate equivalent to the 10-year U.S. Treasury Bond rate. The rate will be adjusted quarterly for the term of the
SBA note based on the 10-year Constant Maturity Treasury rate.
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 subsidiary. The note matured and was paid in
October 2017.
BB&T Term Note Payable
On May 26, 2016, we issued a $5,200,000, 15-year term note payable to BB&T (the BB&T note) with the
intent to use the funds to purchase, renovate, furnish and equip our home office. The note bears interest at 1.65%
in excess of the one-month LIBOR. In the event of default, BB&T, may, among other things, declare its loan
immediately due and payable, require us to pledge additional collateral to the bank, and take possession of and
foreclose upon our home office which has been pledged to the bank as security for the loan.
Financial Covenants
The SBA note, BB&T note, and $150M senior notes contain representations and warranties, conditions and
covenants. If these requirements are not met, all amounts outstanding or otherwise owed could become due and
payable immediately and other limitations could be placed on our ability to use any available borrowing capacity.
At December 31, 2017, we were in compliance with all covenants as specified in the notes. Refer to Part II;
Item 7 for additional information regarding financial covenants.
Debt Issuance Costs
The table below presents the rollforward of our debt issuance costs paid, in conjunction with the debt
instruments described above, during the years ended December 31, 2017 and 2016:
Balance at January 1,
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 549
3,264
(526)
$—
596
(47)
Balance at December 31,
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$3,287
$549
2017
2016
12) COMMITMENTS AND CONTINGENCIES
We are involved in claims-related legal actions arising in the ordinary course of business. We accrue
amounts resulting from claims-related legal actions in unpaid losses and LAE during the period that we
determine an unfavorable outcome becomes probable and we can estimate the amounts. Management makes
revisions to our estimates based on its analysis of subsequent information that we receive regarding various
98
UNITED INSURANCE HOLDINGS CORP.
Notes to Consolidated Financial Statements
December 31, 2017
factors, including: (i) per claim information; (ii) company and industry historical loss experience; (iii) judicial
decisions and legal developments in the awarding of damages, and (iv) trends in general economic conditions,
including the effects of inflation.
At December 31, 2017, we were not involved in any material non-claims-related legal actions.
See Note 11 for information regarding commitments related to long-term debt, and Note 14 for
commitments related to regulatory actions.
13) INCOME TAXES
The following table summarizes the provision for income taxes:
Year Ended December 31,
2015
2016
2017
Federal:
Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (1,147) $(1,906) $10,143
2,103
(9,911)
1,920
(Benefit) provision for Federal income tax expense . . . . . . . . . . . . . . . .
(11,058)
14
12,246
State:
Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for State income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . .
496
1,327
1,823
1,001
290
1,291
2,054
202
2,256
(Benefit) provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (9,235) $ 1,305
$14,502
The actual income tax expense differs from the expected income tax expense computed by applying the
combined applicable effective federal and state tax rates to income before the provision for income taxes as
follows:
Expected income tax expense at federal rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State tax expense, net of federal deduction benefit . . . . . . . . . . . . . . . . . . . . . .
Dividend received deduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other permanent items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior period adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrual adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Section 847 payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Municipal tax-exempt interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in enacted tax rate (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended December 31,
2016
2017
2015
$
319
366
(294)
128
(791)
(1,472)
—
(1,398)
(6,777)
684
$ 2,381
934
(217)
—
—
—
—
(1,011)
—
(782)
$14,671
1,023
—
—
42
—
(693)
—
—
(541)
Reported income tax (benefit) expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(9,235) $ 1,305
$14,502
(1)
Pursuant to the recently enacted 2017 Tax Act legislation.
99
UNITED INSURANCE HOLDINGS CORP.
Notes to Consolidated Financial Statements
December 31, 2017
On December 22, 2017, the 2017 Tax Act was signed into law. One of the provisions of the 2017 Tax Act
reduced the corporate federal income tax rate from 35% to 21% effective January 1, 2018. The SEC staff issued
Staff Accounting Bulletin 118 (SAB 118), which provides guidance on accounting for the tax effects of the Tax
Act. SAB 118 addresses situations where accounting for certain income tax effects of the Tax Act under ASC
740 may be incomplete upon issuance of an entity’s financial statements and provides a one-year measurement
period from the enactment date to complete the accounting under ASC 740. In accordance with SAB 118, a
company must reflect the following:
•
•
•
Income tax effects of those aspects of the 2017 Tax Act for which accounting under ASC 740 is
complete,
Provisional estimate of income tax effects of the 2017 Tax Act to the extent accounting is incomplete
but a reasonable estimate is determinable and
If a provisional estimate cannot be determined, ASC 740 should still be applied on the basis of tax law
provisions that were in effect immediately before the enactment of the 2017 Tax Act.
We revalued all deferred tax assets and liabilities to recognize the tax rate that is expected to apply when the
tax effects are ultimately recognized in future periods. The impact of revaluing the deferred tax assets and
liabilities from 35% to 21% was a reduction to income tax expense of $6,777,000, as disclosed in the table above.
This revaluation adjustment included a $1,549,000 reduction related to the deferred tax liability associated with
the net unrealized gains on our investment portfolio, which was originally recorded as a component of other
comprehensive income and not through the tax provision. The remainder was associated with our other deferred
tax assets and liabilities identified in the table below.
Deferred income taxes, which are included in other assets or other liabilities as appropriate, reflect the net
tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. As noted above, the federal deferred tax assets and
liabilities at December 31, 2017, have been revalued to reflect the new 21% federal corporate income tax rate
under the 2017 Tax Act.
100
UNITED INSURANCE HOLDINGS CORP.
Notes to Consolidated Financial Statements
December 31, 2017
The table below summarizes the significant components of our net deferred tax liability:
December 31,
2017
2016
Deferred tax assets:
Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax-related discount on loss reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bad debt expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other-than-temporary impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
AMT credit carryforward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 17,459
1,113
90
16
304
226
89
$ 19,113
1,479
54
27
—
—
507
Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
19,297
21,180
Deferred tax liabilities:
Unrealized gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred acquisitions costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capitalized software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(2,822)
(21,549)
(204)
(10,883)
(535)
(17)
(689)
(63)
(642)
(19,586)
(1,505)
(3,371)
—
—
—
(895)
Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(36,762)
(25,999)
Net deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(17,465) $ (4,819)
In assessing the net realizable value of deferred tax assets, we consider whether it is more likely than not
that we will not realize some portion or all of the deferred tax assets. The ultimate realization of deferred tax
assets depends upon the generation of future taxable income during the periods in which those temporary
differences become deductible. We consider the scheduled reversal of deferred tax liabilities, projected future
taxable income and tax planning strategies in making this assessment.
The statute of limitations related to our consolidated Federal income tax returns and our Florida income tax
returns expired for all tax years up to and including 2013; therefore, only the 2014 through 2017 tax years remain
subject to examination by taxing authorities. No taxing authorities are currently examining any of our federal or
state income tax returns.
UPC Insurance’s reinsurance subsidiary, which is based in the Cayman Islands, made an irrevocable
election under section 953(d) of the U.S. Internal Revenue Code of 1986, as amended, to be treated as a domestic
insurance company for U.S. Federal income tax purposes. As a result of this election, our reinsurance subsidiary
is subject to United States income tax on its worldwide income as if it were a U.S. corporation.
As of December 31, 2017, we have not taken any uncertain tax positions with regard to our tax returns.
101
UNITED INSURANCE HOLDINGS CORP.
Notes to Consolidated Financial Statements
December 31, 2017
14) 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 subsidiaries, UPC and ACIC, are domiciled in Florida, while FSIC and IIC are
domiciled in Hawaii and New York, respectively. At December 31, 2017, and during the year then ended, our
insurance subsidiaries met all regulatory requirements of the states in which they operate, and they did not incur
any material assessments.
The NAIC has Risk-Based Capital (RBC) guidelines for insurance companies that are designed to assess
capital adequacy and to raise the level of protection that statutory surplus provides for policyholders. Most states,
including Florida, Hawaii and New York, have enacted statutory requirements adopting the NAIC RBC
guidelines, and insurers having less statutory surplus than required will be subject to varying degrees of
regulatory action, depending on the level of capital inadequacy. State insurance regulatory authorities could
require an insurer to cease operations in the event the insurer fails to maintain the required statutory capital.
The state laws of Florida, Hawaii and New York permit an insurer to pay dividends or make distributions
out of that part of statutory surplus derived from net operating profit and net realized capital gains. The state laws
further provide calculations to determine the amount of dividends or distributions that can be made without the
prior approval of the insurance regulatory authorities in those states and the amount of dividends or distributions
that would require prior approval of the insurance regulatory authorities in those states. Statutory RBC
requirements may further restrict our insurance subsidiaries’ ability to pay dividends or make distributions if the
amount of the intended dividend or distribution would cause statutory surplus to fall below minimum RBC
requirements.
Governmental agencies or certain quasi-governmental entities can levy assessments upon us in the states in
which we write policies. See Note 2(k) for a description of how we recover assessments imposed upon us. We
expense an assessment when the particular governmental agency or quasi-governmental entity levies it upon us;
therefore, expected recoveries are not assets and we will record the amounts as income when collected from
policyholders.
Governmental agencies or certain quasi-governmental entities can also levy assessments upon
policyholders, and we collect the amount of the assessments from policyholders as surcharges for the benefit of
the assessing agency. We currently collect assessments levied upon policyholders on behalf of Citizens Property
Insurance Corporation (Citizens) in the amount of 1.0%, and on behalf of FHCF in the amount of 1.3%. We
multiply the premium written on each policy, except our flood policies, by these assessment percentages to
determine the additional amount that we will collect from the policyholder and remit to the assessing agencies.
Our insurance subsidiaries must maintain capital and surplus ratios or balances as determined by the
regulatory authority of the states in which they are domiciled. The table below shows the minimum capital and
102
UNITED INSURANCE HOLDINGS CORP.
Notes to Consolidated Financial Statements
December 31, 2017
surplus requirements, as well as the amount of surplus as regards policyholders for our regulated entities at
December 31, 2017 and 2016.
Minimum Requirement December 31, 2017 December 31, 2016
UPC (1)
. . . . . . . . . . . . . . . . . . . . . . . . . .
ACIC (1)(2) . . . . . . . . . . . . . . . . . . . . . . . .
FSIC . . . . . . . . . . . . . . . . . . . . . . . . . . . .
IIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$45,187,000
$16,565,000
$ 3,250,000
$ 4,700,000
$164,281,000
$160,238,000
$ 22,038,000
$ 42,827,000
$155,587,000
N/A
$ 16,269,000
$ 40,442,000
(1) UPC and ACIC are required to maintain capital and surplus equal to the greater of 10% of its total liabilities or $5,000,000.
(2)
There is not a reportable value for ACIC at December 31, 2016 as we did not own the company until April 2017.
The amount of restricted net assets of UPC, ACIC, FSIC, and IIC at December 31, 2017 was $144,526,000,
$162,234,000, $26,027,000, and $46,699,000, respectively.
NAIC law limits an insurer’s investment in equity instruments and also restricts investments in medium to
low quality debt instruments. We were in compliance with all investment restrictions at December 31, 2017 and
2016.
The SBA note is considered a surplus note pursuant to statutory accounting principles. As a result, UPC is
subject to the authority of the Insurance Commissioner of the State of Florida with regard to its ability to repay
principal and interest on the SBA note. Any payment of principal or interest requires permission from the
insurance regulatory authority.
We have reported our insurance subsidiaries’ assets, liabilities and results of operations in accordance with
GAAP, which varies from statutory accounting principles prescribed or permitted by state laws and regulations,
as well as by general industry practices. The following items are principal differences between statutory
accounting and GAAP:
•
•
•
•
•
•
•
Statutory accounting requires that we exclude certain assets, called non-admitted assets, from the
balance sheet.
Statutory accounting requires us to expense policy acquisition costs when incurred, while GAAP
allows us to defer to the extent realizable, and amortize policy acquisition costs over the estimated life
of the policies.
Statutory accounting requires that surplus notes, also known as surplus debentures, be recorded in
statutory surplus, while GAAP requires us to record surplus notes as a liability.
Statutory accounting allows certain investments to be carried at amortized cost or fair value based on
the rating received from the Securities Valuation Office of the NAIC, while they are recorded at fair
value for GAAP because the investments are held as available for sale.
Statutory accounting allows ceding commission income to be recognized when written if the cost of
acquiring and renewing the associated business exceeds the ceding commissions, but under GAAP
such income is deferred and recognized over the coverage period.
Statutory accounting requires that unearned premiums and loss reserves are presented net of related
reinsurance rather than on a gross basis under GAAP.
Statutory accounting requires a provision for reinsurance liability be established for reinsurance
recoverable on paid losses aged over ninety days and for unsecured amounts recoverable from
103
UNITED INSURANCE HOLDINGS CORP.
Notes to Consolidated Financial Statements
December 31, 2017
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 subsidiaries 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 stockholders’ equity under GAAP.
The table below reconciles our consolidated GAAP net income to the statutory net income of our insurance
subsidiaries:
Consolidated GAAP net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase (decrease) due to:
Year Ended December 31,
2015
2016
2017
$ 10,145
$ 5,698
$ 27,358
Commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred policy acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premium tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment PGAAP adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operations of non-statutory subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Statutory net income acquired (1)
401
9,413
(17,935)
240
101
(1,800)
1,148
(71)
(6,930)
6,120
17,486
(3,255)
(6,342)
(24)
(538)
—
—
166
(10,621)
3,513
339
(2,518)
(4,962)
97
131
—
—
—
(10,077)
152
Statutory net income of insurance subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . .
$
832
$ 6,083
$ 10,520
(1)
Statutory net income acquired for 2017, 2016, and 2015 relates to the acquisitions of ACIC, IIC, and FSH, respectively.
104
UNITED INSURANCE HOLDINGS CORP.
Notes to Consolidated Financial Statements
December 31, 2017
The table below reconciles our consolidated GAAP stockholders’ equity to the surplus as regards
policyholders of our insurance subsidiaries:
Consolidated GAAP stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase (decrease) due to:
December 31,
2017
2016
$ 537,125
$241,327
Deferred policy acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-admitted assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Surplus debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for reinsurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity of non-statutory subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(35,689)
961
955
9
10,000
(3,583)
(138,833)
19,502
(468)
(595)
(15,373)
(3,338)
1,386
(623)
11,176
(7,648)
(32,615)
18,570
(564)
—
Statutory surplus as regards policyholders of insurance subsidiaries . . . . . . . . . . . . . . . . .
$ 389,384
$212,298
105
UNITED INSURANCE HOLDINGS CORP.
Notes to Consolidated Financial Statements
December 31, 2017
15) LEASES
We lease approximately 16,500 square feet of office space in Florida, New York, and Hawaii. These leases
are generally short-term to medium-term leases of commercial office space. In addition to office space, we lease
office equipment and a parking lot under operating leases. Lease expense amounted to $290,000, $205,000, and
$922,000 for the years ended December 31, 2017, 2016, and 2015, respectively. At December 31, 2017, our
minimum future lease payments under non-cancellable operating leases are:
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$457
275
243
187
51
Amount
16) RELATED PARTY TRANSACTIONS
One of our executive officers, Ms. Salmon, is a former partner at the law firm of Groelle & Salmon, PA,
where her spouse remains partner and co-owner. Groelle & Salmon, PA provides legal representation to us
related to our claims litigation, and also provided representation to us for several years prior to Ms. Salmon
joining UPC Insurance in 2014. During the years ended December 31, 2017 and 2016, Groelle & Salmon, PA
billed us approximately $3,188,000 and $2,892,000, respectively. Ms. Salmon’s spouse has a 50% interest in
these billings, or approximately $1,594,000 and $1,446,000 for the years ended December 31, 2017 and 2016,
respectively.
AmRisc, LLC (AmRisc), a managing general agent, handles the underwriting, claims processing, premium
collection and reinsurance review for AmCo. R. Daniel Peed, Vice Chairman of our Board of Directors,
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
$220,150,000 of gross written premiums for the year ended December 31, 2017, resulting in fees and
commission (including a profit commission) of $60,016,000 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 $3,564,000 in ceded premiums to AmRisc as a
reinsurance intermediary for the year ended December 31, 2017. We also incurred $25,000 during that period for
rent under a sublease agreement with AmRisc.
Net premiums receivable (net of commissions) of $29,913,000 were due from AmRisc as of December 31,
2017. These premiums were paid by AmRisc to our premium trust account by wire transfer within 15 days of
collection pursuant to the underwriting contract with AmRisc.
17) EMPLOYEE BENEFIT PLAN
We provide a 401(k) plan for substantially all of our employees. We match 100% of the first 5% of
employees’ contributions to the plan. For the years ended December 31, 2017, 2016, and 2015, our contributions
to the plan on behalf of the participating employees were $604,000, $444,000, and $365,000, respectively.
106
UNITED INSURANCE HOLDINGS CORP.
Notes to Consolidated Financial Statements
December 31, 2017
18) ACCUMULATED OTHER COMPREHENSIVE INCOME
We report changes in other comprehensive income items within comprehensive income on the Consolidated
Statements of Comprehensive Income, and we include accumulated other comprehensive income as a component
of stockholders’ equity on the Consolidated Balance Sheets.
The table below details the components of accumulated other comprehensive income at year end:
December 31, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in net unrealized gain on investments . . . . . . . . . . . . . . . . . . .
Reclassification adjustment for net realized gains . . . . . . . . . . . . . . . .
December 31, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in net unrealized gain on investments . . . . . . . . . . . . . . . . . . .
Reclassification adjustment for net realized gains . . . . . . . . . . . . . . . .
December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in net unrealized gain on investments . . . . . . . . . . . . . . . . . . .
Reclassification adjustment for net realized gains . . . . . . . . . . . . . . . .
Reclassification due to adoption of ASU 2018-02 . . . . . . . . . . . . . . . .
Pre-Tax
Amount
$ 6,537
(3,070)
(827)
2,640
(629)
(547)
1,464
10,647
(67)
—
Tax
(Expense)
Benefit
$(2,526)
1,187
319
Net-of-Tax
Amount
$ 4,011
(1,883)
(508)
(1,020)
167
211
(642)
(3,747)
17
1,549
1,620
(462)
(336)
822
6,900
(50)
1,549
December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$12,044
$(2,823)
$ 9,221
19) STOCKHOLDERS’ EQUITY
Our Board of Directors declared dividends on our outstanding shares of common stock as follows for the
periods presented (in thousands, except per share amounts):
2017
Year Ended December 31,
2016
2015
Per Share
Amount
Aggregate
Amount
Per Share
Amount
Aggregate
Amount
Per Share
Amount
Aggregate
Amount
First Quarter . . . . . . . . . . . . . . . . .
Second Quarter
. . . . . . . . . . . . . .
Third Quarter . . . . . . . . . . . . . . . .
Fourth Quarter . . . . . . . . . . . . . . .
$0.06
$0.06
$0.06
$0.06
$1,301
$2,561
$2,564
$2,565
$0.05
$0.06
$0.06
$0.06
$1,076
$1,300
$1,299
$1,299
$0.05
$0.05
$0.05
$0.05
$1,073
$1,077
$1,076
$1,076
On April 3, 2017, we completed the acquisition of AmCo by issuing 20,956,355 shares of our common
stock as consideration for the final purchase price. See Note 4 for additional information on this acquisition.
On February 3, 2015, we completed the acquisition of FSH and its subsidiaries by issuing 503,857 shares of
our common stock as consideration for the initial purchase price. In March 2016 we paid contingent
consideration of 32,943 shares of common stock as part of the FSH acquisition.
See Note 20 for information regarding the activity of our common stock and share-based compensation.
107
UNITED INSURANCE HOLDINGS CORP.
Notes to Consolidated Financial Statements
December 31, 2017
20) 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 167,622 shares of restricted common stock awards during the twelve months ended
December 31, 2017, which had a weighted-average grant date fair value of $15.62 per share. We granted 115,405
shares of restricted stock during the twelve months ended December 31, 2016, which had a weighted-average
grant date fair value of $16.90 per share.
The following table presents certain information related to the activity of our non-vested common stock
grants:
Number of
Restricted Shares
Weighted Average
Grant Date Fair Value
Outstanding as of December 31, 2014 . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding as of December 31, 2015 . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding as of December 31, 2016 . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding as of December 31, 2017 . . . . . . . . . . . . . . . . . . . . . .
153,383
130,442
14,365
90,277
179,183
115,405
26,082
98,864
169,642
167,622
17,537
107,633
212,094
$10.91
20.38
13.80
12.71
16.67
16.90
17.44
16.39
16.87
15.62
14.07
16.24
$16.44
We had approximately $1,140,000 of unrecognized stock compensation expense on December 31, 2017
related to non-vested stock-based compensation granted, that we expect to recognize over the next three years.
We recognized $1,616,000, $877,000 and $808,000 of stock-based compensation expense during the twelve
months ended December 31, 2017, 2016 and 2015, respectively.
We had approximately $343,000 of unrecognized director stock-based compensation expense at
December 31, 2017 related to non-vested director stock-based compensation granted, which we expect to
recognize ratably until the 2018 Annual Meeting of Stockholders. We recognized $996,000, $1,070,000 and
$1,166,000 of director stock-based compensation expense during the twelve months ended December 31, 2017,
2016 and 2015, respectively.
108
UNITED INSURANCE HOLDINGS CORP.
Notes to Consolidated Financial Statements
December 31, 2017
21) QUARTERLY RESULTS (UNAUDITED)
Three Months Ended
March 31,
June 30, September 30, December 31,
(In thousands, except per share data)
2017
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings per common share—Basic (1) . . . . . . . . . . . .
Earnings per common share—Diluted (1)
. . . . . . . . . .
2016
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings per common share—Basic (1) . . . . . . . . . . . .
. . . . . . . . . .
Earnings per common share—Diluted (1)
$122,633
5,938
$
3,899
$
0.18
$
0.18
$
$107,561
4,330
$
2,951
$
0.14
$
0.14
$
$178,073
$ 12,650
7,257
$
0.17
$
0.17
$
$120,921
$ 15,210
9,841
$
0.46
$
0.45
$
$171,128
$ (45,487)
$ (28,012)
(0.66)
$
(0.66)
$
$127,202
5,041
$
3,423
$
0.16
$
0.16
$
(1)
The sum of the quarterly reported amounts may not equal the full year, as each is computed independently.
$182,586
$ 27,809
$ 27,001
0.63
$
0.63
$
$131,433
$ (17,578)
$ (10,517)
(0.49)
$
(0.49)
$
22) SUBSEQUENT EVENTS
We evaluate all subsequent events and transactions for potential recognition or disclosure in our financial
statements.
On February 21, 2018, our Board of Directors declared a $0.06 per share quarterly cash dividend payable on
March 14, 2018 to stockholders of record on March 7, 2018.
109
UNITED INSURANCE HOLDINGS CORP.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain a set of disclosure controls and procedures designed to ensure that information required to be
disclosed 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 December 31, 2017, 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 not effective at the reasonable assurance level due to the material weaknesses in internal
control over financial reporting described below in “Management’s Report on Internal Control over
Financial Reporting.”
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over our financial
reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) promulgated under
the Exchange Act, as a process to provide reasonable assurance regarding the reliability of our financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles in the United States. Internal control over financial reporting includes those policies and
procedures that: (a) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect
our transactions and dispositions of our assets; (b) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that our receipts and expenditures are being made only in accordance with authorizations of our
management and directors; and (c) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial
statements.
Our management assessed the effectiveness of our internal control over financial reporting as of
December 31, 2017. In making this assessment, our management used the criteria set forth in the Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission in 2013. As permitted, management excluded from its assessment of internal control over financial
reporting AmCo Holding Company and its Subsidiaries which were acquired on April 3, 2017 and accounted for
approximately 36% of consolidated total assets and 146% of net income as of the year ended December 31, 2017.
Based on the criteria set forth in the Internal Control-Integrated Framework, our management concluded that, as
of December 31, 2017, our internal control over our financial reporting was not effective, at the reasonable
assurance level, as management identified deficiencies in internal control over financial reporting that were
assessed as material weaknesses.
110
UNITED INSURANCE HOLDINGS CORP.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial
reporting such that there is a reasonable possibility that a material misstatement of an entity’s financial
statements will not be prevented or detected and corrected on a timely basis.
Identification of the Material Weaknesses in Internal Control over Financial Reporting
During our assessment we determined that the following material weaknesses existed as of December, 31,
2017 in the principles associated with both the control activities and information and communication components
of the COSO framework:
• A failure of the operating effectiveness of a monitoring control designed to ensure that the Company
obtains evidence of the design and operating effectiveness of the general information technology
controls intended to prevent unauthorized system access and inappropriate change management to two
third-party service organization’s professional services systems and information contained within
(Service Organization Controls Weakness).
Two third-party service organization systems are used by the Company to record direct written premium for
IIC and loss and LAE for IIC, UPC and FSIC. We rely upon a SOC 1 Type 2 report from the service
organizations attesting to the vendor’s internal controls. We were notified that we would not receive two of the
reports in a timely manner. Although we performed additional testing regarding the controls subsequent to year
end, such monitoring and testing of control was not executed to a sufficient level of detail or in a timely manner.
We further assessed the impact that the noted deficiencies had on our 2016 assessment and determined that we
should have identified a material weakness in 2016 related to one of these systems.
Although no adjustment was required to our consolidated financial statements as a result of this material
weakness, management concluded that there is a reasonable possibility that a material misstatement could occur
in premium revenue and loss and LAE in the consolidated financial statements if the control deficiency was not
remediated.
• We did not maintain effective accounting policies and procedural controls over the financial reporting
for income taxes, acquisition purchase accounting and investments to ensure accurate and consistent
financial reporting in accordance with US GAAP (Accounting Procedures Weakness).
This material weakness resulted in errors within the tax expense, goodwill and investments balances in the
Company’s December 31, 2017 Consolidated Balance Sheet and in the Consolidated Statements of
Comprehensive Income, Consolidated Statement of Stockholders’ Equity, the computations of basic and diluted
earnings per share, and the Consolidated Statements of Cash Flows. Specifically, as it relates to income taxes, we
did not maintain controls over the analysis and assessments of the income tax effects related to business
acquisitions and the adoption of ASU 2018-02. Specifically, as it relates to purchase accounting, we did not
maintain controls over the analysis and assessment of deferred taxes related to the transaction. The errors were
corrected before we issued our earnings release on February 21, 2018. As it relates to investments we did not
maintain controls over the reporting and disclosures of certain investments. The errors were corrected before the
issuance of our December 31, 2017 Form 10-K. This material weakness could have resulted in a material
misstatement of account balances or disclosures that would have resulted in a misstatement of the annual or
interim consolidated financial statements that would not have been prevented or detected.
RSM US LLP, our independent registered public accounting firm that audited the consolidated financial
statements included in this Form 10-K, has issued their attestation report on our internal control over financial
reporting, which is included herein.
111
UNITED INSURANCE HOLDINGS CORP.
Planned Remediation of Material Weaknesses
Service Organization Controls Weakness
We are in the process of remediating the deficiency by fully implementing effective controls over these third
party systems and continue working with the providers to receive timely SOC reports in the future.
Accounting Procedures Weakness
We have begun the remediation of the process and controls in place to measure and record transactions
related to tax accounting, acquisition accounting and investment accounting to enhance the effectiveness of the
design and operation of those controls. The Company will focus on the accounting and disclosure for unusual and
complex transactions and will continue to augment existing staff with additional skilled accounting resources and
strengthen the review process to improve the operation of financial reporting and corresponding internal controls.
Changes in Internal Control over Financial Reporting
During the year ended December 31, 2017, other than the identification of the material weaknesses
discussed above, there were no changes in our internal control over financial reporting that has materially
affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
Limitations on Controls
Because of the inherent limitations of internal controls, we do not expect our disclosure controls and
procedures or our internal control over financial reporting will prevent or detect all errors and fraud. Any control
system, no matter how well designed and operated, is based upon certain assumptions and can provide only
reasonable, not absolute, assurance that our objectives will be met. Further, no evaluation of controls can provide
absolute assurance that we will prevent all misstatements due to error or fraud or that we will detect all control
issues and instances of fraud, if any, within our company.
Item 9B. Other Information
None.
112
UNITED INSURANCE HOLDINGS CORP.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors
United Insurance Holdings Corp.
Opinion on the Internal Control Over Financial Reporting
We have audited United Insurance Holdings Corp. (the Company)’s internal control over financial reporting as of
December 31, 2017, based on criteria established in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission in 2013. In our opinion, because of the
effect of the material weakness described below on the achievement of the objectives of the control criteria, the
Company has not maintained effective internal control over financial reporting as of December 31, 2017, based
on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission in 2013.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States) (PCAOB), the consolidated financial statements of the Company and our report dated March 28,
2018, expressed an unqualified opinion.
As described in Management’s Report on Internal Control over Financial Reporting, management has excluded
AmCo Holding Company and its Subsidiaries from its assessment of internal control over financial reporting as
of December 31, 2017, because it was acquired by the Company in a purchase business combination in the
second quarter of 2017. We have also excluded AmCo Holding Company and its Subsidiaries from our audit of
internal control over financial reporting. AmCo Holding Company and its Subsidiaries is a wholly owned
subsidiary whose total assets and net income represent approximately 36 percent and 146 percent, respectively,
of the related consolidated financial statement amounts as of and for the year ended December 31, 2017.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting,
such that there is a reasonable possibility that a material misstatement of the company’s annual or interim
financial statements will not be prevented, or detected and corrected, on a timely basis. The following material
weaknesses have been identified and included in management’s assessment:
• Management’s information and communication controls failed to prevent, or detect and correct,
material reclassifications from being identified and corrected related to other investments and portfolio
loans.
• Management’s information and communication controls failed to prevent or detect material
reclassifications from being identified and corrected related to short-term investments and cash and
cash equivalents.
• Management’s controls over the business combination failed to correctly identify and correctly record
material adjustments related to the purchase price, deferred tax expense, and goodwill related to its
acquisition of AmCo Holding Company.
• Management was unable to obtain adequate evidence from two of its service providers to support that
the service provider had adequate controls over change management. These two service providers are
used in the processing and handling of a portion of the Company’s premiums and claims.
• Management incorrectly recorded the change in enacted federal tax rates in its calculation of the tax
effect on unrealized investment gains and losses included in accumulated other comprehensive income
by incorrectly recording the charge as an increase to deferred income tax expense.
113
UNITED INSURANCE HOLDINGS CORP.
These material weaknesses were considered in determining the nature, timing and extent of audit tests applied in
our audit of the 2017 consolidated financial statements, and this report does not affect our report dated March 28,
2018, on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and
for its assessment of the effectiveness of internal control over financial reporting in the accompanying
management’s report on internal control over financial reporting. Our responsibility is to express an opinion on
the Company’s internal control over financial reporting based on our audit. We are a public accounting firm
registered with the PCAOB and are required to be independent with respect to the Company in accordance with
U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission
and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on the assessed risk. Our audit also included
performing such other procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the
company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent, or detect and
correct, misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the
risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
Impact of Identified Material Weakness on Previously Expressed Opinion
The evaluation of the material weakness related to the design and operating effectiveness of the entity’s controls
over its service providers identified deficiencies in the Company’s internal control over financial reporting as of
December 31, 2016. The following material weakness was identified as a result of these deficiencies
• Management was unable to obtain adequate evidence from one of its service providers to support that
the service provider had adequate controls over change management. The service provider is used in
the processing and handling of the Company’s claims.
114
UNITED INSURANCE HOLDINGS CORP.
Our report dated March 15, 2017 on the effectiveness of the Company’s internal control over financial reporting
as of December 31, 2016 expressed an unqualified opinion on the effectiveness of the Company’s internal control
over financial reporting. As described above, a material weakness was subsequently identified to exist as of
December 31, 2016. Accordingly, our opinion on the effectiveness of the Company’s internal control over
financial reporting as of December 31, 2016 should have been different from that expressed in our previous
report.
/s/ RSM US LLP
Omaha, Nebraska
March 28, 2018
115
UNITED INSURANCE HOLDINGS CORP.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Other than the information regarding our Code of Conduct and Ethics set forth below, all information
required by this Item is incorporated herein by reference to our definitive Proxy Statement for the 2018 Annual
Meeting of our Stockholders to be filed with the SEC within 120 days after the end of our fiscal year ended
December 31, 2017 (the 2018 Proxy Statement).
CODE OF CONDUCT AND ETHICS
We have adopted a code of ethics (our Code of Conduct and Ethics) that applies to our officers, directors
and employees, including our principal executive officer and our principal financial and accounting officer, in
accordance with applicable federal securities laws. This document may be reviewed by accessing our investor
relations site at investors.upcinsurance.com. In addition, a copy of our Code of Conduct and Ethics will be
provided without charge upon written request submitted to us via regular mail or via electronic mail to
investorrelations@upcinsurance.com. We intend to post notice of any waiver from, or amendment to, any
provision in our Code of Conduct and Ethics applicable to our principal executive officer, principal financial
officer, principal accounting officer or controller on our website at www.upcinsurance.com.
Item 11. Executive Compensation
The information required by this Item is incorporated herein by reference to our 2018 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Information required by this Item is incorporated herein by reference to our 2018 Proxy Statement.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item is incorporated herein by reference to our 2018 Proxy Statement.
Item 14. Principal Accountant Fees and Services
The information required by this Item is incorporated herein by reference to our 2018 Proxy Statement.
116
UNITED INSURANCE HOLDINGS CORP.
Item 15. Exhibits and Financial Statement Schedules
The following documents are filed as part of this Report:
PART IV
(1) Consolidated Financial Statements. In Part II, Item 8, we have included our consolidated
financial statements, the notes thereto and the report of the Independent Registered Public
Accounting Firm.
(2) Financial Statement Schedules. Schedule I – Summary of Investments, Schedule II—
Condensed Financial Information of Registrant, Schedule IV – Reinsurance, and Schedule V –
Valuation and Qualifying Accounts are filed as a part hereof along with the related report of the
Independent Registered Public Accounting Firm included in Part II, Item 8. All other schedules
have been omitted because the information required to be set forth therein is not applicable or is
included in the consolidated financial statements or notes thereto.
(3) Exhibits. We hereby file as part of this Form 10-K the exhibits listed in the following Index.
117
UNITED INSURANCE HOLDINGS CORP.
EXHIBIT INDEX
Exhibit
Description
2.1
2.2
3.1
3.2
3.3
4.1
4.2
4.3
10.1
10.2
10.3
10.4
Stock Purchase Agreement, dated as of September 26, 2015, by and between United Insurance
Holdings Corp and Interboro LLC (included as exhibit 2.1 to the Form 8-K filed on September 28,
2015, and incorporated herein by reference).
Agreement and Plan of Merger, dated as of August 17, 2016, by and among United Insurance
Holdings Corp., Kilimanjaro Corp., Kili LLC, RDX Holding, LLC, certain equityholders of RDX
Holding, LLC party thereto and AmCo Holding Company (included as Exhibit 2.1 to the Form 8-K
filed on August 19, 2016, and incorporated herein by reference).
Second Amended and Restated Certificate of Incorporation (as amended to include the Certificate of
Designations, Powers, Preferences and Rights of Series A Junior Participating Preferred Stock of
United Insurance Holdings Corp.) (filed as exhibit 3.1 to the Form 10-Q filed on August 8, 2012, and
incorporated herein by reference).
Bylaws (included as exhibit 3.3 to the Form S-1 (Registration No. 333-143466), filed June 4, 2007,
and incorporated herein by reference).
Certificate of Elimination of Series A Junior Participating Preferred Stock, dated as of January 10,
2018 (included as exhibit 3.1 to the Form 8-K filed January 12, 2018, and incorporated herein by
reference).
Specimen Common Stock Certificate (included as exhibit 4.2 to Amendment No. 1 to Post-Effective
Amendment No. 1 on Form S-3 (Registration No. 333-150327), filed on December 23, 2008, and
incorporated herein by reference).
Registration Rights Agreement, dated October 4, 2007, by and among FMG Acquisition Corp. and the
investors named therein (included as exhibit 10.4 to the Form 8K, filed October 12, 2007, and
incorporated herein by reference).
Second Amendment (the “Second Amendment”) to Rights Agreement, dated as of January 10, 2018
(as amended, the “Rights Agreement”), between the Company and American Stock Transfer & Trust
Company, LLC, as rights agent (included as Exhibit 4.1 to the Form 8-K filed on January 12, 2018,
and incorporated herein by reference).
Investment Management Agreement between United Property & Casualty Insurance Company and
Synovus Trust Company, dated October 8, 2003 (included as exhibit 10.18 to the Form S-4/A
(Registration No. 333-150327), filed June 13, 2008, and incorporated herein by reference).
Insurance Capital Build-up Incentive Program Surplus Note between United Property & Casualty
Insurance Company and the State Board of Administration of Florida dated September 22, 2006
(included as exhibit 10.31 to the Form S-4/A (Registration No. 333-150327), filed June 13, 2008, and
incorporated herein by reference).
Master Business Process Outsourcing Services Agreement between United Insurance Management,
LLC and Computer Sciences Corporation, dated March 11, 2008 (included as exhibit 10.24 to the
Form S-4/A (Registration No. 333-150327), filed June 13, 2008, and incorporated herein by
reference).
Addendum Number One to Insurance Capital Build-Up Incentive Program Surplus Note, dated
November 7, 2008 and effective July 1, 2008, between the State Board of Administration of Florida
and United Property & Casualty Insurance Company (included as exhibit 10.1 to the Form 8-K, filed
November 12, 2008, and incorporated herein by reference).
118
UNITED INSURANCE HOLDINGS CORP.
Exhibit
Description
10.5
10.6
Federal Income Tax Allocation Agreement between United Insurance Holdings Corp., United
Insurance Management, L.C., Skyway Claims Services, LLC, United Property & Casualty Insurance
Company, UPC Re and amended to include Family Security Holdings, LLC and its subsidiaries dated
July 1, 2012 (filed as exhibit 10.11 to the Form 10-Q filed on August 8, 2012, and incorporated
herein by reference).
Assumption Agreement between Sunshine State Insurance Company and United Property & Casualty
Insurance Company, effective July 1, 2010 (included as exhibit 10.7 to the Form 10-Q, filed
August 9, 2010, and incorporated herein by reference).
10.7(a)
Continuing Employment and Senior Advisor Agreement between United Insurance Holdings Corp.
and Don Cronin effective November 1, 2011 (included as exhibit 10.19 to the Form 10-K, filed
March 14, 2012, and incorporated herein by reference).
10.8
10.9
Form of Indemnification Agreement between United Insurance Holdings Corp. and its Directors
(included as Exhibit 10.1 to the Form 8-K, filed October 10, 2012, and incorporated herein by
reference).
Assumption Agreement between Citizens and United Property Casualty Insurance Company,
effective November 20, 2012 (filed as Exhibit 10.1 to the Form 10-Q, filed May 8, 2013, and
incorporated herein by reference).
10.10(a) Form of Restricted Stock Award under the United Insurance Holdings Corp. 2013 Omnibus Incentive
Plan (included as Exhibit 10.1 to the Form 8-K, filed September 30, 2013, and incorporated herein by
reference).
10.11(a) United Insurance Holdings Corp. 2013 Omnibus Incentive Plan (incorporated by reference to
Appendix A to the Company’s Definitive Proxy statement for its 2013 Annual Meeting, filed on
April 16, 2013).
10.12(a) Restricted Stock Award Agreement, dated March 21, 2014, by and between United Insurance
Holdings Corp. and Kimberly Salmon (included as exhibit 10.2 to the Form 10-Q filed on May 1,
2014, and incorporated herein by reference).
10.13(a) Form of Restricted Stock Award Agreement (for Non-Employee Members of the Board of Directors)
under the United Insurance Holdings Corp. 2013 Omnibus Incentive Plan (included as exhibit 10.1 to
the Form 8-K filed on September 25, 2014, and incorporated herein by reference).
10.14(a) Form of Restricted Stock Award (for Employees) under the United Insurance Holdings Corp. 2013
Omnibus Incentive Plan (included as exhibit 10.2 to the Form 8-K filed on September 25, 2014, and
incorporated herein by reference).
10.15(a) Form of Restricted Stock Award Agreement (for Chairman of the Board) under the United Insurance
Holdings Corp. 2013 Omnibus Incentive Plan (included as exhibit 10.3 to the Form 8-K filed on
September 25, 2014, and incorporated herein by reference).
10.16(a) Non-Executive Chairman Agreement, dated September 19, 2014, between United Insurance Holdings
Corp. and Gregory C. Branch (included as exhibit 10.4 to the Form 8-K filed on September 25, 2014,
and incorporated herein by reference).
10.17
Purchase and Sale Agreement, dated September 5, 2014, between AAA Auto Club South, Inc. and
United Insurance Holdings Corp. (included as exhibit 10.1 to the Form 8-K filed on September 11,
2014, and incorporated herein by reference).
119
UNITED INSURANCE HOLDINGS CORP.
Exhibit
Description
10.18
10.19(a)
10.20
12.1
14.1
21.1
23.1
31.1
31.2
32.1
32.2
Stockholders Agreement, dated as of August 17, 2016, by and among United Insurance Holdings
Corp., RDX Holding, LLC., R. Daniel Peed and Peed FLP1, Ltd., L.L.P (included as Exhibit 10.1
to the Form 8-K filed on August 19, 2016, and incorporated herein by reference).
Employment Agreement between United Insurance Holdings Corp. and John Forney, dated
April 21, 2017 (included as Exhibit 10.1 to the Form 8-K, filed April 24, 2017, and incorporated
herein by reference).
Indenture, dated as of December 13, 2017, by and between the Company and Deutsche Bank Trust
Company Americas, as trustee (included at exhibit 4.1 to the Form 8-K, filed on December 13,
2017, and incorporated herein by reference).
Computation of Ratio of Earnings to Fixed Charges
Code of Conduct and Ethics (included as exhibit 14 to the Form S-1 (Registration
No. 333-143466), filed June 4, 2007, and incorporated herein by reference).
Subsidiaries of United Insurance Holdings Corp.
Consent of RSM US LLP.
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.
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema
101.CAL
XBRL Taxonomy Extension Calculation Linkbase
101.DEF
XBRL Taxonomy Extension Definition Linkbase
101.LAB
XBRL Taxonomy Extension Label Linkbase
101.PRE
XBRL Taxonomy Extension Presentation Linkbase
(a)
Indicates management contract or compensatory plan
120
UNITED INSURANCE HOLDINGS CORP.
SCHEDULE I. SUMMARY OF INVESTMENTS
December 31, 2017
Cost or
Amortized
Cost
Fair
Value
Amount Shown in
Consolidated
Balance Sheet
Bonds:
U.S. government and agency securities . . . . . . . . . . . . . . . . .
Foreign governments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
States, municipalities and political subdivisions . . . . . . . . . .
Public utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Redeemable preferred stocks . . . . . . . . . . . . . . . . . . . . . . . . .
Total fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mutual funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stocks:
Public utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other common stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonredeemable preferred stocks . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Portfolio loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$237,809
2,022
200,706
20,215
287,025
14,902
755
763,434
29,079
1,343
18,856
1,718
50,996
8,057
20,000
$235,891
2,036
201,512
20,257
287,562
14,905
692
762,855
31,924
1,702
27,902
1,767
63,295
8,381
20,000
$235,891
2,036
201,512
20,257
287,562
14,905
692
762,855
31,924
1,702
27,902
1,767
63,295
8,381
20,000
Total investments . . . . . . . . . . . . . . . . . . . . . . . . . .
$842,487
$854,531
$854,531
121
UNITED INSURANCE HOLDINGS CORP.
SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Condensed Balance Sheets
December 31,
2016
2017
Assets
Fixed maturities, available for sale, at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 26,583
79,331
579,313
10,157
7,761
12,439
$ —
7,399
263,712
10,841
7,993
11,337
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$715,584
$301,282
Liabilities
Intercompany payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 26,128
967
—
151,364
$ 14,531
520
1,906
42,998
Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
178,459
59,955
Stockholders’ Equity
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4
387,145
(431)
9,221
141,186
2
99,353
(431)
822
141,581
Total Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
537,125
241,327
Total Liabilities and Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$715,584
$301,282
122
UNITED INSURANCE HOLDINGS CORP.
SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT, CONTINUED
Condensed Statements of Comprehensive Income
Years Ended December 31,
2015
2016
2017
Revenues
Net income from subsidiaries (equity method) . . . . . . . . . . . . . . . . . . . . . . .
Net realized investment (loss) gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$14,000
—
53
$13,296
(14)
88
$27,562
951
239
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14,053
13,370
28,752
Expenses
Operating and underwriting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for income tax (benefit) expense . . . . . . . . . . . . . . . . . . . . . . . . .
348
9,078
2,939
12,365
1,688
75
1,763
(8,382)
337
11,805
496
12,638
732
60
792
(4,906)
138
1,252
—
1,390
27,362
245
27,607
249
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$10,145
$ 5,698
$27,358
Unrealized gain (loss) on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reclassification adjustments—losses (gains) . . . . . . . . . . . . . . . . . . . . . . . .
Income tax (expense) benefit related to other items of comprehensive
10,647
(67)
(629)
(547)
(3,070)
(827)
income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(2,181)
378
1,506
Total Comprehensive Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$18,544
$ 4,900
$24,967
123
UNITED INSURANCE HOLDINGS CORP.
SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT, CONTINUED
Condensed Statements of Cash Flows
OPERATING ACTIVITIES
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Year Ended December 31,
2015
2016
2017
$ 10,145
$ 5,698
$ 27,358
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized investment gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in operating assets and liabilities:
Accrued investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . . . . .
Intercompany payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,208
—
(777)
2,613
—
359
447
11,597
(1,905)
682
14
382
1,947
3
(22,553)
—
5,874
1,969
74
(951)
126
1,974
(3)
450
—
2,557
918
Net cash provided by (used in) operating activities . . . . . . . . . . . . . . . . . . . . . .
23,687
(5,984)
32,503
INVESTING ACTIVITIES
Proceeds from sales of investments available for sale . . . . . . . . . . . . . . . .
Purchases of investments available for sale . . . . . . . . . . . . . . . . . . . . . . . .
Additional investment in subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of property and equipment acquired . . . . . . . . . . . . . . . . . . . . . . . . . .
—
(26,584)
(23,283)
(449)
34,551
(70)
(68,563)
(1,797)
19,633
(53,212)
16,276
(3,255)
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(50,316)
(35,879)
(20,558)
FINANCING ACTIVITIES
Tax withholding payment related to net settlement of equity awards . . . . .
Proceeds from borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayments of borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments of debt issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by (used in) financing activities . . . . . . . . . . . . . . . . . . . . . .
Increase in cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . . . . . . . . .
(287)
150,000
(38,897)
(3,264)
(8,991)
98,561
71,932
7,399
(270)
42,951
—
—
(4,974)
37,707
(4,156)
11,555
(185)
—
—
—
(4,302)
(4,487)
7,458
4,097
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 79,331
$ 7,399
$ 11,555
Notes to Condensed Financial Statements—Basis of Presentation
The Company’s investment in subsidiaries is stated at cost plus equity in the undistributed earnings of
subsidiaries since the date of acquisition. The Company’s share of net income of its subsidiaries is included in
income using the equity method. These financial statements should be read in conjunction with UPC Insurance’s
consolidated financial statements.
124
UNITED INSURANCE HOLDINGS CORP.
SCHEDULE IV. REINSURANCE
Property and Casualty Insurance
Direct
Premium
Written
Premiums
Ceded to
Other
Companies
Premiums
Assumed
from Other
Companies
Net
Premiums
Written
Percentage of
Premiums
Assumed to Net
Years Ended December 31,
2017 . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . .
$ 989,525
708,252
548,916
$ 447,329
262,340
183,808
$ 51,323
(96)
20,820
$ 593,519
445,816
385,928
8.6%
— %
5.4%
SCHEDULE V. VALUATION AND QUALIFYING ACCOUNTS
Uncollectible Premium Liability
Balance at
Beginning
of Period
Charged to
Costs and
Expenses Deductions
Balance
at End of
Period
Years Ended December 31,
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
144
132
34
$
294
356
198
$ (54)
(344)
(100)
$
384
144
132
125
UNITED INSURANCE HOLDINGS CORP.
Item 16. Form 10-K Summary
Not applicable.
126
UNITED INSURANCE HOLDINGS CORP.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: March 28, 2018
UNITED INSURANCE HOLDINGS CORP.
/s/ John L. Forney
By:
Name: John L. Forney
Title: Chief Executive Officer
(principal executive officer and duly authorized
officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/ John L. Forney
John L. Forney
/s/ B. Bradford Martz
B. Bradford Martz
/s/ Gregory C. Branch
Gregory C. Branch
/s/ R. Daniel Peed
R. Daniel Peed
/s/ Alec L. Poitevint, II
Alec L. Poitevint, II
/s/ Kern M. Davis, M.D.
Kern M. Davis, M.D.
/s/ Michael R. Hogan
Michael R. Hogan
/s/ William H. Hood, III
William H. Hood, III
/s/ Sherrill W. Hudson
Sherrill W. Hudson
/s/ Patrick F. Maroney
Patrick F. Maroney
/s/ Kent G. Whittemore
Kent G. Whittemore
President, Chief Executive Officer and Director
(principal executive officer)
Chief Financial Officer
(principal financial and accounting officer)
March 28, 2018
March 28, 2018
Chairman of the Board
March 28, 2018
Vice Chairman of the Board
March 28, 2018
Lead Director
Director
Director
Director
Director
Director
Director
127
March 28, 2018
March 28, 2018
March 28, 2018
March 28, 2018
March 28, 2018
March 28, 2018
March 28, 2018
CORPORATE HEADQUARTERS
United Insurance Holdings Corp.
800 2nd Avenue S.
St. Petersburg, FL 33701
TRANSFER AGENT
American Stock Transfer & Trust Company, LLC
6201 15th Avenue
Brooklyn, NY 11219
INDEPENDENT AUDITORS
RSM US LLP
1299 Farnam Street
Suite 530
Omaha, NE 68102
INVESTOR RELATIONS
The Equity Group, Inc.
800 Third Avenue
36th Floor
New York, NY 10022
STOCK LISTING
NASDAQ; symbol UIHC
ANNUAL MEETING
The 2018 Annual Meeting will be held on Tuesday, May 8, 2018 at 1:00 p.m. EDT at the corporate headquarters
of United Insurance Holdings Corp.
DIRECTORS
Gregory C. Branch, Chairman — Chairman and President of Branch Properties, Inc.
R. Daniel Peed, Vice Chairman — President and Chief Executive Officer of AmRisc, LLC
Alec L. Poitevint, II, Lead Director — Chairman and President of Southeastern Minerals, Inc.
Kern M. Davis, M.D. — President of Pathology Associates P.A.
Michael R. Hogan — President of Puckett, Sheets, and Hogan Insurance
William H. Hood, III — Managing member of Hall Capital Holdings LLC
Sherrill W. Hudson — Retired Chairman of TECO Energy, Inc.
Patrick F. Maroney — Professor Emeritas at Florida State University College of Business
Kent G. Whittemore — President and a shareholder of The Whittemore Law Group, P.A.
John Forney, CFA — President and Chief Executive Officer of United Insurance Holdings Corp.
EXECUTIVE OFFICERS
John Forney, CFA — President, Chief Executive Officer and Director
B. Bradford Martz, CPA — Chief Financial Officer
Paul DiFrancesco — Chief Underwriting Officer
Deepak Menon — Chief Revenue Officer
Kimberly Salmon — General Counsel, Chief Legal Officer and Corporate Secretary
Scott St John — Chief Claims Officer
Andrew D. Swenson — Vice President and Chief Information Officer
KEEPING THE PROMISE IS SMART BUSINESS
WA
OR
MT
ID
20TH LARGEST
HOMEOWNERS
INSURER
in the U.S. for 2017
WY
ND
SD
NE
NV
UT
CO
MN
UPC IS ACHIEVING GROWTH,
GEOGRAPHIC DIVERSIFICATION,
AND PROFITABILITY
UPC is licensed in 18 coastal
MI
states, and writing in 12 states
WI
VT
NH
MA
CT
NY
IA
5-year annualized return on
equity is 13%
IL
IN
OH
WV
PA
NJ
DC
VA
NC
CA
KS
MO
KY
TN
AZ
NM
OK
TX
HI
AR
LA
MS
AL
GA
SC
FL
Writing
Licensed
Our Core Values
• Teamwork
• Trust
• Accountability
• Integrity
• Bias To Action
• Persistence
Our Vision
To be the premier provider of property
insurance in catastrophe-exposed areas.