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(cid:67)(cid:80)(cid:70)(cid:2)(cid:67)(cid:68)(cid:75)(cid:78)(cid:75)(cid:86)(cid:91)(cid:2)(cid:86)(cid:81)(cid:2)(cid:82)(cid:67)(cid:91)(cid:2)(cid:69)(cid:78)(cid:67)(cid:75)(cid:79)(cid:85)(cid:2)(cid:75)(cid:80)(cid:2)(cid:67)(cid:78)(cid:78)(cid:2)(cid:69)(cid:75)(cid:84)(cid:69)(cid:87)(cid:79)(cid:85)(cid:86)(cid:67)(cid:80)(cid:69)(cid:71)(cid:85)(cid:16) A LETTER TO SHAREHOLDERS PRESIDENT & CHIEF EXECUTIVE OFFICER JOHN FORNEY 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enthusiasm.(cid:187)(cid:3)(cid:21)(cid:62)(cid:133)(cid:62)(cid:133)(cid:62)(cid:93)(cid:3)(cid:22)(cid:3)(cid:204)(cid:133)(cid:136)(cid:152)(cid:142)(cid:3)(cid:22)(cid:3)(cid:142)(cid:152)(cid:156)(cid:220)(cid:3)(cid:220)(cid:133)(cid:62)(cid:204)(cid:3)(cid:133)(cid:105)(cid:3)(cid:147)(cid:105)(cid:62)(cid:152)(cid:204)(cid:176)(cid:3)(cid:34)(cid:213)(cid:192)(cid:3)(cid:204)(cid:105)(cid:62)(cid:147)(cid:3)(cid:192)(cid:105)(cid:147)(cid:62)(cid:136)(cid:152)(cid:195)(cid:3)(cid:105)(cid:152)(cid:204)(cid:133)(cid:213)(cid:195)(cid:136)(cid:62)(cid:195)(cid:204)(cid:136)(cid:86)(cid:93)(cid:3)(cid:62)(cid:152)(cid:96)(cid:3)(cid:220)(cid:105)(cid:3) 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Here’s why: Rates (cid:45)(cid:105)(cid:105)(cid:3)(cid:96)(cid:136)(cid:195)(cid:86)(cid:213)(cid:195)(cid:195)(cid:136)(cid:156)(cid:152)(cid:3)(cid:62)(cid:76)(cid:156)(cid:219)(cid:105)(cid:176)(cid:3)(cid:55)(cid:105)(cid:3)(cid:133)(cid:62)(cid:219)(cid:105)(cid:3)(cid:76)(cid:105)(cid:105)(cid:152)(cid:3)(cid:62)(cid:152)(cid:96)(cid:3)(cid:220)(cid:136)(cid:143)(cid:143)(cid:3)(cid:86)(cid:156)(cid:152)(cid:204)(cid:136)(cid:152)(cid:213)(cid:105)(cid:3)(cid:204)(cid:156)(cid:3)(cid:76)(cid:105)(cid:3)(cid:62)(cid:125)(cid:125)(cid:192)(cid:105)(cid:195)(cid:195)(cid:136)(cid:219)(cid:105)(cid:3)(cid:136)(cid:152)(cid:3)(cid:156)(cid:213)(cid:192)(cid:3)(cid:192)(cid:62)(cid:204)(cid:105)(cid:135)(cid:195)(cid:105)(cid:204)(cid:204)(cid:136)(cid:152)(cid:125)(cid:3) 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1(cid:34)(cid:213)(cid:192)(cid:3)(cid:86)(cid:156)(cid:147)(cid:171)(cid:62)(cid:152)(cid:222)(cid:3)(cid:86)(cid:105)(cid:143)(cid:105)(cid:76)(cid:192)(cid:62)(cid:204)(cid:105)(cid:96)(cid:3)(cid:136)(cid:204)(cid:195)(cid:3)(cid:211)(cid:228)(cid:204)(cid:133)(cid:3)(cid:62)(cid:152)(cid:152)(cid:136)(cid:219)(cid:105)(cid:192)(cid:195)(cid:62)(cid:192)(cid:222)(cid:3)(cid:143)(cid:62)(cid:195)(cid:204)(cid:3)(cid:222)(cid:105)(cid:62)(cid:192)(cid:176)(cid:3)(cid:22)(cid:152)(cid:3)(cid:204)(cid:133)(cid:156)(cid:195)(cid:105)(cid:3)(cid:204)(cid:220)(cid:105)(cid:152)(cid:204)(cid:222)(cid:3)(cid:222)(cid:105)(cid:62)(cid:192)(cid:195)(cid:93)(cid:3)(cid:204)(cid:133)(cid:105)(cid:192)(cid:105)(cid:3)(cid:133)(cid:62)(cid:219)(cid:105)(cid:3)(cid:76)(cid:105)(cid:105)(cid:152)(cid:3)(cid:195)(cid:136)(cid:221)(cid:3)(cid:220)(cid:136)(cid:204)(cid:133)(cid:3)(cid:133)(cid:213)(cid:192)(cid:192)(cid:136)(cid:86)(cid:62)(cid:152)(cid:105)(cid:3) (cid:143)(cid:156)(cid:195)(cid:195)(cid:105)(cid:195)(cid:3)(cid:112)(cid:3)(cid:211)(cid:228)(cid:228)(cid:123)(cid:93)(cid:3)(cid:211)(cid:228)(cid:228)(cid:120)(cid:93)(cid:3)(cid:62)(cid:152)(cid:96)(cid:3)(cid:105)(cid:62)(cid:86)(cid:133)(cid:3)(cid:156)(cid:118)(cid:3)(cid:204)(cid:133)(cid:105)(cid:3)(cid:171)(cid:62)(cid:195)(cid:204)(cid:3)(cid:118)(cid:156)(cid:213)(cid:192)(cid:3)(cid:222)(cid:105)(cid:62)(cid:192)(cid:195)(cid:116) LETTER TO SHAREHOLDERS – 1 Reserves 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(cid:133)(cid:62)(cid:195)(cid:3)(cid:76)(cid:105)(cid:105)(cid:152)(cid:3)(cid:171)(cid:192)(cid:156)(cid:119)(cid:204)(cid:62)(cid:76)(cid:143)(cid:105)(cid:93)(cid:3)(cid:105)(cid:219)(cid:105)(cid:152)(cid:3)(cid:220)(cid:136)(cid:204)(cid:133)(cid:3)(cid:204)(cid:133)(cid:105)(cid:3)(cid:143)(cid:156)(cid:195)(cid:195)(cid:3)(cid:105)(cid:221)(cid:171)(cid:105)(cid:192)(cid:136)(cid:105)(cid:152)(cid:86)(cid:105)(cid:3)(cid:156)(cid:118)(cid:3)(cid:204)(cid:133)(cid:105)(cid:3)(cid:171)(cid:62)(cid:195)(cid:204)(cid:3)(cid:118)(cid:156)(cid:213)(cid:192)(cid:3)(cid:222)(cid:105)(cid:62)(cid:192)(cid:195)(cid:176)(cid:3)(cid:47)(cid:133)(cid:62)(cid:204)(cid:189)(cid:195)(cid:3)(cid:220)(cid:133)(cid:222)(cid:3)(cid:220)(cid:105)(cid:3)(cid:62)(cid:192)(cid:105) (cid:62)(cid:76)(cid:143)(cid:105)(cid:3)(cid:204)(cid:156)(cid:3)(cid:119)(cid:152)(cid:136)(cid:195)(cid:133)(cid:3)(cid:171)(cid:143)(cid:62)(cid:86)(cid:105)(cid:147)(cid:105)(cid:152)(cid:204)(cid:195)(cid:3)(cid:105)(cid:62)(cid:192)(cid:143)(cid:222)(cid:3)(cid:62)(cid:152)(cid:96)(cid:3)(cid:220)(cid:136)(cid:204)(cid:133)(cid:3)(cid:219)(cid:105)(cid:192)(cid:222)(cid:3)(cid:147)(cid:62)(cid:152)(cid:62)(cid:125)(cid:105)(cid:62)(cid:76)(cid:143)(cid:105)(cid:3)(cid:171)(cid:192)(cid:136)(cid:86)(cid:136)(cid:152)(cid:125)(cid:93)(cid:3)(cid:220)(cid:133)(cid:136)(cid:86)(cid:133)(cid:3)(cid:143)(cid:156)(cid:156)(cid:142)(cid:195)(cid:3)(cid:204)(cid:156)(cid:3)(cid:76)(cid:105)(cid:3)(cid:204)(cid:133)(cid:105)(cid:3)(cid:86)(cid:62)(cid:195)(cid:105) (cid:62)(cid:125)(cid:62)(cid:136)(cid:152)(cid:3)(cid:136)(cid:152)(cid:3)(cid:211)(cid:228)(cid:211)(cid:228)(cid:176)(cid:3)(cid:386)(cid:152)(cid:96)(cid:3)(cid:76)(cid:105)(cid:86)(cid:62)(cid:213)(cid:195)(cid:105)(cid:3)(cid:220)(cid:105)(cid:3)(cid:76)(cid:213)(cid:222)(cid:3)(cid:62)(cid:3)(cid:195)(cid:204)(cid:62)(cid:86)(cid:142)(cid:105)(cid:96)(cid:3)(cid:133)(cid:136)(cid:125)(cid:133)(cid:3)(cid:195)(cid:136)(cid:152)(cid:125)(cid:143)(cid:105)(cid:135)(cid:195)(cid:133)(cid:156)(cid:204)(cid:3)(cid:86)(cid:62)(cid:195)(cid:86)(cid:62)(cid:96)(cid:136)(cid:152)(cid:125)(cid:3)(cid:195)(cid:204)(cid:192)(cid:213)(cid:86)(cid:204)(cid:213)(cid:192)(cid:105)(cid:93)(cid:3)(cid:156)(cid:213)(cid:192)(cid:3)(cid:192)(cid:136)(cid:195)(cid:142)(cid:3) (cid:156)(cid:118)(cid:3)(cid:192)(cid:213)(cid:136)(cid:152)(cid:3)(cid:136)(cid:195)(cid:3)(cid:118)(cid:62)(cid:192)(cid:3)(cid:195)(cid:147)(cid:62)(cid:143)(cid:143)(cid:105)(cid:192)(cid:3)(cid:204)(cid:133)(cid:62)(cid:152)(cid:3)(cid:156)(cid:204)(cid:133)(cid:105)(cid:192)(cid:3)(cid:19)(cid:143)(cid:156)(cid:192)(cid:136)(cid:96)(cid:62)(cid:135)(cid:105)(cid:221)(cid:171)(cid:156)(cid:195)(cid:105)(cid:96)(cid:3)(cid:136)(cid:152)(cid:195)(cid:213)(cid:192)(cid:105)(cid:192)(cid:195)(cid:176)(cid:3)(cid:55)(cid:105)(cid:3)(cid:195)(cid:204)(cid:136)(cid:143)(cid:143)(cid:3)(cid:133)(cid:62)(cid:219)(cid:105)(cid:3)(cid:156)(cid:219)(cid:105)(cid:192)(cid:3)(cid:62)(cid:3)(cid:76)(cid:136)(cid:143)(cid:143)(cid:136)(cid:156)(cid:152)(cid:3)(cid:96)(cid:156)(cid:143)(cid:143)(cid:62)(cid:192)(cid:195)(cid:3)(cid:156)(cid:118)(cid:3) (cid:192)(cid:105)(cid:136)(cid:152)(cid:195)(cid:213)(cid:192)(cid:62)(cid:152)(cid:86)(cid:105)(cid:3)(cid:143)(cid:105)(cid:118)(cid:204)(cid:3)(cid:156)(cid:152)(cid:3)(cid:22)(cid:192)(cid:147)(cid:62)(cid:93)(cid:3)(cid:62)(cid:3)(cid:147)(cid:213)(cid:86)(cid:133)(cid:3)(cid:96)(cid:136)(cid:118)(cid:118)(cid:105)(cid:192)(cid:105)(cid:152)(cid:204)(cid:3)(cid:192)(cid:105)(cid:195)(cid:213)(cid:143)(cid:204)(cid:3)(cid:204)(cid:133)(cid:62)(cid:152)(cid:3)(cid:156)(cid:204)(cid:133)(cid:105)(cid:192)(cid:3)(cid:86)(cid:62)(cid:192)(cid:192)(cid:136)(cid:105)(cid:192)(cid:195)(cid:3)(cid:62)(cid:192)(cid:105)(cid:3)(cid:195)(cid:105)(cid:105)(cid:136)(cid:152)(cid:125)(cid:3)(cid:192)(cid:136)(cid:125)(cid:133)(cid:204)(cid:3)(cid:152)(cid:156)(cid:220)(cid:176) Capital (cid:13)(cid:219)(cid:105)(cid:152)(cid:3)(cid:220)(cid:136)(cid:204)(cid:133)(cid:3)(cid:204)(cid:133)(cid:105)(cid:3)(cid:86)(cid:133)(cid:62)(cid:143)(cid:143)(cid:105)(cid:152)(cid:125)(cid:105)(cid:195)(cid:3)(cid:156)(cid:118)(cid:3)(cid:204)(cid:133)(cid:105)(cid:3)(cid:171)(cid:62)(cid:195)(cid:204)(cid:3)(cid:195)(cid:105)(cid:219)(cid:105)(cid:192)(cid:62)(cid:143)(cid:3)(cid:222)(cid:105)(cid:62)(cid:192)(cid:195)(cid:93)(cid:3)(cid:220)(cid:105)(cid:3)(cid:133)(cid:62)(cid:219)(cid:105)(cid:3)(cid:76)(cid:105)(cid:105)(cid:152)(cid:3)(cid:125)(cid:156)(cid:156)(cid:96)(cid:3)(cid:195)(cid:204)(cid:105)(cid:220)(cid:62)(cid:192)(cid:96)(cid:195)(cid:3)(cid:156)(cid:118)(cid:3)(cid:86)(cid:62)(cid:171)(cid:136)(cid:204)(cid:62)(cid:143)(cid:3) (cid:195)(cid:136)(cid:152)(cid:86)(cid:105)(cid:3)(cid:220)(cid:105)(cid:3)(cid:195)(cid:204)(cid:62)(cid:192)(cid:204)(cid:105)(cid:96)(cid:3)(cid:96)(cid:156)(cid:220)(cid:152)(cid:3)(cid:204)(cid:133)(cid:136)(cid:195)(cid:3)(cid:141)(cid:156)(cid:213)(cid:192)(cid:152)(cid:105)(cid:222)(cid:3)(cid:156)(cid:118)(cid:3)(cid:125)(cid:192)(cid:156)(cid:220)(cid:204)(cid:133)(cid:3)(cid:62)(cid:152)(cid:96)(cid:3)(cid:96)(cid:136)(cid:219)(cid:105)(cid:192)(cid:195)(cid:136)(cid:119)(cid:86)(cid:62)(cid:204)(cid:136)(cid:156)(cid:152)(cid:3)(cid:136)(cid:152)(cid:3)(cid:211)(cid:228)(cid:163)(cid:211)(cid:176)(cid:3)(cid:34)(cid:219)(cid:105)(cid:192)(cid:3)(cid:204)(cid:133)(cid:62)(cid:204)(cid:3)(cid:62)(cid:143)(cid:147)(cid:156)(cid:195)(cid:204) (cid:105)(cid:136)(cid:125)(cid:133)(cid:204)(cid:135)(cid:222)(cid:105)(cid:62)(cid:192)(cid:3)(cid:204)(cid:136)(cid:147)(cid:105)(cid:3)(cid:171)(cid:105)(cid:192)(cid:136)(cid:156)(cid:96)(cid:93)(cid:3)(cid:220)(cid:105)(cid:3)(cid:133)(cid:62)(cid:219)(cid:105)(cid:3)(cid:125)(cid:192)(cid:156)(cid:220)(cid:152)(cid:3)(cid:76)(cid:156)(cid:156)(cid:142)(cid:3)(cid:219)(cid:62)(cid:143)(cid:213)(cid:105)(cid:3)(cid:171)(cid:105)(cid:192)(cid:3)(cid:195)(cid:133)(cid:62)(cid:192)(cid:105)(cid:3)(cid:62)(cid:204)(cid:3)(cid:62)(cid:3)(cid:86)(cid:156)(cid:147)(cid:171)(cid:156)(cid:213)(cid:152)(cid:96)(cid:105)(cid:96)(cid:3)(cid:62)(cid:152)(cid:152)(cid:213)(cid:62)(cid:143)(cid:3)(cid:125)(cid:192)(cid:156)(cid:220)(cid:204)(cid:133)(cid:3) (cid:192)(cid:62)(cid:204)(cid:105)(cid:3)(cid:156)(cid:118)(cid:3)(cid:163)(cid:228)(cid:176)(cid:110)(cid:175)(cid:176)(cid:3)(cid:12)(cid:105)(cid:195)(cid:171)(cid:136)(cid:204)(cid:105)(cid:3)(cid:62)(cid:3)(cid:152)(cid:105)(cid:125)(cid:62)(cid:204)(cid:136)(cid:219)(cid:105)(cid:3)(cid:163)(cid:120)(cid:135)(cid:171)(cid:156)(cid:136)(cid:152)(cid:204)(cid:3)(cid:86)(cid:156)(cid:147)(cid:76)(cid:136)(cid:152)(cid:105)(cid:96)(cid:3)(cid:192)(cid:62)(cid:204)(cid:136)(cid:156)(cid:3)(cid:136)(cid:147)(cid:171)(cid:62)(cid:86)(cid:204)(cid:3)(cid:118)(cid:192)(cid:156)(cid:147)(cid:3)(cid:86)(cid:62)(cid:204)(cid:3)(cid:105)(cid:219)(cid:105)(cid:152)(cid:204)(cid:195)(cid:3)(cid:156)(cid:219)(cid:105)(cid:192)(cid:3) (cid:204)(cid:133)(cid:105)(cid:3)(cid:171)(cid:62)(cid:195)(cid:204)(cid:3)(cid:118)(cid:156)(cid:213)(cid:192)(cid:3)(cid:222)(cid:105)(cid:62)(cid:192)(cid:195)(cid:93)(cid:3)(cid:156)(cid:213)(cid:192)(cid:3)(cid:76)(cid:156)(cid:156)(cid:142)(cid:3)(cid:219)(cid:62)(cid:143)(cid:213)(cid:105)(cid:3)(cid:133)(cid:62)(cid:195)(cid:3)(cid:76)(cid:105)(cid:105)(cid:152)(cid:3)(cid:195)(cid:204)(cid:62)(cid:76)(cid:143)(cid:105)(cid:3)(cid:96)(cid:213)(cid:192)(cid:136)(cid:152)(cid:125)(cid:3)(cid:204)(cid:133)(cid:62)(cid:204)(cid:3)(cid:204)(cid:136)(cid:147)(cid:105)(cid:93)(cid:3)(cid:147)(cid:105)(cid:62)(cid:152)(cid:136)(cid:152)(cid:125)(cid:3)(cid:220)(cid:105)(cid:3)(cid:62)(cid:192)(cid:105)(cid:3)(cid:220)(cid:105)(cid:143)(cid:143)(cid:135) (cid:171)(cid:156)(cid:195)(cid:136)(cid:204)(cid:136)(cid:156)(cid:152)(cid:105)(cid:96)(cid:3)(cid:204)(cid:156)(cid:3)(cid:204)(cid:62)(cid:142)(cid:105)(cid:3)(cid:62)(cid:96)(cid:219)(cid:62)(cid:152)(cid:204)(cid:62)(cid:125)(cid:105)(cid:3)(cid:156)(cid:118)(cid:3)(cid:147)(cid:62)(cid:192)(cid:142)(cid:105)(cid:204)(cid:3)(cid:96)(cid:136)(cid:195)(cid:192)(cid:213)(cid:171)(cid:204)(cid:136)(cid:156)(cid:152)(cid:3)(cid:62)(cid:152)(cid:96)(cid:3)(cid:86)(cid:156)(cid:147)(cid:171)(cid:105)(cid:204)(cid:136)(cid:204)(cid:156)(cid:192)(cid:3)(cid:220)(cid:105)(cid:62)(cid:142)(cid:152)(cid:105)(cid:195)(cid:195)(cid:176)(cid:3)(cid:55)(cid:105)(cid:3)(cid:136)(cid:152)(cid:204)(cid:105)(cid:152)(cid:96)(cid:3)(cid:204)(cid:156)(cid:3)(cid:96)(cid:156) (cid:141)(cid:213)(cid:195)(cid:204)(cid:3)(cid:204)(cid:133)(cid:62)(cid:204)(cid:176)(cid:3)(cid:19)(cid:156)(cid:192)(cid:3)(cid:204)(cid:133)(cid:156)(cid:195)(cid:105)(cid:3)(cid:220)(cid:133)(cid:156)(cid:3)(cid:133)(cid:62)(cid:219)(cid:105)(cid:3)(cid:76)(cid:105)(cid:105)(cid:152)(cid:3)(cid:220)(cid:136)(cid:204)(cid:133)(cid:3)(cid:49)(cid:22)(cid:21)(cid:10)(cid:3)(cid:118)(cid:156)(cid:192)(cid:3)(cid:62)(cid:3)(cid:220)(cid:133)(cid:136)(cid:143)(cid:105)(cid:3)(cid:112)(cid:3)(cid:204)(cid:133)(cid:62)(cid:152)(cid:142)(cid:195)(cid:3)(cid:118)(cid:156)(cid:192)(cid:3)(cid:195)(cid:204)(cid:136)(cid:86)(cid:142)(cid:136)(cid:152)(cid:125)(cid:3)(cid:220)(cid:136)(cid:204)(cid:133)(cid:3)(cid:213)(cid:195)(cid:3)(cid:156)(cid:152)(cid:3)(cid:204)(cid:133)(cid:105)(cid:3) (cid:141)(cid:156)(cid:213)(cid:192)(cid:152)(cid:105)(cid:222)(cid:176)(cid:3)(cid:22)(cid:118)(cid:3)(cid:222)(cid:156)(cid:213)(cid:189)(cid:192)(cid:105)(cid:3)(cid:141)(cid:213)(cid:195)(cid:204)(cid:3)(cid:125)(cid:105)(cid:204)(cid:204)(cid:136)(cid:152)(cid:125)(cid:3)(cid:195)(cid:204)(cid:62)(cid:192)(cid:204)(cid:105)(cid:96)(cid:93)(cid:3)(cid:220)(cid:105)(cid:3)(cid:220)(cid:105)(cid:143)(cid:86)(cid:156)(cid:147)(cid:105)(cid:3)(cid:222)(cid:156)(cid:213)(cid:176) Conclusion 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(cid:42)(cid:192)(cid:105)(cid:195)(cid:136)(cid:96)(cid:105)(cid:152)(cid:204)(cid:3)(cid:69)(cid:3)(cid:10)(cid:133)(cid:136)(cid:105)(cid:118)(cid:3)(cid:13)(cid:221)(cid:105)(cid:86)(cid:213)(cid:204)(cid:136)(cid:219)(cid:105)(cid:3)(cid:34)(cid:118)(cid:119)(cid:86)(cid:105)(cid:192) (cid:49)(cid:152)(cid:136)(cid:204)(cid:105)(cid:96)(cid:3)(cid:22)(cid:152)(cid:195)(cid:213)(cid:192)(cid:62)(cid:152)(cid:86)(cid:105)(cid:3)(cid:21)(cid:156)(cid:143)(cid:96)(cid:136)(cid:152)(cid:125)(cid:195)(cid:3)(cid:10)(cid:156)(cid:192)(cid:171)(cid:176) LETTER TO SHAREHOLDERS – 2 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, 2019 Commission File Number 001-35761 United Insurance Holdings Corp. (Exact Name of Registrant as Specified in Its Charter) Delaware (State or Other Jurisdiction of Incorporation or Organization) 800 2nd Avenue S St. Petersburg, Florida (Address of Principal Executive Offices) 75-3241967 (IRS Employer Identification Number) 33701 (Zip Code) 727-895-7737 (Telephone number, including area code) Title of Each Class Securities registered pursuant to Section 12(b) of the Act: Trading Symbol(s) Name of Each Exchange on Which Registered Common Stock, $0.0001 par value per share UIHC Nasdaq Stock Market LLC 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 every Interactive Data File required to be submitted 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 such files). Yes Í No ‘ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See 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 ‘ 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. ‘ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ‘ No Í The aggregate market value of shares of the registrant’s common stock held by non–affiliates of the registrant was approximately $291,281,804 as of June 28, 2019, 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 2, 2020, 43,027,622 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 2020 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, 2019. 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 (Loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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 17 31 32 32 32 33 36 38 53 57 57 59 60 61 62 63 108 108 109 112 112 112 112 112 Part IV. Item 15. Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113 Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Form 10-K Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 16. 114 123 Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124 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, earnings per share, estimated unpaid losses on insurance policies, investment returns, and diversification and expectations about our liquidity, our ability to meet our investment objectives and our ability to manage and mitigate market risk with respect to our investments. Without limiting the generality of the foregoing, words such as “may,” “will,” “expect,” “endeavor,” “project,” “believe,” “plan,” “anticipate,” “intend,” “could,” “would,” “estimate,” or “continue” or the negative variations thereof or comparable terminology are intended to identify forward- looking statements. These statements are based on current expectations, estimates and projections about the industry and market in which we operate, and management’s beliefs and assumptions. Forward-looking statements are not guarantees of future performance and involve certain known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. The risks and uncertainties include, without limitation: • • • • • • • • • • • • • • • • • • our exposure to catastrophic events and severe weather conditions; the regulatory, economic and weather conditions present in Florida, the state in which we are most concentrated; our ability to cultivate and maintain agent relationships, particularly our relationship with AmRisc, LLC (AmRisc); the possibility that actual claims incurred may exceed our loss reserves for claims; assessments charged by various governmental agencies; our ability to implement and maintain adequate internal controls over financial reporting; our ability to maintain information technology and data security systems, and to outsource relationships; our reliance on key vendor relationships, and the ability of our vendors to protect the personally identifiable 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; risks associated with joint ventures and investments in which we share ownership or management with third parties; our ability to generate sufficient cash to service all of our indebtedness and comply with covenants related to our indebtedness; 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; 3 UNITED INSURANCE HOLDINGS CORP. • • • • • • • the possibility of the pricing and terms for our products to decline due to the historically cyclical nature of the property and casualty insurance and reinsurance industry; the outcome of litigation pending against us, including the terms of any settlements; downgrades in our financial strength ratings; the impact of future transactions of substantial amounts of our common stock by us or our significant stockholders on our stock price; our ability to pay dividends in the future; the ability of R. Daniel Peed and his affiliates to exert significant control over us due to substantial ownership of our common stock, subject to certain restrictive covenants that may restrict our ability to pursue certain opportunities; and the other risks identified in this report, including under “Risk Factors” in Part I, Item 1A. 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 personal and commercial property and casualty insurance business in the United States. Our largest insurance subsidiary is United Property & Casualty Insurance Company (UPC), and we also write business through American Coastal Insurance Company (ACIC), Family Security Insurance Company, Inc. (FSIC), Interboro Insurance Company (IIC), and Journey Insurance Company (JIC). Our insurance subsidiaries provide personal residential and commercial property and casualty insurance products that protect our policyholders against losses due to damages to structures and their contents. Some of our insurance subsidiaries sell policies that protect against liability for accidents as well as property damage. Our non-insurance subsidiaries support our insurance and investment operations. As of December 31, 2019, 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, powerful modeling software and exposure management tools, 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 its 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. On August 30, 2018, the Company, in strategic partnership with RJ Kiln & Co. (No. 3 Limited) (Kiln), a subsidiary of Tokio Marine Kiln Group Limited, formed JIC. The Company owns 66.7% of JIC, while Kiln owns 33.3%. Financial strength or stability 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 Demotech, AM Best, 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). AM Best maintains a letter-scale financial strength rating system ranging from A++ (Superior) to S (suspended). Kroll maintains a letter-scale financial strength rating system for insurance companies ranging from AAA (extremely strong operations and no risk) to R (operating under regulatory supervision). The financial strength or stability ratings of our insurance company subsidiaries as of December 31, 2019 are listed below. With these ratings, we expect our property insurance policies will be acceptable to the secondary mortgage marketplace and mortgage lenders. 5 UNITED INSURANCE HOLDINGS CORP. Subsidiary Demotech Rating AM Best Kroll Rating UPC . . . . . . . . . . . . . . . . . . . . . ACIC . . . . . . . . . . . . . . . . . . . . FSIC . . . . . . . . . . . . . . . . . . . . IIC . . . . . . . . . . . . . . . . . . . . . . JIC . . . . . . . . . . . . . . . . . . . . . . UIHC . . . . . . . . . . . . . . . . . . . . A A’ A A A- A- A- A- BBB- A- As of December 31, 2019, we had 363 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 2019, we continued to grow our premium base in our existing states. Our gross written premiums increased by 10% in 2019 compared to 2018. This is primarily a reflection of organic growth in new and renewal business generated in all regions. 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, low financial leverage and a conservative investment approach. UPC Insurance has several reinsurance programs in place including quota share, catastrophe excess-of-loss, and aggregate catastrophe. During 2019, our excess-of-loss reinsurance program covered all four of our wholly-owned insurance subsidiaries and JIC, gaining synergies in reinsurance costs and increasing our coverage limits for the June 1, 2019 to May 31, 2020 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 have used to support our growth initiatives, such as forming JIC. 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. As of December 31, 2019, our financial leverage was 24%. 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. 6 UNITED INSURANCE HOLDINGS CORP. We follow a conservative investment approach using two outside investment 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 $1,011,723,000 at December 31, 2019, compared to $951,836,000 at December 31, 2018 with approximately 85.8% of our fixed maturities invested in U.S. Treasuries, or corporate bonds rated “A” or better. 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 2019, we continued to focus on the development of our internal claims department function. In 2017, 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. In addition, we have taken two initiatives to monitor our risk management strategy related to loss activity. We have an eight-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 Throughout the years ended 2017, 2018, and 2019, we maintained our diverse product mix through organic growth. This diversification was initially established through our merger with AmCo in 2017, resulting in a significant increase in our mix of commercial products. 2019 Product Mix Personal Property: 69% Commercial: 29% Flood: 2% 7 UNITED INSURANCE HOLDINGS CORP. 2018 Product Mix 2017 Product Mix Personal Property: 70% Personal Property: 75% Commercial: 28% Commercial: 23% Flood: 2% Flood: 2% 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 2019, personal residential property policies (by which we mean both standard homeowners’, dwelling fire, renters and condo owners’ policies) produced written premium of $952,227,000 and accounted for 69% of our total gross written premium. Approximately 56% of the personal residential gross written premium was written outside of Florida. 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 for residential condominium associations in Florida. We include coverage to policyholders 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 2019, commercial policies produced written premium of $406,914,000 and accounted for 29% of our total gross written premium. Not-At-Risk Offerings On our equipment breakdown, identity theft, and flood policies (excluding our new inland flood 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 (flood risk) and other private companies (other risks). We offer flood policies in all states in which we write business. Flood policies produced written premium of $21,127,000 and accounted for 2% of our total gross written premium at December 31, 2019. 8 UNITED INSURANCE HOLDINGS CORP. Other Offerings In addition to our personal and commercial residential products, in December 2019, we began offering Inland Flood and Cyber Security insurance. These products did not comprise a material portion of our written business at December 31, 2019. Underwriting We price our products 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 proprietary 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. We have established underwriting guidelines designed to provide a uniform approach to our risk selection and designed to achieve acceptable 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, 2019, we market and distribute our policies to consumers through approximately 11,500 independent agents representing over 6,400 agencies, with only one agency, Allstate, 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 expanded our commission program in order to allow agents and brokers to be eligible to earn a bonus commission based on the overall profitability of policies they place with UPC Insurance in a particular year. 9 UNITED INSURANCE HOLDINGS CORP. 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 partner with GEICO to underwrite homeowners’ policies for some 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, 2019, 2018 and 2017. Policies In-Force By Region (1) 2019 2018 2017 Florida . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Northeast . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gulf . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Southeast 258,487 144,880 132,480 91,383 239,725 130,808 126,285 85,278 217,763 110,550 124,649 75,231 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 627,230 582,096 528,193 (1) “Northeast” is comprised of Connecticut, Massachusetts, New Jersey, New York and Rhode Island; “Gulf” is comprised of Hawaii, Louisiana and Texas; and “Southeast” is comprised of Georgia, North Carolina and South Carolina. 2019 Policies In-Force By Region Gulf: 21.1% Southeast: 14.6% Northeast: 23.1% Florida: 41.2% 10 UNITED INSURANCE HOLDINGS CORP. 2018 Policies In-Force By Region 2017 Policies In-Force By Region Northeast: 22.5% Southeast: 14.7% Northeast: 20.9% Southeast: 14.3% Gulf: 21.7% Gulf: 23.6% Florida: 41.1% Florida: 41.2% The table below shows the geographic distribution of our total insured value (TIV) of all polices in-force as of December 31, 2019, 2018 and 2017. TIV By Region(1) 2019 2018 2017 Florida . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Northeast . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gulf . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Southeast . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $179,924,925 96,776,972 54,307,883 41,450,816 $160,406,387 85,296,121 51,219,071 37,913,396 $144,151,960 70,480,702 50,844,315 33,607,596 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $372,460,596 $334,834,975 $299,084,573 (1) “Northeast” is comprised of Connecticut, Massachusetts, New Jersey, New York and Rhode Island; “Gulf” is comprised of Hawaii, Louisiana and Texas; and “Southeast” is comprised of Georgia, North Carolina and South Carolina. 2019 TIV By Region Northeast: 26.0% Gulf: 14.6% Southeast: 11.1% Florida: 48.3% 11 UNITED INSURANCE HOLDINGS CORP. 2018 TIV By Region 2017 TIV By Region Northeast: 25.5% Northeast: 23.6% Gulf: 15.3% Florida: 47.9% Southeast: 11.3% Florida: 48.2% Gulf: 17.0% Southeast: 11.2% COMPETITION Our target market for homeowners’ insurance, our primary product offering, includes the 18 states in which we are currently licensed. The following table summarizes the homeowners’ insurance market countrywide for the year ended December 31, 2019, the date for which the most current data is available (dollars in thousands): Countrywide Property Insurance Market—2019 Homeowners DWP * 2019 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . USAA Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Liberty Mutual Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Farmers Insurance Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Travelers Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . American Family Insurance Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Nationwide Corp Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Chubb Ltd. Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Erie Insurance Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Auto Owners Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Progressive Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Universal Insurance Holding Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Metropolitan Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . American International Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Hartford Fire & Casualty Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CSAA Insurance Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amica Mutual Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United Insurance Holdings Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Auto Club Enterprises Insurance Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . National Gen Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Heritage Insurance Holdings Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Country Insurance & Financial Services Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Automobile Club MI Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Assurant Inc Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 18,698,346,990 8,723,237,606 6,835,803,795 6,745,863,809 5,943,814,279 4,240,932,822 4,057,498,959 3,244,683,077 2,989,473,645 1,746,390,202 1,705,821,568 1,646,585,214 1,215,487,315 1,112,254,566 1,104,034,356 951,880,299 946,899,577 944,824,579 861,088,601 850,085,080 829,999,348 802,544,383 734,628,439 704,659,407 704,536,374 18.0% 8.4% 6.6% 6.5% 5.7% 4.1% 3.9% 3.1% 2.9% 1.7% 1.6% 1.6% 1.2% 1.1% 1.1% 0.9% 0.9% 0.9% 0.8% 0.8% 0.8% 0.8% 0.7% 0.7% 0.7% Total—Top 25 Insurers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total—All Insurers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 78,341,374,290 $103,976,559,088 75.3% 100.0% 12 UNITED INSURANCE HOLDINGS CORP. * The information displayed in the table above is compiled and published by the National Association of Insurance Commissioners (NAIC) as of December 31, 2019 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 2019. 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. However, we face the risk that policyholders may be able to obtain more favorable terms from competitors rather than renewing coverage with us. 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, ACIC, and JIC 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, protection of personally identifiable information, 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 13 UNITED INSURANCE HOLDINGS CORP. discretion. In 2018, the Hawaii Insurance Division of the Department of Commerce and Consumer Affairs finished performing a regularly scheduled statutory examination of FSIC for the five years ended December 31, 2016. There were no significant findings resulting from this examination. Three of our insurance subsidiaries, UPC, FSIC and ACIC, are members of an intercompany property and casualty reinsurance pooling arrangement. Pooling arrangements permit the participating companies to rely on the capacity of the entire pool’s statutory capital and surplus rather than just on their own statutory capital and surplus. Under such arrangements, the participating companies share substantially all insurance business that is written and allocate the combined premiums, losses and expenses. 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, 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. The table below outlines each of our subsidiary’s RBC ratios, all of which were in excess of minimum requirements, as of December 31, 2019. Subsidiary RBC Ratio UPC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ACIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . FSIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . JIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 378% 337% 433% 806% 3,671% 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. 14 UNITED INSURANCE HOLDINGS CORP. 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. 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 L.C., UPC 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, a managing general underwriter, handles the underwriting, claims processing and premium collection for AmCo’s and JIC’s commercial businesses and, in return, is reimbursed through monthly management fees. The Company does not utilize a managing general agent structure in New York. Instead, UPC Insurance allocates a portion of relevant expenses to IIC for statutory accounting purposes at cost. 15 UNITED INSURANCE HOLDINGS CORP. 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 number 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 reportable segment, property and casualty insurance policies. Our chief operating decision maker is our Chief Executive Officer, who makes decisions to allocate resources and assesses performance at the corporate level. 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 Securities and Exchange Commission (SEC). 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. 16 UNITED INSURANCE HOLDINGS CORP. Item 1A. Risk Factors Many factors affect our business, financial condition and results of operations, some of which are beyond our control. If any of the following risks or uncertainties occur, our business, financial condition or results of operations may be materially and adversely affected. In that event, the trading price of our securities could decline, and investors could lose all or part of their investment in our securities. Additional risks and uncertainties we are unaware of, or we currently deem immaterial, may also 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 the unpredictability of future catastrophic events and severe weather conditions. 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, tropical storms, tornadoes, 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 experienced in prior years; catastrophe losses projected to be incurred, using third-party catastrophe modeling software; catastrophe loss estimates 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. Florida, Louisiana, North Carolina, South Carolina and Texas, all states in which we write policies, have experienced significant hurricanes in recent years, which some weather analysts believe is consistent with a period of sustained greater hurricane activity. 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. We cannot predict how legal, regulatory and social responses to concerns around climate change may impact our business. 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. 17 UNITED INSURANCE HOLDINGS CORP. Because we conduct a significant portion of our business in Florida, our financial results substantially depend on, and could be adversely affected by, the regulatory, legal, economic, political, demographic, competitive and weather conditions present in that state. As of December 31, 2019, approximately 41% of our policies in-force were 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 such 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. Because we rely on insurance agents, the loss of these agent relationships, particularly our relationship with AmRisc, LLC (AmRisc), or our inability to attract and incentivize new agents could have an adverse impact on our business. We market our policies to a broad range of prospective policyholders through approximately 11,500 independent agents representing over 6,400 agencies as of December 31, 2019. 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. Our competitors may offer a greater variety of insurance products, lower premiums for insurance coverage or higher commissions to their agents. 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 and incentivize new agents or the failure of agents to act as anticipated could adversely affect sales of our insurance products. Additionally, ACIC and JIC have managing agency contracts (the MGA contracts) with AmRisc, pursuant to which AmRisc serves as ACIC’s and JIC’s 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 and JIC’s underwriting guidelines. The contract between ACIC and AmRisc is exclusive, while the contract between JIC and AmRisc is not. Under the MGA contracts, AmRisc must produce a certain volume of business for ACIC. Therefore, failure of AmRisc to comply with the exclusivity requirement or 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 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 and JIC’s commercial business and operations with AmRisc, AmRisc may have substantial leverage in negotiations with ACIC and JIC regarding the MGA contracts, and amendments to the terms and conditions of the MGA contracts and other changes to the commercial relationship between AmRisc and ACIC on the one hand, and AmRisc and JIC, on the other hand, could have a material adverse effect on our business, financial condition and results of operations. Following the termination or expiration of the MGA contracts, ACIC’s and JIC’s ability to compete for and solicit renewals of business previously underwritten by AmRisc on their respective behalves may be 18 UNITED INSURANCE HOLDINGS CORP. 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 and JIC’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, emerging economic and social trends 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, which may have a material adverse effect on our results of operations. 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. We have identified and remediated material weaknesses in our internal control over financial reporting. Our failure to maintain adequate internal controls could have a material adverse effect on our business, financial condition, results of operations and stock price. “Internal control over financial reporting” refers to those processes within a company that are designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles. Section 404 of the Sarbanes-Oxley Act of 2002 requires our management to annually assess the effectiveness of our internal control over financial reporting. Management concluded that we did not maintain effective internal control over financial reporting as of December 31, 2018 and 2017; however, these weaknesses were remediated as of December 31, 2019 as described in more detail in Part II, Item 9A of this report. If we fail to maintain adequate internal controls, or if we have future material weaknesses in our internal controls, in each case in accordance with applicable standards, we may be unable to conclude on an ongoing 19 UNITED INSURANCE HOLDINGS CORP. basis that we have effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002. 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 do not remain effective or if future material weaknesses in our internal controls are identified. If we experience difficulties with our information technology or data security systems 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. We use computer systems to store, retrieve, evaluate and utilize customer, employee and company data and information. 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, which presents certain risks. A shutdown of or inability to access one or more of our facilities, power outages, a major failure of the Internet, a pandemic or a failure of one or more of our information technology, telecommunications or other systems could significantly impair our ability to perform such functions on a timely basis. In addition, 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 continued evaluation of potential attackers’ techniques and tactics and our efforts in monitoring, training, planning and prevention, our information technology systems are vulnerable to computer viruses, natural disasters, unauthorized access, cyber-attacks, system failures, human error and negligence and similar disruptions. There is no assurance that our security measures will provide fully effective protection from such disruptions. Because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. 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 personally identifiable 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, or the personally identifiable information of our customers, claimants and employees, it could cause significant damage to our reputation, adversely affect our relationships with our customers, result in litigation or regulatory investigations, increased remediation costs and/or regulatory penalties, and ultimately harm our business. Third parties to whom we outsource certain 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 and results of operations. In addition, we may transmit, receive and store personally identifiable, confidential and proprietary information by any number of standard data transmission methods or other electronic means. We may be unable to keep such information confidential, in all events, especially with clients, vendors, service providers, counterparties and other third parties who may not have or use appropriate controls to protect confidential information. Furthermore, we are subject to compliance with laws and regulations enacted by U.S. federal and state governments, or enacted by various regulatory organizations or exchanges relating to the privacy and security of the information of clients, employees or others. The compromise of personally identifiable, 20 UNITED INSURANCE HOLDINGS CORP. confidential or proprietary information could result in remediation costs, legal liability, regulatory action and reputational harm. Additionally, in the absence of overarching federal law, individual states are adopting their own privacy and cybersecurity laws and regulations. For example, the New York State Department of Financial Services (NYDFS) adopted regulation providing minimum standards for an organization’s cybersecurity program and requiring additional certification confirming compliance. Though the NYDFS cybersecurity regulation helps to reduce the third-party risk, the evolving compliance and operational requirements of privacy and cybersecurity laws and regulations impose significant costs that are likely to increase over time and may restrict the way services involving data are offered, all of which may adversely affect our results of operations. Loss of key vendor relationships or failure of a vendor to protect personally identifiable information of our customers, claimants or employees could have an adverse effect on our business, results of operations or financial condition. 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 payroll and benefits vendors who process sensitive personally identifiable information. In the event that one or more of our vendors suffers a bankruptcy, renews its contractual arrangement on terms less favorable to us, fails to comply with legal or regulatory requirements or otherwise becomes unable to continue to provide products or services, or fails to protect personally identifiable information of our customers, claimants or employees, we may suffer operational impairments and financial losses. An interruption in or the cessation of service by any service provider as a result of system failures, capacity constraints, financial difficulties or for any other reason could disrupt our operations, impact our ability to offer certain products and services and result in contractual or regulatory penalties, liability claims from clients or employees, damage to our reputation and harm to our business. Moreover, in the event of a data breach involving any of our third-party vendors, our customers, claimants or employees’, personally identifiable 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 reputation, relationships with our customers, business, results of operations and financial condition. 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 or results of operations. Our senior executive officers play an integral role in the development and management of our business given their skills, knowledge of our business, years of industry experience and the potential difficulty of promptly finding qualified replacement employees. Due to the intense competition in our industry for senior executive officers with demonstrated ability, 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. Losing any of our senior executive officers and/or not succeeding in attracting and retaining senior executive officers could have an adverse effect on our results of operations and financial condition. Our acquisitions, mergers 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 21 UNITED INSURANCE HOLDINGS CORP. 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, or other strategic transaction, 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 or other strategic transaction, 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; keeping existing customs and 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; 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; and limitations on our ability to access additional capital when needed. 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, mergers or other strategic transactions or integrate the operations, products or personnel gained through any such acquisition, merger or other strategic transaction without a material adverse effect on our business, financial condition and results of operations. We face risks associated with joint ventures and investments in which we share ownership or management with third parties. From time to time, we have and may continue to enter into joint ventures and invest in entities in which we share ownership or management with third parties, such as our strategic partnership with a subsidiary of Tokio Marine Kiln Group Limited to form JIC. In certain circumstances, we may not have complete control over governance, financial reporting, operations, legal and regulatory compliance or other matters relating to such joint ventures or entities. As a result, we may face certain operating, financial, legal, regulatory, compliance and other risks relating to these joint ventures and entities, including, but not limited to, risks related to the financial strength of joint venture partners and other investors; the willingness of joint venture partners and other investors to provide adequate funding for the joint venture or entity; differing goals, strategies, priorities or objectives between us and joint venture partners or other investors; our inability to unilaterally implement actions, policies or procedures with respect to the joint venture or entity that we believe are favorable; legal and regulatory compliance risks relating to actions of the joint venture, entity, joint venture partners or other investors; and the risk that we will be unable to resolve disputes with joint venture partners or other investors. As a result, joint ventures and investments in which we share ownership or management subject us to risk and may contribute significantly less than anticipated to our earnings and cash flows. 22 UNITED INSURANCE HOLDINGS CORP. Our Senior Notes place certain restrictions on our operations and our failure to comply with such restrictions, including as a result of events beyond our control, could result in an event of default, which could materially and adversely affect our liquidity, financial condition and results of operations. Our 6.25% Senior Notes due 2027 (Senior Notes) place certain restrictions on the Company’s financial operations. Because we are a holding company, our assets consist primarily of the securities of our subsidiaries. The negative pledge provisions in the Senior Notes limit our ability to pledge securities of our subsidiaries and restrict dispositions of the capital stock of our subsidiaries. Our Senior Notes require us to maintain certain financial ratios and to comply with various operational and other covenants, including limitations on our ability to incur any indebtedness unless certain conditions are met. Our failure to comply with such restrictions, including as a result of events beyond our control, could result in an event of default and an acceleration of the maturity of the Senior Notes. We cannot assure you that our assets or cash flow would be sufficient to fully repay the Senior Notes if accelerated, or that we would be able to restructure the payments on the Senior Notes. This could have a material adverse impact on our liquidity, 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, 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. Customers may turn to our competitors as a result of our failure to deliver on customer expectations, service flaws, technology issues, gaps in operational support or other issues affecting customer experience. 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. In addition, industry developments could further increase competition in our industry. These developments could include: • • • • an influx of new capital in the marketplace as existing companies attempt to expand their businesses and new companies attempt to enter the insurance business as a result of better premium pricing and/or policy terms; an increase in programs in which state-sponsored entities provide property insurance in catastrophe- prone areas; changes in state regulatory climates; and the passage of federal proposals for an optional federal charter that would allow some competing insurers to operate under regulations different or less stringent than those applicable to us. These developments and others could make the property and casualty insurance marketplace more competitive by increasing the supply of insurance available. If competition limits our ability to write new business at adequate rates, our future results of operations would be adversely affected. 23 UNITED INSURANCE HOLDINGS CORP. 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. This regulation relates to authorization for lines of business, capital and surplus requirements, investment limitations, underwriting limitations, transactions with affiliates, dividend limitations, changes in control, premium rates and a variety of other financial and non-financial components of an insurance company’s business. 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. We strive to maintain all required licenses and approvals. However, we may not fully comply with the wide variety of applicable laws and regulations. The relevant authority’s interpretation of the laws and regulations also may change from time to time. Regulatory authorities have relatively broad discretion to grant, renew or revoke licenses and approvals. If we do not have the required licenses and approvals or do not comply with applicable regulatory requirements, these authorities could preclude or temporarily suspend us from carrying on some or all of our activities or impose substantial fines. In addition, we may face individual and class action lawsuits by insured and other parties for alleged violations of certain of these laws or regulations. 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. 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 24 UNITED INSURANCE HOLDINGS CORP. 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. 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. For example, the Dodd-Frank Act established a Federal Insurance Office (FIO) within the U.S. Department of Treasury Department to collect data on the insurance industry, recommend changes to the state system of insurance regulation and preempt certain state insurance laws. The potential impact on our business as a result of the Dodd-Frank Act and the FIO’s current and future recommendations remains unclear; however, the implementation of any federal insurance regulations that constrain our business opportunities or reduce investment flexibility could negatively impact our business. 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 could 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. Both the availability of reinsurance and the cost of reinsurance are 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 25 UNITED INSURANCE HOLDINGS CORP. 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 may have to reduce the amount of risk we underwrite or accept higher reinsurance costs. Any of these alternatives 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 have a material adverse effect on our business, results of operation, financial condition and cash flow. 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 for which we obtain reinsurance. 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, inability to make payments, or dispute of its obligations under the terms of a reinsurance contract could have a material adverse effect on our business, results of operations, financial condition and cash flow. Our efforts to manage these risks through underwriting guidelines, collateral requirements, financial strength ratings and other oversight mechanisms may not be successful. As a result, our exposure to counterparty risk under our reinsurance agreements may have 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. Our investment assets are invested by professional investment management firms under the direction of our management team in accordance with investment guidelines approved by the Investment Committee of the Board of Directors. Our investments are subject to market risks and risks inherent in individual securities. In particular, interest rates are highly sensitive to many factors, including monetary and fiscal policy, domestic and international economic and political issues and other factors beyond our control. Our portfolio is primarily invested in fixed income securities and 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. The volatility of any losses may force us to liquidate securities, which may cause us to incur capital losses. Realized fixed income and equity and unrealized equity losses in our investment portfolio would generally reduce our book value and, if significant, could affect our ability to conduct business. 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. 26 UNITED INSURANCE HOLDINGS CORP. 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, private equity limited partnership interests or other investments, which are generally subject to greater volatility than fixed maturity investments. Moreover, our private equity limited partnership interests are subject to transfer restrictions and may be illiquid. General economic conditions, stock market conditions, geopolitical events 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 or we may incur losses on sales 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 the estimated fair value of our investment portfolio is not reflective of prices at which actual transactions would occur. Additionally, in the case of our private equity limited partnership interests, such valuations are determined by outside managers. 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 (Loss). 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 with certainty 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 materially affect our operating results, cash flows and financial condition. Trends in the insurance industry regarding claims and coverage issues, such as increased litigation and the willingness of courts to expand covered causes of loss, may contribute to increased litigation costs and increase our loss exposure under the policies that we underwrite. 27 UNITED INSURANCE HOLDINGS CORP. 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; and plaintiffs targeting property and casualty insurers in purported class-action litigation relating to claims- handling and other practices. 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. 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 or stability ratings could adversely impact our business volume and our ability to access additional debt or equity financing. Financial strength or stability ratings are 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 the marketing of its products and enhance the company’s competitive position. Rating agencies review their ratings periodically, and our current ratings may not be maintained in the future. 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, ACIC and JIC will maintain their current A (Exceptional) or higher ratings by Demotech, A- ratings by Kroll or A- rating by AM Best. 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. These material adverse effects could include, but are not limited to: • • • reducing demand for new sales of insurance products; requiring us to modify our existing products or services, introduce new products or services or reduce prices for our products and services, in order to remain competitive; adversely affecting our relationships with our independent agents; • materially increasing the number or amount of policy cancellations and non-renewals by policyholders; • requiring us to post additional collateral under certain of our financing transactions; 28 UNITED INSURANCE HOLDINGS CORP. • • • limiting financial flexibility and access to capital markets; adversely affecting our ability to obtain reinsurance at reasonable prices or at all; and increasing the interest rates on our outstanding Senior Notes. 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, 2019, we had 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 Company as consideration in the merger with AmCo, resulting in substantial dilution to our then-existing stockholders. Future share issuances in connection with merger transactions or other acquisitions could result in substantial additional dilution to our stockholders. 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 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 stockholders 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 owned approximately 32% of our issued and outstanding common stock at December 31, 2019. Mr. Peed also has a proxy from another member of RDX Holding, LLC, the former parent 29 UNITED INSURANCE HOLDINGS CORP. 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. 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. 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. Transactions by Mr. Peed and his affiliates involving our common stock may have an adverse effect on the price of our common stock. As noted above, Mr. Peed beneficially owned approximately 32% of our issued and outstanding common stock as of December 31, 2019. The Company has granted Mr. Peed and his affiliates customary demand and piggyback registration rights pursuant to which, subject to certain limitations, all of such shares eligible to be registered under the Securities Act of 1933, as amended (the Securities Act), and may be offered and sold to the public from time to time after the effectiveness of the related registration statement. Such shares may also be resold into the public markets in accordance with an exemption from registration under the Securities Act, including Rule 144, subject to the volume limitations, manner of sale requirements and notice requirements thereof. Sales of our common stock by Mr. Peed and his affiliates could have the effect of lowering our stock price. The perceived risk associated with the possible sale of a large number of shares by these stockholders could cause some of our other stockholders to sell their stock, thus causing the price of our stock to decline. In addition, actual or anticipated downward pressure on our stock price due to actual or anticipated sales of stock by Mr. Peed and his affiliates could cause other institutions or individuals to engage in short sales of our common stock, which may further cause the price of our stock to decline. 30 UNITED INSURANCE HOLDINGS CORP. 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. 31 UNITED INSURANCE HOLDINGS CORP. Item 2. Properties We use all of our owned and leased properties for office space. We own three buildings located in St. Petersburg, Florida. Our principal executive office contains approximately 40,000 square feet of commercial office space and associated property. We have two secondary locations of approximately 7,800 square feet and 8,000 square feet of commercial office space. All three buildings are used as our principal executive offices. We lease in total approximately 22,700 square feet of office space located in Florida, New York, Hawaii, and Minnesota. These leases are generally short-term to medium-term leases of commercial office space. Item 3. Legal Proceedings We are involved in routine 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, 2019, we were not involved in any material non-claims-related legal actions. Item 4. Mine Safety Disclosures Not applicable. 32 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”. HOLDERS OF COMMON EQUITY As of March 2, 2020, we had 2,825 holders of record of our common stock. The number of record holders does not include stockholders who are beneficial owners, but whose shares are held in street name by brokers and other nominees. DIVIDENDS During 2019, we paid a regular quarterly dividend of $0.06 per share of our common stock. While we expect to continue to pay a regular quarterly dividend of $0.06 per share in 2020, 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. During August 2019. we received a dividend of $13,579,000 from our insurance subsidiary ACIC. During November 2018, ACIC and IIC paid dividends to the Company of $50,000,000 and $1,764,000, respectively. Additionally, we returned the $1,764,000 dividend to IIC in 2019, which was originally paid in 2018. Under Florida law, Florida-domiciled insurers such as UPC, ACIC, and JIC 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, ACIC, or JIC 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. 10% of the insurer’s surplus as to policyholders derived from realized net operating profits on its business and net realized capital gains, or 33 UNITED INSURANCE HOLDINGS CORP. b. 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, 2019, we were in compliance with these requirements. 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 third immediately preceding calendar years. As of December 31, 2019, 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. See Note 14 to our Notes to Consolidated Financial Statements for further discussion of restrictions on future payments of dividends by our insurance affiliates. 34 UNITED INSURANCE HOLDINGS CORP. PERFORMANCE GRAPH Set forth below is a line graph comparing the dollar change in the cumulative total stockholder return on our common stock from December 31, 2014 through December 31, 2019 as compared to the cumulative total return of the Russell 2000 Index and the Nasdaq Insurance Index. The cumulative total stockholder 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 2014 through 2019 of a $100 investment made on December 31, 2014 with all dividends reinvested. s r a l l o D 175 150 125 100 75 50 25 0 2014 2015 2016 2017 2018 2019 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 $ 78.82 94.29 106.45 $ 70.84 112.65 123.10 $ 81.84 127.46 127.02 $ 79.99 111.94 116.21 $ 61.84 138.50 147.24 2014 2015 2016 2017 2018 2019 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, as amended, 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, as amended, 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 2019, we did not have any unregistered sales of our equity securities. REPURCHASES OF EQUITY SECURITIES During 2019, we did not repurchase any of our equity securities. 35 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, 2019, 2018 and 2017 and the consolidated balance sheet data at December 31, 2019 and 2018 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, 2016 and 2015 and the balance sheet data at December 31, 2017, 2016 and 2015 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, 2019 2018 2017 2016 2015 Income Statement Data: Revenue: Gross premiums written . . . . . . . . . . . . $1,380,268 1,333,526 Gross premiums earned . . . . . . . . . . . . . $1,252,401 1,180,961 $1,040,848 986,023 $708,156 666,829 $569,736 504,215 Net premiums earned . . . . . . . . . . . . . . $ 752,400 56,134 Net investment gain . . . . . . . . . . . . . . . . 16,582 Other revenue . . . . . . . . . . . . . . . . . . . . $ 689,276 19,556 15,110 $ 585,490 17,879 51,051 $456,931 11,226 18,960 $335,958 10,039 11,572 Total revenue . . . . . . . . . . . . . . . . . $ 825,116 $ 723,942 $ 654,420 $487,117 $357,569 Expenses: Loss and loss adjustment expenses . . . . Other operating expenses . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . 499,493 348,567 9,781 408,589 309,842 9,866 365,535 284,881 3,247 298,353 181,138 723 183,108 132,569 326 Total expenses . . . . . . . . . . . . . . . . $ 857,841 (32,606) (3,121) Income (loss) before income taxes . . . . Provision (benefit) for income taxes . . . $ 728,297 (4,239) (4,633) $ 653,663 910 (9,235) $480,214 7,003 1,305 $316,003 41,860 14,502 Net income (loss) . . . . . . . . . $ (29,485) $ 394 $ 10,145 $ 5,698 $ 27,358 Less: Net income attributable to noncontrolling interests (NCI) . . . . . . . . . 387 Net Income (loss) attributable to UIHC . . . . $ (29,872) $ Earnings per share Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . $ Cash dividends declared per share . . . . . . . . $ (0.70) $ (0.70) $ $ 0.24 104 290 0.01 0.01 0.24 $ $ $ $ — 10,145 0.27 0.27 0.24 $ $ $ $ — — 5,698 $ 27,358 0.27 0.26 0.23 $ $ $ 1.29 1.28 0.20 36 UNITED INSURANCE HOLDINGS CORP. As of and for the Years Ended December 31, 2019 2018 2017 2016 2015 Other Data: Return on equity (1) . . . . . . . . . . . . . . . . . . . . Ceded ratio (2) . . . . . . . . . . . . . . . . . . . . . . . . . Ratios to net premiums earned: Loss and loss adjustment expenses . . . . Expenses . . . . . . . . . . . . . . . . . . . . . . . . (5.6)% 43.6% 66.4% 46.3% 0.1% 41.6% 59.3% 45.0% 2.2% 40.6% 62.4% 48.7% 2.4% 31.5% 65.3% 39.6% Combined Ratio . . . . . . . . . . . . . . . . . . . 112.7% 104.3% 111.1% 104.9% 12.4% 33.4% 54.5% 39.5% 94.0% Effect of current year catastrophe losses on combined ratio . . . . . . 12.9% 14.5% 19.8% 12.2% 8.5% Effect of prior year unfavorable (favorable) development on combined ratio . . . . . . . . . . . . . . Effect of ceding commission income on combined ratio . . . . . Underlying Combined Ratio(3) . . . . . . . 4.4% 0.6% (0.4)% 3.7% (0.7)% — % 95.4% — % 89.2% 6.3% 85.4% 1.5% 87.5% — % 86.2% (1) Calculated by dividing the net income attributable to UIHC for the period by the average stockholders’ equity attributable to UIHC. (2) Calculated as ceded premiums earned divided by gross premiums earned. Management uses this operating metric to analyze our ceding loss trends. (3) 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,(1) 2019 2018 2017 2016 2015 Selected Balance Sheet Data: Cash and invested assets . . . . . . . . . . . . . . . Ceded unearned premiums . . . . . . . . . . . . . Total Assets . . . . . . . . . . . . . . . . . . . . . $1,298,780 270,034 2,467,218 $1,135,956 217,885 2,321,428 $1,130,806 201,904 2,059,921 $679,335 132,564 999,686 $537,500 79,399 740,021 Unpaid loss and loss adjustment expenses . . . . . . . . . . . . . . . . . . . . . . . . . Unearned premiums . . . . . . . . . . . . . . . . . . Reinsurance payable . . . . . . . . . . . . . . . . . . Operating lease liability . . . . . . . . . . . . . . . Notes payable . . . . . . . . . . . . . . . . . . . . . . . Total Liabilities . . . . . . . . . . . . . . . . . . Total stockholders’ equity attributable to UIHC stockholders . . . . . . . . . . . Noncontrolling Interest . . . . . . . . . . . . . . . . Total Stockholders’ Equity . . . . . . . . . . . . . Book value per share . . . . . . . . . . . . . . . . . . Statutory Surplus . . . . . . . . . . . . . . . . . . . . . $ 760,357 674,055 166,131 324 158,932 1,943,353 $ 661,203 627,313 175,272 — 160,118 1,781,059 $ 482,232 555,873 149,117 — 161,364 1,522,796 503,138 20,727 $ 523,865 $ 11.69 $ 415,948 520,230 20,139 $ 540,369 $ 12.10 $ 437,449 537,125 — $ 537,125 $ 12.56 $ 389,384 $140,855 372,223 99,891 — 54,175 758,359 241,327 — $241,327 $ 11.15 $212,298 $ 76,792 304,653 64,542 — 12,353 500,810 239,211 — $239,211 $ 11.11 $150,860 (1) Comparability of periods impacted by the acquisition of AmCo, IIC and FSH in 2017, 2016 and 2015, respectively. 37 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. The following discussion provides an analysis of our results of operations and financial condition for 2019 as compared to 2018. Discussion regarding our results of operations and financial condition for 2018 as compared to 2017 is included in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2018. 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 personal and commercial property and casualty insurance in the United States. We conduct our business principally through four wholly-owned insurance subsidiaries and one majority-owned insurance subsidiary: United Property & Casualty Insurance Company (UPC); American Coastal Insurance Company (ACIC); Family Security Insurance Company, Inc. (FSIC); Interboro Insurance Company (IIC); and Journey Insurance Company (JIC). 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. We are also licensed to write property and casualty insurance in an additional six states; however, we have not commenced writing in these states. 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 and partnerships, including our acquisitions of AmCo Holding Company (AmCo) and its subsidiaries, including ACIC, in April 2017, IIC in April 2016, and Family Security Holdings, LLC (FSH), including its subsidiary FSIC in February 2015, and our strategic partnership with a subsidiary of Tokio Marine Kiln Group Limited (Kiln), which formed JIC in August 2018. As a result of these transactions, along with the organic growth of premium in states in which we currently write premium, we have grown our policies in-force by 7.8% from 582,096 policies in-force at December 31, 2018 to 627,230 policies in-force at December 31, 2019. Our business is subject to the impact of weather-related catastrophes on our loss and loss adjustment expenses (LAE). During the third quarter of 2017, Hurricane Harvey made landfall in Texas and Hurricane Irma made landfall in Florida. In 2017, we retained $83,000,000 of pre-tax catastrophe losses, net of reinsurance recoverable as a result of these hurricanes. During the years ended December 31, 2019 and 2018, we increased our loss and LAE reserves as a result of development trends from Hurricane Irma that indicated our ultimate gross loss estimate should be increased. During the third and fourth quarters of 2018, Hurricane Florence made landfall in North Carolina and Hurricane Michael made landfall in Florida. We retained $50,000,000 of pre-tax catastrophe losses, net of reinsurance recoverable, as a result of these storms. During the third quarter of 2019, Hurricane Dorian caused damage up the eastern coast of the United States, eventually making landfall in North Carolina. Additionally, we experienced losses from four other named storms in the third and fourth quarters of 2019. We retained $32,170,000 of pre-tax catastrophe losses, net of reinsurance recoverable, as a result of these storms. 38 UNITED INSURANCE HOLDINGS CORP. The following discussion highlights significant factors influencing the consolidated financial position and results of operations of UPC Insurance. In evaluating our results of operations, we use premiums written and earned, policies in-force and new and renewal policies by geographic concentration. We also consider the impact of catastrophe losses and prior year development on our loss ratios, expense ratios and combined ratios. In monitoring our investments, we use credit quality, investment income, cash flows, realized gains and losses, unrealized gains and losses, asset diversification and portfolio duration. To evaluate our financial condition, we consider our liquidity, financial strength, ratings, book value per share and return on equity. Consolidated Net Income Year Ended December 31, 2018 2017 2019 REVENUE: Gross premiums written . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in gross unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,380,268 (46,742) $1,252,401 (71,440) $1,040,848 (54,825) Gross premiums earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ceded premiums earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,333,526 (581,126) 1,180,961 (491,685) 986,023 (400,533) Net premiums earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net unrealized gains (losses) on equity securities . . . . . . . . . . . Other revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EXPENSES: Losses and loss adjustment expenses . . . . . . . . . . . . . . . . . . . . Policy acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . General and administrative expenses . . . . . . . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income (loss) before other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income (loss) before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Benefit for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 752,400 30,145 1,228 24,761 16,582 825,116 499,493 238,268 44,310 65,989 9,781 857,841 (32,725) 119 (32,606) (3,121) 689,276 27,201 1,655 (9,300) 15,110 723,942 408,589 203,140 40,590 66,112 9,866 728,297 (4,355) 116 (4,239) (4,633) Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (29,485) $ Less: Net income attributable to noncontrolling interests . . . . . . . . . . . . 387 Net income (loss) attributable to UIHC . . . . . . . . . . . . . . . . . . . . . . . . . . $ (29,872) $ Net income (loss) per diluted share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Book value per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Return on equity based on GAAP net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss ratio, net (1) Expense ratio (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ Combined ratio (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Effect of current year catastrophe losses on combined ratio . . . . . . . Effect of prior year development on combined ratio . . . . . . . . . . . . . . . . . . . Effect of ceding commission income on combined ratio (4) Underlying combined ratio (5)(6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.70) $ $ 11.69 (5.6)% 66.4% 46.3% 112.7% 12.9% 4.4% — % 95.4% $ $ $ $ 394 104 290 0.01 12.10 0.1% 59.3% 45.0% 104.3% 14.5% 0.6% — % 89.2% 585,490 17,812 67 — 51,051 654,420 365,535 175,444 27,675 81,762 3,247 653,663 757 153 910 (9,235) 10,145 — 10,145 0.27 12.56 2.2% 62.4% 48.7% 111.1% 19.8% (0.4)% 6.3% 85.4% 39 UNITED INSURANCE HOLDINGS CORP. (1) (2) Loss ratio, net is calculated as losses and LAE net of losses ceded to reinsurers, relative to net premiums earned. Management uses this operating metric to analyze our loss trends and believes it is useful for investors to evaluate this component separately from our other operating expenses. Expense ratio is calculated as the sum of all operating expenses less interest expense relative to net premiums earned. Management uses this operating metric to analyze our expense trends and believes it is useful for investors to evaluate these components separately from our loss expenses. (3) Combined ratio is the sum of the loss ratio, net and expense ratio. Management uses this operating metric to analyze our total expense (4) trends and believes it is a key indicator for investors when evaluating the overall profitability of our business. For the year ended December 31, 2018, we presented $42,416,000 of ceding commissions earned as a $9,323,000 decrease to ceded earned premium and a $33,093,000 decrease in policy acquisition costs which reduced other revenue and removed the distortive impact to our underlying combined ratio. (5) Underlying combined ratio, a measure that is not based on 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 can be found in “Definitions of Non-GAAP Measures”, below. Included in both the expense ratio and the combined ratio are merger professional fees and amortization expense predominately associated with the AmCo, IIC, and FSH acquisitions, which cause comparative differences among periods. (6) 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 measure, 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 highlight the trends in our business that may be obscured by current year catastrophe losses, 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 directly comparable GAAP measure is the combined ratio. The underlying combined ratio should not be considered as a substitute for the combined ratio and does not reflect the overall profitability of our business. Net loss and LAE excluding the effects of current year catastrophe losses and prior year reserve development (underlying loss and LAE) is a non-GAAP measure which is computed by subtracting the effect of current year catastrophe losses and prior year reserve development from net 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 trends in a given period. We believe it is useful for investors to evaluate these components separately and in the aggregate when reviewing our performance. The most directly comparable GAAP measure is net loss and LAE. The underlying loss and LAE measure should not be considered a substitute for net loss and LAE and does not reflect the overall profitability of our business. Operating expenses excluding the effects of ceding commission income earned (underlying expense) is a non-GAAP measure which is computed by subtracting ceding commission income earned related to our quota share reinsurance agreement. Ceding commission income compensates the Company for expenses it incurs in 40 UNITED INSURANCE HOLDINGS CORP. 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 directly comparable GAAP measure is operating expenses. The underlying expense measure should not be considered a substitute for operating expenses and does not reflect the overall profitability of our business. RESULTS OF OPERATIONS Net loss attributable to UIHC for the year ended December 31, 2019 increased by $30,162,000 to $29,872,000, compared to net earnings of $290,000 for the year ended December 31, 2018. The decrease in net earnings was primarily due to an increase in losses and LAE, as well as an increase in policy acquisition expenses. Revenues Our gross written premiums increased by $127,867,000, or 10.2%, to $1,380,268,000 for the year ended December 31, 2019, from $1,252,401,000 for the year ended December 31, 2018, primarily reflecting organic growth in new and renewal business generated in all regions. In response to the underwriting experience in the personal property lines, we continue to take rate action, as well as make changes to policy terms and conditions, which also contribute to the increase in gross written premium while reducing our exposure in select products and geographies. The breakdown of the year-over-year changes in both direct and assumed written premiums by region and gross written premium by line of business are shown in the table below. Direct Written and Assumed Premium By Region (1) 2019 2018 Change Florida . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gulf . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Northeast . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Southeast $ 737,615 225,636 199,504 115,886 $ 655,736 210,230 177,958 104,266 $ 81,879 15,406 21,546 11,620 Total direct written premium by region . . . . . . . . . . . . . . . . . . . . . . . . $1,278,641 $1,148,190 $130,451 Assumed premium (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101,627 104,211 (2,584) Total gross written premium by region . . . . . . . . . . . . . . . . . . . . . . . . $1,380,268 $1,252,401 $127,867 Gross Written Premium by Line of Business Personal property (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 973,354 406,914 $ 890,515 361,886 $ 82,839 45,028 Total gross written premium by line of business . . . . . . . . . . . . . . . . . $1,380,268 $1,252,401 $127,867 (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 2019 and 2018 primarily included commercial property business assumed from unaffiliated insurers. (3) Includes gross written premium from flood policies. New and Renewal Policies (1) By Region (2) Florida . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Northeast . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gulf . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Southeast 2019 266,841 152,673 138,468 95,000 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 652,982 2018 Change 249,033 135,835 131,896 89,718 606,482 17,808 16,838 6,572 5,282 46,500 41 UNITED INSURANCE HOLDINGS CORP. (1) Only includes new and renewal homeowner, commercial and dwelling fire policies written during the year. (2) “Northeast” is comprised of Connecticut, Massachusetts, New Jersey, New York and Rhode Island; “Gulf” is comprised of Hawaii, Louisiana and Texas; and “Southeast” is comprised of Georgia, North Carolina and South Carolina. 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, 2019 increased $129,544,000, or 17.8%, to $857,841,000 for the year ended December 31, 2019, from $728,297,000 for 2018. The increase in expenses was primarily due to an increase in losses and LAE combined with an increase in policy acquisition costs. The calculations of our combined loss ratios and underlying loss ratios are shown below. ($ in thousands) Year Ended December 31, 2018 2019 Change Net loss and LAE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . % of Gross earned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . % of Net earned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $499,493 37.5% 66.4% $408,589 $90,904 34.6% 2.9 pts 59.3% 7.1 pts Less: Current year catastrophe losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prior year reserve unfavorable (favorable) development . . . . . . . . . . . . . . . $ 96,875 33,134 $ 99,988 4,318 $ (3,113) 28,816 Underlying loss and LAE (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . % of Gross earned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . % of Net earned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $369,484 27.7% 49.1% $304,283 $65,201 25.8% 1.9 pts 44.1% 5.0 pts (1) Underlying loss and LAE is a non-GAAP financial measure and is reconciled above to net loss and LAE, the most directly comparable GAAP measure. Additional information regarding non-GAAP financial measures presented in this Form 10-K can be found in the “Definitions of Non-GAAP Measures” section, above. The calculations of the Company’s expense ratios are shown below. ($ in thousands) Policy acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating and underwriting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Operating Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . % of Gross earned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . % of Net earned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Year Ended December 31, 2018 2019 Change $238,268 44,310 65,989 $348,567 26.1% 46.3% $203,140 40,590 66,112 $ 35,128 3,720 (123) $309,842 $ 38,725 26.2% (0.1) pts 45.0% 1.3 pts Loss and LAE increased by $90,904,000, or 22.2%, to $499,493,000 for the year ended December 31, 2019, from $408,589,000 for the year ended December 31, 2018. Loss and LAE expense as a percentage of net earned premiums increased 7.1 points to 66.4% for the year ended December 31, 2019, compared to 59.3% for the year ended December 31, 2018. Excluding catastrophe losses and reserve development, our gross underlying loss and LAE ratio for the year ended December 31, 2019 would have been 27.7%, an increase of 1.9 points from 25.8% during the year ended December 31, 2018 . 42 UNITED INSURANCE HOLDINGS CORP. Policy acquisition costs increased by $35,128,000, or 17.3%, to $238,268,000 for the year ended December 31, 2019, from $203,140,000 for the year ended December 31, 2018. The primary drivers of the increase in costs were an increase of $23,596,000 in agent commissions, which were generally consistent with our growth in premium production and higher average market commission rates outside of Florida, and an increase of $8,888,000 in managing general agent commissions related to commercial premiums. Operating and underwriting expenses increased by $3,720,000, or 9.2%, to $44,310,000 for the year ended December 31, 2019, from $40,590,000 for the year ended December 31, 2018, primarily due to increased expenses of $6,691,000 related to our investment in software. This was partially offset by a $1,188,000 decrease in printing and postage expenses as well as a $1,086,000 decrease in home inspection expenses. General and administrative expenses decreased by $123,000, or 0.2%, to $65,989,000 for the year ended December 31, 2019, from $66,112,000 for the year ended December 31, 2018, primarily due to amortization costs of $6,879,000 of which $8,453,000 was related to the merger with AmCo incurred during the first quarter of 2018, with the remaining offset from amortization related to our capitalized software systems in 2019. This was offset by increased salary costs totaling $6,484,000 related to an increase in employee headcount. We experienced unfavorable reserve development in the current year and its historical impact on our net loss and net underlying loss ratios is outlined in the following table. Historical Reserve Development ($ in thousands, except ratios) 2015 2016 2017 2018 2019 Prior year reserve favorable (unfavorable) development . . . . . Development as a % of earnings before interest and taxes . . . $2,368 $(16,988) $2,613 $(4,318) $(33,134) 5.7% 219.9% 62.9% (76.7)% 145.2% Consolidated net loss and LAE ratio (LR) . . . . . . . . . . . . . . Prior year reserve unfavorable (favorable) development on 54.5% 65.3% 62.4% 59.3% 66.4% LR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Current year catastrophe losses on LR . . . . . . . . . . . . . . . . . . . (0.7)% 8.5% 3.7% (0.4)% 0.6% 12.2% 19.8% 14.6% 4.4% 12.9% Underlying net loss and LAE ratio (1) . . . . . . . . . . . . . . . . . . 46.7% 49.4% 43.0% 44.1% 49.1% (1) Underlying net loss and LAE Ratio is a non-GAAP measure and is reconciled above to the Consolidated net loss and LAE 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. 43 UNITED INSURANCE HOLDINGS CORP. ANALYSIS OF FINANCIAL CONDITION 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 The primary goals of our investment strategy are to preserve capital, maximize after-tax investment income, maintain liquidity and minimize risk. To accomplish our goals, we purchase debt securities in sectors that represent the most attractive relative value, and we maintain a moderate equity exposure. Limiting equity exposure manages risks and helps to preserve capital for two reasons: first, bond market returns are less volatile than stock market returns, and second, should the bond issuer enter bankruptcy liquidation, bondholders generally have a higher priority than equityholders in a bankruptcy proceeding. We must comply with applicable state insurance regulations that prescribe the type, quality and concentrations of investments our insurance subsidiaries can make; therefore, our current investment policy limits investment in non-investment-grade fixed maturities and limits total investment amounts in preferred stock, common stock and mortgage notes receivable. We do not invest in derivative securities. Two outside asset management companies, which have authority and discretion to buy and sell securities for us, manage our investments subject to (i) the guidelines established by our Board of Directors and (ii) the direction of management. The Investment Committee of our Board of Directors reviews and approves our investment policy on a regular basis. Our cash and investment portfolios totaled $1,298,780,000 at December 31, 2019 compared to $1,135,956,000 at December 31, 2018. 44 UNITED INSURANCE HOLDINGS CORP. The following table summarizes our investments, by type: December 31, 2019 December 31, 2018 Estimated Fair Value Percent of Total Estimated Fair Value Percent of Total U.S. government and agency securities . . . . . . . . . . . . . . . . Foreign governments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . States, municipalities and political subdivisions . . . . . . . . . Public utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Corporate securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . Asset-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . Redeemable preferred stocks . . . . . . . . . . . . . . . . . . . . . . . . $ 120,816 4,071 133,751 25,334 288,872 251,903 57,129 2,985 Total fixed maturities . . . . . . . . . . . . . . . . . . . . . . Mutual fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Public utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Common stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Nonredeemable preferred stocks . . . . . . . . . . . . . . . . . . . . . Total equity securities . . . . . . . . . . . . . . . . . . . . . Other long-term investments . . . . . . . . . . . . . . . . 884,861 65,453 3,663 44,492 3,002 116,610 10,252 Total investments . . . . . . . . . . . . . . . . . . . . . 1,011,723 Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 215,469 71,588 9.3% $ 0.3% 10.3% 2.0% 22.3% 19.4% 4.4% 0.2% 68.2% 5.0% 0.3% 3.4% 0.2% 8.9% 0.8% 77.9% 16.6% 5.5% 98,975 3,982 144,468 23,890 301,988 223,854 64,037 1,151 862,345 50,016 1,759 27,198 2,005 80,978 8,513 951,836 112,679 71,441 8.7% 0.4% 12.7% 2.1% 26.6% 19.7% 5.6% 0.1% 75.9% 4.4% 0.2% 2.4% 0.2% 7.2% 0.7% 83.8% 9.9% 6.3% Total cash and investments . . . . . . . . . . . . . $1,298,780 100.0% $1,135,956 100.0% We classify all of our investments as available-for-sale. Our investments at December 31, 2019 and 2018 consisted mainly of U.S. government and agency securities, states, municipalities and political subdivisions, mortgage-backed securities 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, 2019, approximately 85.8% of our fixed maturities were U.S. Treasuries, or corporate bonds rated “A” or better, and 14.2% were corporate bonds rated “BBB” or “BB”. 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. 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). The Company follow the same definition when evaluating events as 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 which we define as incidents that result in $1,000,000 or more in losses for multiple policyholders. 45 UNITED INSURANCE HOLDINGS CORP. During the second quarter of 2019, we placed our reinsurance program for the 2019 hurricane season. We purchased catastrophe excess of loss reinsurance protection of $3,200,000,000. The contracts reinsure for personal and commercial lines property excess catastrophe losses caused by multiple perils including hurricanes, tropical storms, and tornadoes. The agreements were effective as of June 1, 2019, for a one-year term and incorporate the mandatory coverage required by and placed with the Florida Hurricane Catastrophe Fund (FHCF). The FHCF covers Florida risks only and we participate at 90%. The state of Florida may enact legislation altering the size and the terms and operations of the FHCF at their discretion. Effective June 1, 2019, we extended our quota share reinsurance agreement that was set to expire on May 31, 2019, for a one-year term. This quota share reinsurance agreement has a cession rate of 22.5% for all subject business and provides coverage for all catastrophe perils and attritional losses. We also included coverage for our subsidiary, FSIC, under this renewal. Effective January 1, 2019, we renewed the aggregate excess of loss agreement 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 2019 were 41.7% of gross premiums earned compared to 40.1% of gross premiums earned for 2018. The increase in this ratio was driven by the changes to our quota share agreement as described above. We amortize our ceded unearned premiums over the annual agreement period, and we record that amortization in ceded premiums earned on our Consolidated Statements of Comprehensive Income (Loss). The table below summarizes the amounts of our ceded premiums written under the various types of agreements, as well as the amortization of ceded unearned premiums: Quota Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Excess-of-loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equipment & identity theft . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Flood . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(174,147) $ (94,267) $ (88,379) (331,289) (389,633) (424,622) (9,576) (9,163) (13,379) (18,085) (19,207) (21,127) Year Ended December 31, 2017 2018 2019 Ceded premiums written . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Increase in ceded unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . $(633,275) $(512,270) $(447,329) 46,796 52,149 20,585 Ceded premiums earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(581,126) $(491,685) $(400,533) 46 UNITED INSURANCE HOLDINGS CORP. Current year catastrophe losses disaggregated between name and numbered storms and all other catastrophe loss events are shown in the following table. Number of Events Incurred Loss and Loss adjustment expense (LAE) (1) Combined Ratio Impact December 31, 2019 Current period catastrophe losses incurred Named and numbered storms . . . . . . . . . . . . . . . . . . . . . . . All other catastrophe loss events . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 31, 2018 Current period catastrophe losses incurred Named and numbered storms . . . . . . . . . . . . . . . . . . . . . . . All other catastrophe loss events . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 31, 2017 Current period catastrophe losses incurred Named and numbered storms . . . . . . . . . . . . . . . . . . . . . . . All other catastrophe loss events . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 32 37 5 27 32 6 16 22 $ 32,170 64,705 $ 96,875 $ 53,227 46,761 $ 99,988 $ 84,226 32,198 $116,424 4.3% 8.6% 12.9% 7.7% 6.8% 14.5% 14.4% 5.5% 19.9% (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 development on storms during the year in which it occurred. 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 $760,357,000 and $661,203,000 as of December 31, 2019 and 2018, respectively. The balance has increased year over year as a result of increased reserves for both weather-related and non weather-related activity during 2019 compared to 2018. In addition, during the year ended December 31, 2019, we increased our loss and LAE reserves for Hurricane Irma as a result of development trends that indicated our ultimate gross loss estimate should be increased. 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 47 UNITED INSURANCE HOLDINGS CORP. 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. 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 year ended December 31, 2019 we contributed $4,000,000 and $13,000,000 to our insurance subsidiaries UPC and FSIC, respectively. During the year ended December 31, 2018, we contributed $94,000,000, including our contribution to form our new subsidiary as described below. We may make future contributions of capital to our insurance subsidiaries as circumstances require. During August 2019. we received a dividend of $13,579,000 from our insurance subsidiary ACIC. During November 2018, ACIC and IIC paid dividends to the Company of $50,000,000 and $1,764,000, respectively. In 2019, the $1,764,000 dividend paid by IIC in 2018 was returned by UIHC. During August 2018, we contributed $40,000,000 to fund a new subsidiary, JIC, and Kiln contributed $20,000,000, for total funding of $60,000,000. JIC is owned 66.7% by the Company and 33.3% by Kiln. On December 13, 2017, we issued $150,000,000 of senior notes (Senior Notes) that will mature on December 15, 2027 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 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. 48 UNITED INSURANCE HOLDINGS CORP. On April 3, 2017, we successfully completed our acquisition of 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. Cash Flows for the Year Ended December 31, (in millions) Operating $149.0 $25.8 $35.5 2019 2018 2017 Operating Activities Investing Financing $97.4 $7.7 $(34.0) $(7.3) $(12.1) $(125.6) 2018 2017 2019 2019 2018 2017 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, 2019, several changes in operating assets and liabilities were impacted by developments in non-catastrophe losses. Unpaid losses and LAE increased during the period and, as a result, we expect an increase in cash outflows related to the payment of non-catastrophe claims in the near future. In addition, reinsurance recoverable on paid and unpaid losses decreased during the period. In 2018, we saw losses above our reinsurance retention thresholds and subsequent reinsurance recoverables as a result of Hurricanes Michael and Florence. In 2019, while we did have losses related to catastrophes, these catastrophes were less severe. As a result, fewer losses were incurred that were eligible for ceding under our reinsurance treaty. 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. During the year ended December 31, 2019, cash used in investing activities decreased $91,663,000 as the result of $109,491,000 lower net purchases of investments in 2019 when compared to 2018. 49 UNITED INSURANCE HOLDINGS CORP. 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 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. During the year ended December 31, 2019, cash provided by financing activities decreased by $19,827,000 due to the formation of JIC in 2018, which resulted in cash inflows of $20,000,000 during 2018 that did not recur in 2019. RECENT ACCOUNTING STANDARDS Please refer to Note 2(s) 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. 50 UNITED INSURANCE HOLDINGS CORP. 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 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 also have investments in limited partnerships that require us to use the net asset value per share method of valuation to determine fair value. Investment Portfolio Impairments For investments classified as available for sale, the difference between fair value and cost or amortized cost for fixed income securities is reported as a component of accumulated other comprehensive income (loss) 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 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 51 UNITED INSURANCE HOLDINGS CORP. income (loss). 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. Once assumptions and estimates are made, any number of changes in facts and circumstances could cause us to subsequently determine that a fixed income 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 issue, 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. 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 (loss) in stockholders’ equity. The determination of the amount of other-than-temporary impairment is an inherently subjective process based on periodic evaluations of the following factors: (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. 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. Due to the adoption of Accounting Standards Update (ASU) 2016-01 (ASU 2016-01) as of January 1, 2018, equity securities are reported at fair value with changes in fair value, including impairment write-downs, being recognized in the revenue section of our Consolidated Statements of Comprehensive Income. 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(i) 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 52 UNITED INSURANCE HOLDINGS CORP. 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. OFF-BALANCE SHEET ARRANGEMENTS At December 31, 2019, we did not have any off-balance-sheet arrangements. CONTRACTUAL OBLIGATIONS The following table summarizes our expected payments for contractual obligations at December 31, 2019: 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 $ 195 7,117 11,152 1,000 403,494 $ 205 14,501 22,213 1,333 238,256 $ 41 6,049 22,079 — 88,124 More than 5 Years $ 1,199 2,631 181,920 — 30,483 $ Total 1,640 30,298 237,364 2,333 760,357 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,031,992 $422,958 $276,508 $116,293 $216,233 (1) Represents operating and finance 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 $7,647,000 over the remaining life of the SBA note, and principal payments totaling $3,958,000 over the remaining life of the BB&T note. Additionally, all future interest payments are calculated using the current rates provided at December 31, 2019, and are included. 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, 2019, UPC, FSIC, IIC, ACIC, JIC, and BlueLine Cayman Holdings had unpaid loss and LAE of $760,357,000. 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 20 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 15 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. 53 UNITED INSURANCE HOLDINGS CORP. Our investment policy was established by the Investment Committee of our Board of Directors and is reviewed regularly. Pursuant to this investment policy, our fixed-maturity 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 (loss) within our stockholders’ equity. We do not hold any securities that are classified as held 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. The unrealized gains or losses related to our equity securities are recorded on the income statement per the guidance in ASU 2016-01. 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, 2019, and 2018: Hypothetical Change in Interest Rates 2019 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2018 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 Change in Estimated Fair Value Percentage Increase (Decrease) in Estimated Fair Value $796,252 $825,787 $855,324 $884,861 $914,399 $940,961 $951,925 $771,039 $801,470 $831,905 $862,345 $892,786 $923,113 $949,490 $(88,609) $(59,074) $(29,537) $ — $ 29,538 $ 56,100 $ 67,064 $(91,306) $(60,875) $(30,440) $ — $ 30,441 $ 60,768 $ 87,145 (10.0)% (6.7)% (3.3)% — % 3.3% 6.3% 7.6% (10.6)% (7.1)% (3.5)% — % 3.5% 7.0% 10.1% 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, 2019 rates would not have a material impact on our results of operations or cash flows. As was announced in July 2017, LIBOR is anticipated to be phased out by the end of 2021. We are unable to predict the use of alternate reference rates and corresponding interest rate risk at this time. 54 UNITED INSURANCE HOLDINGS CORP. 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, 2019 and 2018: Comparable Rating Amortized Cost % of Total Amortized Cost Fair Value % of Total Fair Value 2019 AAA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . AA+, AA, AA- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A+, A, A- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . BBB+, BBB, BBB- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $188,458 396,654 162,682 121,804 21.7% 45.6 18.7 14.0 $191,079 402,049 166,206 125,527 21.6% 45.4 18.8 14.2 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $869,598 100.0% $884,861 100.0% 2018 AAA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . AA+, AA, AA- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A+, A, A- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . BBB+, BBB, BBB- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $192,134 387,715 180,585 114,011 22.0% 44.3 20.7 13.0 $191,071 382,698 177,521 111,055 22.2% 44.3 20.6 12.9 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $874,445 100.0% $862,345 100.0% 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. 55 UNITED INSURANCE HOLDINGS CORP. EQUITY PRICE RISK Our equity investment portfolio at December 31, 2019 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, 2019 and 2018: Stocks by Sector Fair Value % of Total Fair Value 2019 Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consumer, non cyclical . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Communications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consumer, Cyclical Energy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Basic Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 65,453 11,491 10,928 8,438 5,555 4,002 3,690 3,597 2,094 1,362 56.0% 9.9 9.4 7.2 4.8 3.4 3.2 3.1 1.8 1.2 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $116,610 100.0% 2018 Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consumer, Non-cyclical . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consumer, Cyclical . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Communications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Energy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Basic Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 50,015 8,386 7,737 3,905 2,573 2,063 1,958 1,744 1,600 997 61.7% 10.4 9.6 4.8 3.2 2.5 2.4 2.2 2.0 1.2 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 80,978 100.0% 56 UNITED INSURANCE HOLDINGS CORP. Item 8. Financial Statements and Supplementary Data REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the shareholders and the Board of Directors of United Insurance Holdings Corp. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheet of United Insurance Holdings Corp. and subsidiaries (the “Company”) as of December, 31, 2019 and 2018, the related consolidated statements of comprehensive income (loss), stockholders’ equity, and cash flows, for each of the two years in the period ended December 31, 2019, and the related notes and the schedules listed in the Index at Item 15 (collectively referred to as 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, 2019 and 2018, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2019, in conformity with the 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, 2019, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of the Sponsoring Organizations of the Treadway Commission and our report dated March 12, 2020, expressed an unqualified opinion on the Company’s internal control over financial reporting. 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 audit. We are a public accounting firm registered with the PCAOB and are required to be independent with the respect to the Company in accordance with the 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 the financial statements are free of material misstatement, whether due to error or fraud. Our audit 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 audit 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 audit provides a reasonable basis for our opinion. /s/ DELOITTE & TOUCHE LLP Tampa, Florida March 12, 2020 We have served as the Company’s auditor since 2018. 57 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 Financial Statements We have audited the accompanying consolidated statements of comprehensive income, stockholders’ equity and cash flows for the year ended December 31, 2017, and the related notes to the consolidated financial statements and schedules (collectively, the financial statements) of United Insurance Holdings Corp. and its subsidiaries (the Company). In our opinion, the financial statements present fairly, in all material respects, the results of the Company’s operations and its cash flows for the year ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America. 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 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 audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audit 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 audit 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 audit provide a reasonable basis for our opinion. We served as the Company’s auditor from 2009 to 2017. /s/ RSM US LLP Omaha, Nebraska March 28, 2018 58 UNITED INSURANCE HOLDINGS CORP. Consolidated Balance Sheets December 31, 2019 2018 ASSETS Investments, at fair value: Fixed maturities, available-for-sale (amortized cost of $869,598 and $874,445, respectively) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other investments (amortized cost of $8,067 and $8,288, respectively) . . . . . . . . . . . . . . $ 884,861 116,610 10,252 $ 862,345 80,978 8,513 Total investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,011,723 Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total cash, cash equivalents and restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Premiums receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reinsurance recoverable on paid and unpaid losses . . . . . . . . . . . . . . . . . . . . . . . . . . Ceded unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred policy acquisition costs, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 215,469 71,588 287,057 5,901 32,728 86,568 550,136 270,034 73,045 104,572 26,079 19,375 951,836 112,679 71,441 184,120 6,017 17,137 95,816 625,998 217,885 73,045 105,582 31,351 12,641 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,467,218 $2,321,428 LIABILITIES AND STOCKHOLDERS’ EQUITY Liabilities: Unpaid losses and loss adjustment expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reinsurance payable on premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payments outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating lease liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Notes payable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 760,357 674,055 166,131 57,555 78,592 324 47,407 158,932 $ 661,203 627,313 175,272 56,534 71,048 — 29,571 160,118 Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,943,353 $1,781,059 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; 43,056,310 and 43,029,845 issued, respectively; 43,028,074 and 42,984,578 outstanding, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Treasury shares, at cost; 212,083 shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 391,852 (431) 11,319 100,394 4 389,141 (431) (9,030) 140,546 Total stockholders’ equity attributable to United Insurance Holdings Corp. (UIHC) stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 503,138 $ 520,230 Noncontrolling interests (NCI) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,727 20,139 Total Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 523,865 $ 540,369 Total Liabilities and Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,467,218 $2,321,428 See accompanying notes to consolidated financial statements. 59 UNITED INSURANCE HOLDINGS CORP. Consolidated Statements of Comprehensive Income (Loss) Year Ended December 31, 2018 2019 2017 REVENUE: Gross premiums written . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in gross unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,380,268 (46,742) $ 1,252,401 (71,440) $ 1,040,848 (54,825) Gross premiums earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ceded premiums earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,333,526 (581,126) 1,180,961 (491,685) 986,023 (400,533) Net premiums earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net realized investment gains . . . . . . . . . . . . . . . . . . . . . . . . . . . Net unrealized gains (losses) on equity securities . . . . . . . . . . . . Other revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EXPENSES: Losses and loss adjustment expenses . . . . . . . . . . . . . . . . . . . . . . Policy acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . General and administrative expenses . . . . . . . . . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income (loss) before other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income (loss) before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Benefit for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 752,400 30,145 1,228 24,761 16,582 825,116 499,493 238,268 44,310 65,989 9,781 857,841 (32,725) 119 (32,606) (3,121) 689,276 27,201 1,655 (9,300) 15,110 723,942 408,589 203,140 40,590 66,112 9,866 728,297 (4,355) 116 (4,239) (4,633) Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (29,485) $ Less: Net income attributable to NCI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 387 Net income (loss) attributable to UIHC . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (29,872) $ 394 104 290 $ $ OTHER COMPREHENSIVE INCOME (LOSS): Change in net unrealized gains (losses) on investments . . . . . . . Reclassification adjustment for net realized investment gains . . Income tax benefit (expense) related to items of other 28,366 (1,228) (22,264) (1,655) 585,490 17,812 67 — 51,051 654,420 365,535 175,444 27,675 81,762 3,247 653,663 757 153 910 (9,235) 10,145 — 10,145 10,647 (67) comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6,588) 5,703 (2,181) Total comprehensive income (loss) . . . . . . . . . . . . . . . . . . . $ (8,935) $ (17,822) $ 18,544 Less: Comprehensive income attributable to NCI . . . . . . . . . . . . . . . . . . . . 588 139 — Comprehensive income (loss) attributable to UIHC . . . . . . . . . . . . . . . . . . $ (9,523) $ (17,961) $ 18,544 Weighted average shares outstanding Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42,763,423 42,650,629 37,152,768 Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42,763,423 42,838,886 37,375,340 Earnings available to UIHC common stockholders per share Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ (0.70) $ (0.70) $ 0.01 0.01 $ $ 0.27 0.27 See accompanying notes to consolidated financial statements. Statements include related party transactions as detailed in Note 15. 60 UNITED INSURANCE HOLDINGS CORP. Consolidated Statements of Stockholders’ Equity — — 6,850 — 6,850 Common Stock Shares Amount December 31, 2016 . . . . . . . 21,646,614 — Net income . . . . . . . . . Other comprehensive 2 $ — Additional Paid-in Capital $ 99,353 — — income . . . . . . . . . . . Reclassification due to adoption of ASU 2018-02 . . . . . . . . . . Stock compensation . . . Issuance of common — — 150,085 — — 2,326 stock . . . . . . . . . . . . 20,956,355 2 285,466 Cash dividends on common stock ($0.24 per common share) . . . . . . . . . . . . — — — December 31, 2017 . . . . . . . 42,753,054 — Net income . . . . . . . . . Other comprehensive 4 387,145 — — — — — — — 231,524 — — 1,996 — — — — — — income (loss) . . . . . . Reclassification due to adoption of ASU 2016-01 . . . . . . . . . . Stock compensation . . . Cash dividends on common stock ($0.24 per common share) . . . . . . . . . . . . Net increase due to acquisitions . . . . . . . Net income (loss) Other comprehensive . . . . income . . . . . . . . . . . Stock compensation . . . Cash dividends on common stock ($0.24 per common share) . . . . . . . . . . . . Accumulated Other Comprehensive Income (loss) Treasury Stock $(431) — $ 822 — Retained Earnings $141,581 10,145 Stockholders’ Equity Attributable to UIHC Total Stockholders’ Equity NCI $241,327 10,145 $ — $241,327 10,145 — — — — — — (431) — — — — — — 1,549 — — — 9,221 — — — — — 6,850 — 2,326 285,468 (1,549) — — 2,326 — 285,468 (8,991) (8,991) 141,186 290 537,125 290 — — 104 (8,991) 537,125 394 (8,913) — (8,913) 35 (8,878) (9,338) — 9,338 — — 1,996 — — — 1,996 — — (10,268) (10,268) — — 140,546 (29,872) 520,230 (29,872) 20,000 20,139 387 201 (10,268) 20,000 540,369 (29,485) 20,550 2,711 December 31, 2018 . . . . . . . 42,984,578 4 389,141 (431) (9,030) 43,496 2,711 20,349 20,349 2,711 (10,280) (10,280) (10,280) December 31, 2019 . . . . . . . 43,028,074 $ 4 $391,852 $(431) $11,319 $100,394 $503,138 $20,727 $523,865 See accompanying notes to consolidated financial statements. 61 UNITED INSURANCE HOLDINGS CORP. Consolidated Statements of Cash Flows Year Ended December 31, 2019 2018 2017 OPERATING ACTIVITIES Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjustments to reconcile net income to net cash provided by operating activities: $ (29,485) $ 394 $ 10,145 Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bond amortization and accretion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net realized gains on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net unrealized losses (gains) on equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ceded unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred policy acquisition costs, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unpaid losses and loss adjustment expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reinsurance payable on premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payments outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,997 5,323 (1,228) (24,761) 553 (4,280) 3,007 116 8,695 75,862 (52,149) 1,010 (6,817) 99,154 46,742 (9,141) 1,021 7,544 324 15,528 18,482 5,005 (1,655) 9,300 358 (2,470) 2,414 (440) (20,899) (230,224) (15,981) (1,700) (1,545) 178,971 71,440 26,155 14,748 24,454 — (51,048) 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 19,853 15,905 — 28,739 Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149,015 25,759 35,548 INVESTING ACTIVITIES Proceeds from sales, maturities and repayments of: Fixed Maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Policy Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchases of: Fixed Maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Policy Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of property, equipment and capitalized software acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . 255,197 2,201 7,104 — (254,357) (15,373) (6,855) — — (21,896) 219,572 9,726 1,302 20,000 (336,590) (34,050) (1,534) — — (4,068) 113,755 3,888 10,686 — (168,061) (26,419) (11,240) (20,000) 95,284 (5,237) Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (33,979) (125,642) (7,344) FINANCING ACTIVITIES Tax withholding payment related to net settlement of equity awards . . . . . . . . . . . . . . . . . . . . . . . Investment in subsidiary—NCI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Repayments of borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payments of debt issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash provided by (used in) financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Increase (decrease) in cash, cash equivalents and restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash, cash equivalents and restricted cash at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (296) — (1,523) — — (10,280) (12,099) 102,937 184,120 (418) 20,000 (1,523) — (63) (10,268) 7,728 (92,155) 276,275 (287) — (40,075) 150,000 (3,264) (8,991) 97,383 125,587 150,688 Cash, cash equivalents and restricted cash at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 287,057 $ 184,120 $ 276,275 Supplemental Cash Flows Information Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-cash transactions Issuance of common stock in connection with acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ $ 9,730 517 $ $ 9,861 4,673 $ $ 3,407 3,896 — $ — $ 285,468 See accompanying notes to consolidated financial statements. 62 UNITED INSURANCE HOLDINGS CORP. Notes to Consolidated Financial Statements December 31, 2019 1) ORGANIZATION, CONSOLIDATION AND PRESENTATION (a) Business United Insurance Holdings Corp. (referred to in this document as we, our, us, the Company or UPC Insurance) is a property and casualty insurance holding company that sources, writes and services residential personal and commercial property and casualty insurance policies using a network of agents, four wholly-owned insurance subsidiaries, and one majority-owned insurance subsidiary. Our largest insurance subsidiary is United Property & Casualty Insurance Company (UPC), which was formed in Florida in 1999 and has operated continuously since that time. Our four other insurance subsidiaries are Family Security Insurance Company, Inc. (FSIC), acquired via merger on February 3, 2015, Interboro Insurance Company (IIC), acquired via merger on April 29, 2016, American Coastal Insurance Company (ACIC), acquired via merger on April 3, 2017, and Journey Insurance Company (JIC). JIC was formed in strategic partnership with a subsidiary of Tokio Marine Kiln Group Limited (Kiln) on August 30, 2018. The Kiln subsidiary holds a noncontrolling interest in JIC. See Note 4 in these Notes to Consolidated Financial Statements for additional information regarding these transactions. Our other subsidiaries include United Insurance Management L.C. (UIM), a managing general agent that manages substantially all aspects of UPC’s and FSIC’s business; Skyway Claims Services, LLC, which provides claims adjusting services to UPC, FSIC and IIC; AmCo Holding Company, LLC (AmCo) and Family Security Holdings, LLC (FSH), which are holding company subsidiaries that consolidate their respective insurance companies; BlueLine Cayman Holdings (BlueLine) which reinsures portfolios of excess and surplus policies; UPC Re which provides a portion of the reinsurance protection purchased by our insurance subsidiaries when needed; and Skyway Reinsurance Services, LLC which provides reinsurance brokerage services for our insurance companies. Our primary product is homeowners’ insurance, which we currently offer in 12 states, under authorization from the insurance regulatory authorities in each state. In addition, we write commercial residential insurance in the state of Florida. We are also licensed to write property and casualty insurance in an additional six states; however, we have not commenced writing in these states. We conduct our operations under one reportable segment, property and casualty insurance policies. Our chief operating decision maker is our Chief Executive Officer who makes decisions to allocate resources and assesses performance at the corporate level. (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 (Loss), 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. 63 UNITED INSURANCE HOLDINGS CORP. Notes to Consolidated Financial Statements December 31, 2019 We reclassified certain amounts in the 2018 and 2017 financial statements to conform to the 2019 presentation, including reclassifying the presentation of “outstanding checks in excess of funds on deposit” in the financing section of the Consolidated Statements of Cash Flows to “changes in payments outstanding” in the operating section, to provide the users of the financial statements with more transparency. In addition, we also reclassified the presentation of our loss development tables. Refer to Note 10 in these Notes to Consolidated Financial Statements for additional information regarding this reclassification. These reclassifications had no impact on our results of operations or stockholders’ equity, as previously reported. 2) SIGNIFICANT ACCOUNTING POLICIES (a) Cash, cash equivalents, and restricted cash Our cash, cash equivalents, and restricted cash include demand deposits with financial institutions, cash that is held in trust for assumed business, cash held in deposit accounts to satisfy state statutory deposit requirements, 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 and short-term investments as available-for-sale, and report them and our equity securities and limited partnership investments 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 (loss). 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. Effective January 1, 2018, in accordance with Accounting Standards Update (ASU) 2016-01 (ASU 2016-01), we present our unrealized gains or losses on equity investments and other investments on the income statement. 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 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 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 (loss). 64 UNITED INSURANCE HOLDINGS CORP. Notes to Consolidated Financial Statements December 31, 2019 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. (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, 2019 and 2018. (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 $302,000 and $362,000 at December 31, 2019 and 2018, 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 premiums 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. Such costs include, but are not limited to: incremental direct costs of contract acquisition, such as commissions; premium taxes; and other essential direct costs that would not have been incurred had a policy not been acquired or renewed. 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, reinsurance 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, 2019 and December 31, 2018. 65 UNITED INSURANCE HOLDINGS CORP. Notes to Consolidated Financial Statements December 31, 2019 (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 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 amortize the capitalized software costs related to our data warehouse, claims system 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 2019 and 2018. iii) Impairment of Long-lived Assets We annually review our long-lived assets, or more frequently when impairment indicators exist, 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 (Loss), we report losses net of amounts ceded to reinsurers. We do not discount our loss reserves for financial statement purposes. 66 UNITED INSURANCE HOLDINGS CORP. Notes to Consolidated Financial Statements December 31, 2019 (i) 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 two reporting units. 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 units and perform a two-step quantitative impairment test. In performing the two-step quantitative impairment test, we use a discounted cash flow valuation approach. 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 units. We apply significant judgment when determining the estimated fair value of our reporting units and when assessing the relationship of market capitalization to the aggregate estimated fair value of our reporting units. The valuation methodology utilized is 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 units could result in goodwill impairments in future periods which could materially adversely affect our results of operations or financial position. For the 2019 annual goodwill impairment tests, we utilized the qualitative assessment for both of our reporting units and determined that the goodwill was not impaired. For the 2018 annual goodwill impairment tests, we utilized the qualitative assessment for one of our reporting units and determined it was not more likely than not that the fair value of the reporting units tested using the applicable methods was less than their carrying amount and, therefore goodwill was not impaired for either period. For our second reporting unit, we used the quantitative approach in 2018 and determined that the goodwill was not impaired. (j) 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 67 UNITED INSURANCE HOLDINGS CORP. Notes to Consolidated Financial Statements December 31, 2019 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 2019 and 2018, we determined that the fair values of the intangible assets were not impaired. (k) 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. (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. 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 did not incur any material tax penalties or income-tax-related interest during the years ended December 31, 2019, 2018 or 2017. (m) Advertising Costs We expense all advertising costs as an operating expense when we incur those costs. For the years ended December 31, 2019, 2018 and 2017, we incurred advertising costs of $1,426,000, $1,674,000, and $1,013,000, respectively. (n) Earnings Per Share (EPS) We report both basic earnings per share and diluted earnings per share. To calculate basic earnings per share, we divide net income attributable to UIHC common stockholders (net income less the net income attributable to NCI) by the weighted-average number of shares of common stock outstanding during the period. We calculate diluted earnings per share using the Treasury method by dividing net income attributable to UIHC common stockholders by the weighted-average number of shares of common stock, common stock equivalents, and restricted shares outstanding during the period. Common share equivalents are only included when they are dilutive. 68 UNITED INSURANCE HOLDINGS CORP. Notes to Consolidated Financial Statements December 31, 2019 (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 write approximately 53% of our gross written premium in Florida as of December 31, 2019; 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 of our cash at five 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 $303,021,000 and $221,175,000 in excess of Federal Deposit Insurance Corporation (FDIC) insurance limits at December 31, 2019 and 2018, respectively. (p) 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 (Loss). (q) 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, ceded unearned premiums, and a liability, reinsurance payable, for the entire contract amount upon commencement of our new reinsurance agreements. We amortize our ceded unearned premiums over the 12-month contract period. We record provisional ceding commissions that we receive in connection with our reinsurance contracts for the 2019 and 2018 underwriting year as an offset to deferred acquisition costs to the extent that they relate to compensation for acquisition costs that are incurred that are deferrable. The remaining provisional ceding commissions are recorded as unearned reinsurance commission and are recognized as an offset to other acquisition costs based in proportion to the premiums earned or coverage provided by the reinsurance contracts. 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 69 UNITED INSURANCE HOLDINGS CORP. Notes to Consolidated Financial Statements December 31, 2019 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, 2019, 2018 or 2017. (r) 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 2019 and 2018, we did not receive any significant assessments from regulatory authorities in the states in which our insurance subsidiaries operate. (s) Accounting Pronouncements Recently Adopted Policies In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842) (ASU 2016-02). This update is intended to replace existing lease guidance by requiring a lessee to recognize substantially all leases (whether operating or finance leases) on the balance sheet as a right-of-use asset and an associated lease liability. Short-term leases of 12 months or less are excluded from this standard. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018. We adopted this standard as of January 1, 2019 using a modified retrospective approach, which allowed us to initially apply the new lease standard at the adoption date and recognize a cumulate effect adjustment to the opening balance of retained earnings for 2019, with no adjustment to prior periods presented. The cumulative effect adjustment to the opening balance of retained earnings was zero. The adoption of the standard resulted in the recognition of a right-of-use asset of $482,000 at January 1, 2019, which was recorded within Other Assets on our Consolidated Balance Sheets, and a corresponding lease liability of $482,000 at January 1, 2019 for our operating lease. Additionally, we elected the practical expedients that permit the exclusions of leases considered to be short-term and with value that falls under our capitalization threshold. We also elected the practical expedient of not segregating lease and nonlease components for leases on our office equipment. 70 UNITED INSURANCE HOLDINGS CORP. Notes to Consolidated Financial Statements December 31, 2019 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 December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes (ASU 2019-12). This update enhances and simplifies various aspects of the income tax guidance, including intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. ASU 2019-12 is effective for annual reporting periods beginning after December 15, 2020, including interim periods within those fiscal years, with earlier 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 August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement (ASU 2018-13). This update modifies the existing disclosure requirements on fair value measurements in Topic 820 by changing requirements regarding Level 1, Level 2 and Level 3 investments. ASU 2018-13 is effective for annual reporting periods beginning after December 15, 2019, including interim periods within those annual periods, with early adoption permitted. Entities are permitted to early adopt any removed or modified disclosures of ASU 2018-13 immediately and delay the adoption of the additional disclosures until their effective date. We have early adopted the guidance on removed and modified disclosures. We do not intend to early adopt the additional disclosures and are assessing the impact of retrospectively adopting the additions from this new accounting standard on our fair value 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 2017-04 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 will follow this new guidance beginning with the assessment to be performed as of September 30, 2020. In the event that a triggering event occurs and requires an earlier interim assessment, the updated guidance will be followed at that time. Any impact of the standard on our consolidated financial statements and related disclosures will be dependent on market conditions of the reporting units at the time of adoption. In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments- Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13). This update is intended to replace the incurred loss impairment methodology in current GAAP with a method that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 will provide users with more useful information regarding the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. In addition, credit losses on available-for-sale debt securities will now have to be presented as an allowance rather than as a write-down. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted for certain requirements. We have not early adopted and are assessing the impact of adopting this new accounting standard on our consolidated financial statements and related disclosures using a modified retrospective approach upon adoption. Based on our current analysis, we expect that the impact will represent an adjustment of approximately $415,000 decreasing our beginning retained earnings in 2020. 71 UNITED INSURANCE HOLDINGS CORP. Notes to Consolidated Financial Statements December 31, 2019 3) INVESTMENTS The following table details fixed maturity available-for-sale securities, by major investment category, at December 31, 2019 and 2018: Cost or Adjusted/ Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value December 31, 2019 U.S. government and agency securities . . . . . . . . . . . . Foreign government . . . . . . . . . . . . . . . . . . . . . . . . . . . States, municipalities and political subdivisions . . . . . Public utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Corporate securities . . . . . . . . . . . . . . . . . . . . . . . . . . . Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . Asset-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . Redeemable preferred stocks . . . . . . . . . . . . . . . . . . . . $120,260 3,975 131,203 24,660 281,892 248,206 56,487 2,915 $ 749 97 2,611 700 7,123 4,174 683 72 $ Total fixed maturities . . . . . . . . . . . . . . . . . . . . . . $869,598 $16,209 $ 193 1 63 26 143 477 41 2 946 December 31, 2018 U.S. government and agency securities . . . . . . . . . . . . Foreign government . . . . . . . . . . . . . . . . . . . . . . . . . . . States, municipalities and political subdivisions . . . . . Public utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Corporate securities . . . . . . . . . . . . . . . . . . . . . . . . . . . Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . Asset-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . Redeemable preferred stocks . . . . . . . . . . . . . . . . . . . . $100,240 3,993 145,415 24,560 307,875 227,004 64,071 1,287 $ 50 5 354 11 272 333 105 3 $ 1,315 16 1,301 681 6,159 3,483 139 139 $120,816 4,071 133,751 25,334 288,872 251,903 57,129 2,985 $884,861 $ 98,975 3,982 144,468 23,890 301,988 223,854 64,037 1,151 Total fixed maturities . . . . . . . . . . . . . . . . . . . . . . $874,445 $ 1,133 $13,233 $862,345 Equity securities are summarized as follows at: December 31, 2019 December 31, 2018 Estimated Fair Value Percent of Total Estimated Fair Value Percent of Total Mutual funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Public utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other common stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Nonredeemable preferred stocks . . . . . . . . . . . . . . . . . . . . . $ 65,453 3,663 44,492 3,002 56.1% 3.1 38.2 2.6 $50,016 1,759 27,198 2,005 61.8% 2.2 33.6 2.4 Total equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $116,610 100.0% $80,978 100.0% 72 UNITED INSURANCE HOLDINGS CORP. Notes to Consolidated Financial Statements December 31, 2019 When we sell investments, we calculate the gain or loss realized on the sale by comparing the sales price (fair value) to the cost or adjusted/amortized cost of the security sold. We determine the cost or adjusted/ amortized cost of the security sold using the specific-identification method. The following table details our realized gains (losses) by major investment category for the years ended December 31, 2019, 2018, and 2017: 2019 2018 2017 Gains (Losses) Fair Value at Sale Gains (Losses) Fair Value at Sale Gains (Losses) Fair Value at Sale Fixed maturities . . . . . . . . . . . . . . . . . Equity securities . . . . . . . . . . . . . . . . . Short-term investments . . . . . . . . . . . . $1,678 94 — $209,302 814 3,863 Total realized gains . . . . . . . . . . . 1,772 213,979 Fixed maturities . . . . . . . . . . . . . . . . . Equity securities . . . . . . . . . . . . . . . . . Short-term investments . . . . . . . . . . . . Total realized losses . . . . . . . . . . (324) (219) (1) (544) 43,573 1,387 1,035 45,995 $ 373 2,828 — 3,201 (1,376) (170) — (1,546) $ 41,776 6,073 — 47,849 135,944 995 — 136,939 $ 268 847 — 1,115 (890) (158) — (1,048) $35,248 2,209 — 37,457 53,194 1,749 — 54,943 Net realized investment gains . . . . . . . $1,228 $259,974 $ 1,655 $184,788 $ 67 $92,400 The table below summarizes our fixed maturities at December 31, 2019 by contractual maturity periods. Actual results may differ as issuers may have the right to call or prepay obligations, with or without penalties, prior to the contractual maturities of those obligations. 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, 2019 Cost or Amortized Cost $ 96,690 282,855 179,718 5,642 304,693 Percent of Total Fair Value Percent of Total 11.1% $ 96,898 287,086 32.5% 185,908 20.7% 5,937 0.6% 309,032 35.1% 11.0% 32.4% 21.0% 0.7% 34.9% Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $869,598 100.0% $884,861 100.0% The following table summarizes our net investment income by major investment category: Year Ended December 31, 2017 2018 2019 Fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $23,267 2,474 4,118 1,253 117 $22,043 2,206 1,953 942 57 $14,942 1,277 626 937 30 Investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,229 (1,084) 27,201 (1,031) 17,812 (686) Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $30,145 $26,170 $17,126 73 UNITED INSURANCE HOLDINGS CORP. Notes to Consolidated Financial Statements December 31, 2019 Portfolio monitoring We have a comprehensive portfolio monitoring process to identify and evaluate each fixed-income security whose carrying value may be other-than-temporarily impaired. For each fixed-income security in an unrealized loss position, we determine if the loss is temporary or other- than-temporary. If our management decides to sell the security or determines that it is more likely than not that we will be required to sell the security before recovery of the cost or amortized cost basis for reasons such as liquidity needs, contractual or regulatory requirements, then the security’s decline in fair value is considered other-than-temporary and is recorded in earnings. If we have not made the decision to sell the fixed-income security and it is more likely than not that we will be required to sell the fixed-income security before recovery of its amortized cost basis, we evaluate whether we expect the security to receive cash flows sufficient to recover the entire cost or amortized cost basis of the security. We calculate the estimated recovery value by discounting the best estimate of future cash flows at the security’s original or current effective rate, as appropriate, and compare this to the cost or amortized cost of the security. If we do not expect to receive cash flows sufficient to recover the entire cost or amortized cost basis of the fixed-income security, the credit loss component of the impairment is recorded in earnings, with the remaining amount of the unrealized loss related to other factors recognized in other comprehensive income (loss). Our portfolio monitoring process includes a quarterly review of all fixed-income securities to identify instances where the fair value of a security compared to its cost or amortized cost is below established thresholds. The process also includes the monitoring of other impairment indicators such as ratings, ratings downgrades and payment defaults. The securities identified, in addition to other securities for which we may have a concern, are evaluated for potential other-than-temporary impairment using information relevant to the collectability or recovery of the security that is reasonably available. Inherent in our evaluation of other-than-temporary impairment for these fixed-income securities are assumptions and estimates about the financial condition and future earnings potential of the issue or issuer. Some of the factors that may be considered in evaluating whether a decline in fair value is other-than-temporary are: (1) the financial condition, near-term and long-term prospects of the issue or issuer, including relevant industry specific market conditions and trends, geographic location and implications of rating agency actions and offering prices; (2) the specific reasons that a security is in an unrealized loss position, including overall market conditions which could affect liquidity; and (3) the length of time and extent to which the fair value has been less than amortized cost or cost. 74 UNITED INSURANCE HOLDINGS CORP. Notes to Consolidated Financial Statements December 31, 2019 The following table presents an aging of our unrealized investment losses by investment class: Less Than Twelve Months Twelve Months or More Number of Securities (1) Gross Unrealized Losses Fair Value Number of Securities (1) Gross Unrealized Losses Fair Value December 31, 2019 U.S. government and agency securities . . . . . . . . . . . . . . . . . Foreign governments . . . . . . . . . . States, municipalities and political subdivisions . . . . . . . . Public utilities . . . . . . . . . . . . . . . Corporate securities . . . . . . . . . . . Mortgage-backed securities . . . . Asset backed securities . . . . . . . . Redeemable preferred stocks . . . Total fixed maturities . . . . . December 31, 2018 U.S. government and agency securities . . . . . . . . . . . . . . . . . Foreign governments . . . . . . . . . . States, municipalities and political subdivisions . . . . . . . . Public utilities . . . . . . . . . . . . . . . Corporate securities . . . . . . . . . . . Mortgage-backed securities . . . . Asset-backed securities . . . . . . . . Redeemable preferred stocks . . . Total fixed maturities . . . . . 37 — 31 9 42 89 15 — 223 45 5 49 30 351 87 67 8 642 $ 89 — 61 25 124 322 34 — $ 26,372 — 14,508 4,626 22,435 59,101 8,447 — 39 2 2 2 27 50 5 1 $ 104 1 $ 31,364 600 2 1 19 155 7 2 1,262 250 9,605 12,738 1,259 97 $ 655 $135,489 128 $ 291 $ 57,175 $ 111 16 $ 28,464 2,978 272 374 3,149 1,303 136 62 38,469 13,685 144,769 88,754 41,871 711 $5,423 $359,701 55 — 91 19 208 135 7 2 517 $1,204 — $ 61,264 — 1,029 307 3,010 2,180 3 77 68,115 7,805 117,351 70,510 1,372 8,377 $7,810 $334,794 (1) This amount represents the actual number of discrete securities, not the number of shares or units of those securities. The numbers are not presented in thousands. During our quarterly evaluations of our securities for impairment, we determined that none of our investments in fixed-income securities that reflected an unrealized loss position were other-than-temporarily impaired. The issuers of our debt securities continue to make interest payments on a timely basis. We do not intend to sell nor is it likely that we would be required to sell the debt securities before we recover our amortized cost basis. Due to the adoption of ASU 2016-01 as of January 1, 2018, equity securities are reported at fair value with changes in fair value recognized in the valuation of equity investments and are no longer included in impairment write-downs, change in intent write-downs and sales. During the years ended December 31, 2019, 2018, and 2017 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 75 UNITED INSURANCE HOLDINGS CORP. Notes to Consolidated Financial Statements December 31, 2019 determining fair value maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Assets and liabilities recorded on our 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 American. 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, 2019 and 2018. Changes in interest rates subsequent to December 31, 2019 may affect the fair value of our investments. The fair value of our fixed maturities is initially calculated by a third-party pricing service. Valuation service providers typically obtain data about market transactions and other key valuation model inputs from multiple sources and, through the use of proprietary models, produce valuation information in the form of a single fair value for individual fixed income and other securities for which a fair value has been requested. The inputs used by the valuation service providers include, but are not limited to, market prices from recently completed transactions and transactions of comparable securities, interest rate yield curves, credit spreads, liquidity spreads, currency rates and other information, as applicable. Credit and liquidity spreads are typically implied from completed transactions and transactions of comparable securities. Valuation service providers also use proprietary discounted cash flow models that are widely accepted in the financial services industry and similar to those used by other market participants to value the same financial information. The valuation models take into account, among other things, market observable information as of the measurement date, as described above, as well as the specific attributes of the security being valued, including its term, interest rate, credit rating, industry sector and, where applicable, collateral quality and other issue or issuer specific information. Executing valuation models effectively requires seasoned professional judgment and experience. Any change in the estimated fair value of our fixed-income securities would impact the amount of unrealized gain or loss we have recorded, which could change the amount we have recorded for our investments and other comprehensive income (loss) on our Consolidated Balance Sheet as of December 31, 2019. 76 UNITED INSURANCE HOLDINGS CORP. Notes to Consolidated Financial Statements December 31, 2019 The following table presents the fair value of our financial instruments measured on a recurring basis by level at December 31, 2019 and 2018: Total Level 1 Level 2 Level 3 December 31, 2019 U.S. government and agency securities . . . . . . . . . . . . . . . . . . . . . Foreign government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . States, municipalities and political subdivisions . . . . . . . . . . . . . . Public utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Corporate securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Asset-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Redeemable preferred stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 120,816 4,071 133,751 25,334 288,872 251,903 57,129 2,985 $ — $120,816 4,071 133,751 25,334 288,872 251,903 57,129 2,238 — — — — — — 747 Total fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 884,861 747 884,114 Mutual funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Public utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other common stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-redeemable preferred stocks . . . . . . . . . . . . . . . . . . . . . . . . . . 65,453 3,663 44,492 3,002 65,453 3,663 44,492 3,002 Total equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116,610 116,610 — — — — — Other long-term investments (1) . . . . . . . . . . . . . . . . . . . . . . . 499 300 199 $— — — — — — — — — — — — — — — Total investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,001,970 $117,657 $884,313 $— December 31, 2018 U.S. government and agency securities . . . . . . . . . . . . . . . . . . . . . Foreign government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . States, municipalities and political subdivisions . . . . . . . . . . . . . . Public utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Corporate securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Asset-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Redeemable preferred stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Total fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mutual Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Public utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other common stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-redeemable preferred stocks . . . . . . . . . . . . . . . . . . . . . . . . . . Total equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other long-term investments (1) . . . . . . . . . . . . . . . . . . . . . . . 98,975 3,982 144,468 23,890 301,988 223,854 64,037 1,151 862,345 50,016 1,759 27,198 2,005 80,978 300 $ — $ 98,975 3,982 144,468 23,890 301,988 223,854 64,037 361 — — — — — — 790 790 861,555 47,223 1,759 27,198 2,005 78,185 300 2,793 — — — 2,793 — $— — — — — — — — — — — — — — — Total investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 943,623 $ 79,275 $864,348 $— (1) Other long-term investments included in the fair value hierarchy exclude these other limited partnership interests that are measured at estimated fair value using the net asset value per share (or its equivalent) practical expedient. 77 UNITED INSURANCE HOLDINGS CORP. Notes to Consolidated Financial Statements December 31, 2019 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). There were no financial instruments measured on a non-recurring basis at December 31, 2019 and 2018. The carrying amounts for the following financial instrument categories approximate their fair values at December 31, 2019 and 2018, because of their short-term nature: cash and cash equivalents, accrued investment income, premiums receivable, reinsurance recoverable, reinsurance payable, other assets, and other liabilities. The carrying amount of the notes payable to the Florida State Board of Administration, the Branch Banking & Trust Corporation (BB&T) and our senior notes approximate fair value as the interest rates and terms are variable. We are responsible for the determination of fair value and the supporting assumptions and methodologies. We have implemented a system of processes and controls designed to provide assurance that our assets and liabilities are appropriately valued. For fair values received from third parties, our processes are designed to provide assurance that the valuation methodologies and inputs are appropriate and consistently applied, the assumptions are reasonable and consistent with the objective of determining fair value, and the fair values are accurately recorded. At the end of each quarter, we determine whether we need to transfer the fair values of any securities between levels of the fair value hierarchy and, if so, we report the transfer as of the end of the quarter. During 2019, we transferred no investments between levels. For our investments in U.S. government securities that do not have prices in active markets, agency securities, state and municipal governments, and corporate bonds, we obtain the fair values from our investment custodians, which use a third-party valuation service. The valuation service calculates prices for our investments in the aforementioned security types on a month-end basis by using several matrix-pricing methodologies that incorporate inputs from various sources. The model the valuation service uses to price U.S. government securities and securities of states and municipalities incorporates inputs from active market makers and inter- dealer brokers. To price corporate bonds and agency securities, the valuation service calculates non-call yield spreads on all issuers, uses option-adjusted yield spreads to account for any early redemption features, and adds final spreads to the U.S. Treasury curve at 3 p.m. (ET) as of quarter end. Since the inputs the valuation service uses in its calculations are not quoted prices in active markets, but are observable inputs, they represent Level 2 inputs. Other investments We acquired investments in limited partnerships, recorded in the other investments line of our Consolidated Balance Sheets and these investments are currently being accounted for at fair value utilizing a net asset value per share equivalent methodology. 78 UNITED INSURANCE HOLDINGS CORP. Notes to Consolidated Financial Statements December 31, 2019 The information presented in the table below is as of December 31, 2019 and 2018: Book Value Unrealized Gain Unrealized Loss Fair Value December 31, 2019 . . . . . . . . . . . . . . . . . . . . . . . . Limited partnership investments (1) Certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $7,568 300 199 Total other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8,067 December 31, 2018 Limited partnership investments (1) Certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $7,988 300 Total other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8,288 $2,236 — — $2,236 $ 225 — $ 225 $ 51 — — $ 51 $— — $— $ 9,753 300 199 $10,252 $ 8,213 300 $ 8,513 (1) Distributions will be generated from investment gains, from operating income, from underlying investments of the funds, and from liquidation of the underlying assets of the funds. We estimate that the underlying assets of the funds will be liquidated over the next two to ten years. Restricted Cash We are required to maintain assets on deposit with various regulatory authorities to support our insurance operations. The cash on deposit with state regulators is available to settle insurance liabilities. We also use trust funds in certain reinsurance transactions. The following table presents the components of restricted assets: December 31, 2018 2019 Trust funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash on deposit (regulatory deposits) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $70,668 920 $70,208 1,233 Total restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $71,588 $71,441 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. AmCo Holding Company On April 3, 2017, the Company completed its acquisition of AmCo and its subsidiaries. The transaction was completed through a series of mergers that ultimately resulted in the Company issuing 20,956,355 shares of its common stock as merger consideration to the equity holders of RDX Holding, LLC, the former parent company 79 UNITED INSURANCE HOLDINGS CORP. Notes to Consolidated Financial Statements December 31, 2019 of AmCo. As a result of the mergers, AmCo merged with and into a wholly-owned subsidiary of the Company. The acquisition of AmCo supported our growth strategy and further strengthened our overall position in the commercial property and casualty insurance market. Goodwill recorded in the transaction, which reflected the synergies expected from the acquisition and enhanced reinsurance opportunities, is not tax deductible. The unaudited pro forma financial information below has been prepared as if the AmCo merger had taken place on January 1, 2017. The unaudited pro forma financial information is not necessarily indicative of the results that we would have achieved had the transaction taken place on January 1, 2017, and the unaudited pro forma information does not purport to be indicative of future financial operating results. Year ended December 31, 2017 Pro Forma Adjustments (1) As Reported Pro Forma Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $654,420 $38,096 $692,516 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,145 $ 6,712 $ 16,857 Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.27 $ — $ 0.39 (1) Adjustments are for the period from January 1, 2017 through April 3, 2017. The following table summarizes the results of the acquired AmCo operations since the acquisition date that have been included within our Consolidated Statements of Comprehensive Income (Loss). January 1, 2019 to December 31, 2019 January 1, 2018 to December 31, 2018 April 3, 2017 to December 31, 2017 Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . $236,741 33,372 $193,168 18,673 $134,386 14,778 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 Comprehensive Income (Loss) during the year ended December 31, 2017. 80 UNITED INSURANCE HOLDINGS CORP. Notes to Consolidated Financial Statements December 31, 2019 5) EARNINGS PER SHARE Basic EPS is based on the weighted average number of common shares outstanding for the period, excluding any dilutive common share equivalents. Diluted EPS reflects the potential dilution resulting from the vesting of outstanding restricted stock awards, restricted stock units, performance stock units and stock options. The following table shows the computation of basic and diluted EPS for the years ended December 31, 2019, 2018 and 2017: Year Ended December 31, 2018 2017 2019 Numerator: Net income (loss) attributable to UIHC common stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (29,872) $ 290 $ 10,145 Denominator: Weighted-average shares outstanding . . . . . . . . . . . . . . . . . . . . . Effect of dilutive securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42,763,423 — 42,650,629 188,257 37,152,768 222,572 Weighted-average diluted shares . . . . . . . . . . . . . . . . . . . . . . . . 42,763,423 42,838,886 37,375,340 Earnings available to UIHC common stockholders per share Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ (0.70) $ (0.70) $ 0.01 0.01 $ $ 0.27 0.27 See Note 19 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unearned ceding commission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 105,582 288,842 (278,161) (11,691) $ 103,882 244,136 (225,900) (16,536) Balance at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 104,572 $ 105,582 2019 2018 81 UNITED INSURANCE HOLDINGS CORP. Notes to Consolidated Financial Statements December 31, 2019 7) PROPERTY AND EQUIPMENT, NET Property and equipment, net consists of the following: Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Building and building improvements (construction in progress of $2,180 for 2019) . . . . . . Computer hardware and software (software in progress of $6,317 and $1,348, respectively) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Office furniture and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Leased vehicles (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total, at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Year Ended December 31, 2018 2019 $ 2,114 11,315 $ 2,114 6,651 33,219 3,260 20 1,693 51,621 17,932 2,800 20 568 30,085 Less: accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (18,893) (12,948) Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 32,728 $ 17,137 (1) Includes vehicles under capital leases. See Note 12 of these Notes to Consolidated Financial Statements for further information on leases. Depreciation and amortization expense under property and equipment was $6,305,000, $4,222,000 and $5,806,000, respectively, for the years ended December 31, 2019, 2018 and 2017. During the years ended December 31, 2019, 2018 and 2017, we incurred non-cash capitalized software write-off charges as a result of our decision to discontinue the use or development of several software projects that were previously capitalized. 8) GOODWILL AND INTANGIBLE ASSETS Goodwill The carrying amount of goodwill, both at December 31, 2019 and 2018 was $73,045,000. There was no goodwill acquired or disposed of during the years ended December 31, 2019 and 2018. We completed our most recent goodwill impairment testing during the fourth quarter of 2019 and determined that there was no impairment in the value of the asset as of December 31, 2019. No impairment loss in the value of goodwill was recognized during the years ended December 31, 2019, 2018 and 2017. Additionally, there was no accumulated impairment related to goodwill at December 31, 2019 or 2018. Intangible Assets The following is a summary of intangible assets excluding goodwill recorded as other assets on our Consolidated Balance Sheets at: Intangible assets subject to amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Indefinite-lived intangible assets(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 31, 2019 December 31, 2018 $22,440 3,639 $26,079 $27,795 3,556 $31,351 (1) Indefinite-lived intangible assets are comprised of state insurance and agent licenses, as well as perpetual software licenses. 82 UNITED INSURANCE HOLDINGS CORP. Notes to Consolidated Financial Statements December 31, 2019 Intangible assets subject to amortization consisted of the following: Weighted-average remaining amortization period (in years) Gross carrying amount Accumulated amortization Net carrying amount 2019 Amortizing intangible assets Value of Business Acquired . . . . . . Agency agreements acquired . . . . . Trade names acquired . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . 2018 Amortizing intangible assets Value of Business Acquired . . . . . . Agency agreements acquired . . . . . Trade names acquired . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . — 6.8 4.3 — 7.3 5.2 $42,788 34,661 6,381 $83,830 $42,788 34,661 6,381 $83,830 $(42,788) (15,658) (2,944) $(61,390) $(42,788) (11,164) (2,083) $(56,035) $ — 19,003 3,437 $22,440 $ — 23,497 4,298 $27,795 No impairment in the value of amortizing or non-amortizing intangible assets was recognized during the years ended December 31, 2019 and 2018. Amortization expense of our intangible assets was $5,355,000, $13,920,000 and $31,200,000 for the years ended December 31, 2019, 2018 and 2017, respectively. The large decrease in amortization expense from 2017 to 2018 was primarily due to the amortization of the Value of Business Acquired intangible asset acquired as part of the AmCo acquisition in 2017 that was fully amortized in the first quarter of 2018. Estimated amortization expense of our intangible assets to be recognized by the Company over the next five years is as follows: Year ending December 31, Estimated Amortization Expense 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,267 3,555 3,246 3,246 2,640 9) REINSURANCE Our reinsurance program is designed, utilizing our risk management methodology, to address our exposure to catastrophes. 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. Although reinsurance agreements contractually obligate our reinsurers to reimburse us for the agreed-upon portion of our gross paid losses, they do not discharge our primary liability. 83 UNITED INSURANCE HOLDINGS CORP. Notes to Consolidated Financial Statements December 31, 2019 Our program includes excess of loss, aggregate excess of loss and quota share treaties. Our excess of loss contract, in effect from June 1, 2019 through May 31, 2020, provides coverage for catastrophe losses from named or numbered windstorms and earthquakes up to an exhaustion point of approximately $3,200,000,000. In addition to this contract, we have an aggregate excess of loss contract, effective January 1, 2019, which provides coverage for all catastrophe perils other than hurricanes, tropical storms, tropical depressions and earthquakes. We ceded $26,488,000 of catastrophe losses under this treaty for the year ended December 31, 2019. The quota share agreement effective June 1, 2019 to May 31, 2020, provides coverage for all catastrophe perils and attritional losses incurred by two of our insurance subsidiaries, UPC and FSIC. For all catastrophe perils, the quota share agreement provides ground-up protection effectively reducing our retention for catastrophe losses. Reinsurance recoverable at the balance sheet dates consists of the following: December 31, 2018 2019 Reinsurance recoverable on unpaid losses and LAE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reinsurance recoverable on paid losses and LAE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $482,315 67,821 $477,870 148,128 Reinsurance recoverable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $550,136 $625,998 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 $1,506,000, $1,575,000, and $1,255,000 for the years ended December 31, 2019, 2018, and 2017, respectively. 84 UNITED INSURANCE HOLDINGS CORP. Notes to Consolidated Financial Statements December 31, 2019 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 (Loss): Year ended December 31, 2018 2019 2017 Premium written: Direct . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ceded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,278,504 101,764 (633,275) $1,148,190 104,211 (512,270) $ 989,525 51,323 (447,329) Net premium written . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 746,993 $ 740,131 $ 593,519 Change in unearned premiums: Direct . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ceded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (59,660) $ (49,048) $ (49,386) (5,439) 46,796 (22,392) 20,585 12,918 52,149 Net decrease (increase) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,407 $ (50,855) $ (8,029) Premiums earned: Direct . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ceded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,218,844 114,682 (581,126) $1,099,142 81,819 (491,685) $ 940,139 45,884 (400,533) Net premiums earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 752,400 $ 689,276 $ 585,490 Losses and LAE incurred: Direct . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ceded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,003,767 44,914 (549,188) $1,101,328 97,444 (790,183) $ 863,928 60,836 (559,229) Net losses and LAE incurred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 499,493 $ 408,589 $ 365,535 Ceded losses incurred decreased by $240,995,000 during the year ended December 31, 2019, compared to the year ended December 31, 2018, primarily as a result of the occurrence of Hurricanes Irma, Florence and Michael, which all occurred in years prior to 2019 and exceeded our retention thresholds, while the named storms occurring in 2019 did not exceed the retention threshold for the catastrophe excess-of-loss contract, resulting in fewer ceded losses. We have billed and received reinsurance recoveries for losses that we incurred on these storms and expect to receive additional recoveries during 2020. 85 UNITED INSURANCE HOLDINGS CORP. Notes to Consolidated Financial Statements December 31, 2019 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, 2018 2017 2019 Unpaid losses and LAE: Direct . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 716,559 43,798 $ 579,710 81,493 $ 441,355 40,877 Gross unpaid losses and LAE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ceded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 760,357 (482,315) 661,203 (477,870) 482,232 (305,673) Net unpaid losses and LAE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 278,042 $ 183,333 $ 176,559 Unearned premiums: Direct . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 637,128 36,927 $ 577,467 49,846 $ 528,419 27,454 Gross unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ceded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 674,055 (270,034) 627,313 (217,885) 555,873 (201,904) Net unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 404,021 $ 409,428 $ 353,969 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 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. 86 UNITED INSURANCE HOLDINGS CORP. Notes to Consolidated Financial Statements December 31, 2019 • 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. To determine our ultimate losses, we first use multiple actuarial techniques to establish a range of reasonable estimates. These techniques are in line with actuarial standards of practice and actuarial literature. A brief overview of each of these techniques is provided below. We then make additional qualitative considerations for many of the previously mentioned factors and select a point within this range. These ultimate loss estimates include reserves for both reported and unreported claims. Estimation of the Reserves for Unpaid Losses and Allocated LAE We calculate our estimate of ultimate losses with the following actuarial methods. The methods are applied to paid and incurred loss data. Incurred losses are defined as paid losses plus case reserves. For 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. • Development Method—The development method is based upon the assumption that the relative change in a given year’s 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 loss data is evaluated. Loss development factors (LDFs) are calculated to measure the change in cumulative losses 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. When applied to incurred loss data, the 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. Applying this method to paid losses avoids potential distortions in the data due to changes in case reserving methodology, but also loses any potentially useful information contained in the current case reserves. The paid development method’s implicit assumption is that the rate of payment of claims has been relatively consistent over time. • Expected Loss Method—Ultimate loss projections are based upon a prior measure of the anticipated losses, usually relative to a measure of exposure (such as earned house years). An expected loss cost is 87 UNITED INSURANCE HOLDINGS CORP. Notes to Consolidated Financial Statements December 31, 2019 applied to each year’s measure of exposure to determine estimated ultimate losses for that year. Actual losses are not considered in this calculation. Because the ultimate loss estimates do not change unless the exposures or loss costs change, this method has the advantage of being stable over time. However, the advantage of this stability is offset by a lack of responsiveness since this method does not consider actual loss experience as it emerges. This method assumes 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 Bornhuetter-Ferguson (B-F) method is a credibility weighting procedure that blends the responsiveness of the Development Method with the stability of the Expected Loss Method by setting ultimate losses equal to actual losses plus the expected unreported losses which are based on the Expected Loss Method. As an experience year matures, actual losses gradually move closer to their ultimate levels so reliance on the Expected Loss Method can be reduced. • 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 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 Each of these methods has its own 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 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 consulting actuary’s opinion and compare the projected ultimate losses to our own estimates to ensure that the reserve for unpaid losses recorded at each annual balance sheet date is based upon 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 88 UNITED INSURANCE HOLDINGS CORP. Notes to Consolidated Financial Statements December 31, 2019 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, 2019, 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, 2010 to 2018 is presented as supplementary information. During 2019, three of our insurance subsidiaries, UPC, FSIC and ACIC, entered into an intercompany property and casualty reinsurance pooling arrangement. Under this arrangement, the participating companies share substantially all business that is written and allocate the combined premiums, losses and expenses. The Company performed an analysis and concluded that the nature of our claims cash flows and development patterns, along with the structure of our reinsurance program, are similar among all products. Therefore, we have elected to reclassify our prior year disclosures of three separate tables into one single property and casualty homeowners’ insurance table which is consistent with our single reporting segment. In addition, we have revised our disclosure of the 2018 cumulative incurred and cumulative paid claims to reflect the addition of $1,380,000, $26,154,000, $27,809,000 and $16,434,000 for accident years 2012, 2013, 2014 and 2016 respectively, amounts which were incorrectly omitted from our prior period disclosure. 89 UNITED INSURANCE HOLDINGS CORP. Notes to Consolidated Financial Statements December 31, 2019 Property & Casualty 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, 2010 2015 2017 2014 2011 2016 2013 2012 Accident Year 2010 . . . . . $73,189 $67,937 $67,969 $ 68,854 $ 66,996 $ 67,106 $ 66,858 $ 67,020 $ 66,980 $ 2011 . . . . . 2012 . . . . . 2013 . . . . . 2014 . . . . . 2015 . . . . . 2016 . . . . . 2017 . . . . . 2018 . . . . . 2019 . . . . . 80,289 91,095 — 113,477 106,992 110,268 106,820 106,222 106,132 — 155,008 154,167 155,729 156,868 156,037 — — 217,832 236,059 239,784 242,508 — — — 304,961 294,271 293,785 — — — — 332,339 345,647 — — — — — 360,919 — — — — — — — — — — — — — 77,706 79,142 — 87,276 — — — — — — — — — — — — — — — 78,763 88,629 80,014 90,817 79,234 87,571 77,649 87,963 79,985 86,818 2018 Audited 2019 66,937 80,199 90,879 106,450 155,956 242,610 295,611 359,018 389,841 421,426 As of December 31, 2019 Total of IBNR Liabilities Plus Expected Development on Reported Claims $ — Cumulative Number of Reported Claims 6,769 8,154 12,852 9,631 14,123 21,078 32,005 83,969 47,757 33,368 43 101 255 461 2,168 3,749 16,039 15,465 103,909 Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance For the Years Ended December 31, Total $2,208,927 Accident Year 2010 . . . . . . . . . . . . . 2011 . . . . . . . . . . . . . 2012 . . . . . . . . . . . . . 2013 . . . . . . . . . . . . . 2014 . . . . . . . . . . . . . 2015 . . . . . . . . . . . . . 2016 . . . . . . . . . . . . . 2017 . . . . . . . . . . . . . 2018 . . . . . . . . . . . . . 2019 . . . . . . . . . . . . . 2010 $39,307 — — — — — — — — — 2011 $55,187 44,547 — — — — — — — — 2012 $59,208 62,812 52,394 — — — — — — — 2013 $63,404 69,461 75,213 69,615 — — — — — — 2014 $64,366 73,215 79,810 94,969 98,762 — — — — — 2015 $ 64,940 77,022 82,908 99,196 135,301 145,180 — — — — 2016 $ 66,348 79,052 86,013 103,441 147,031 210,261 193,876 — — — 2017 $ 66,619 79,480 90,356 104,669 151,954 227,661 265,069 217,983 — — 2018 $ 66,668 80,002 90,580 105,201 153,593 234,018 280,203 313,883 247,365 — $ Audited 2019 66,684 80,020 90,447 105,686 154,597 237,573 288,425 327,986 352,422 240,533 Total All outstanding liabilities before 2010, net of reinsurance $1,944,373 2 Liabilities for claims and claim adjustment expenses, net of reinsurance $ 264,556 The following is supplementary information about average historical claims duration as of December 31, 2019. Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance Unaudited Years 1 2 3 4 5 6 7 8 9 10 60.5% 24.6% 5.7% 3.9% 2.2% 1.9% 0.8% 0.3% 0.1% — % 90 UNITED INSURANCE HOLDINGS CORP. Notes to Consolidated Financial Statements December 31, 2019 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, 2019 2018 Net outstanding liabilities Property and Casualty Homeowners’ Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $264,556 $171,884 Liabilities for unpaid claims and claim adjustment expenses, net of reinsurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $264,556 $171,884 Reinsurance recoverable on unpaid claims Property and Casualty Homeowners’ Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 482,315 477,870 Total reinsurance recoverable on unpaid claims . . . . . . . . . . . . . . . . . . . . . . . . . . 482,315 477,870 Unallocated claims adjustment expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,486 11,449 Total gross liability for unpaid claims and claims adjustment expense . . . . . . . . . . . . . . . . $760,357 $661,203 The table below shows the analysis of our reserve for unpaid losses for each of our last three fiscal years on a GAAP basis: 2019 2018 2017 Balance at January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: reinsurance recoverable on unpaid losses . . . . . . . . . . . . . . . . . . . . . . . . . $661,203 477,870 $482,232 305,673 $140,855 18,724 Net balance at January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $183,333 $176,559 $122,131 Acquired reserves, net of reinsurance recoverables (1) . . . . . . . . . . . . . . . . . . . . Incurred related to: — — 40,299 Current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 466,359 33,134 404,271 4,318 368,148 (2,613) Total incurred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $499,493 $408,589 $365,535 Paid related to: Current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 275,488 129,296 283,821 117,994 256,134 95,272 Total paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $404,784 $401,815 $351,406 Net balance at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Plus: reinsurance recoverable on unpaid losses . . . . . . . . . . . . . . . . . . . . . . . . . $278,042 482,315 $183,333 477,870 $176,559 305,673 Balance at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $760,357 $661,203 $482,232 Composition of reserve for unpaid losses and LAE: Case reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IBNR reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $300,858 459,499 $270,601 390,602 $236,253 245,979 Balance at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $760,357 $661,203 $482,232 (1) Acquired reserves, net of reinsurance recoverables of $19,945,000 for 2017 related to our acquisition of AmCo. 91 UNITED INSURANCE HOLDINGS CORP. Notes to Consolidated Financial Statements December 31, 2019 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 unfavorable development experienced in 2019 and 2018 was primarily the result of worse than expected losses on the named storms that occurred in the 2017 and 2018 accident years and the favorable development in 2017 was primarily the result of losses related to the 2016 accident years coming in better than expected. 11) LONG-TERM DEBT Long-Term Debt The table below presents all long-term debt outstanding as of December 31, 2019 and 2018: Senior Notes . . . . . . . . . . . . . . . . . . . . . . . . . . December 15, 2027 Florida State Board of Administration Maturity Effective Interest Rate Carrying Value at December 31, 2019 December 31, 2018 6.25% $150,000 $150,000 Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . BB&T Term Note . . . . . . . . . . . . . . . . . . . . . July 1, 2026 May 26, 2031 1.69% 3.38% 7,647 3,958 8,824 4,304 Total long-term debt . . . . . . . . . . . . . . . $161,605 $163,128 At December 31, 2019, the annual maturities of our long-term debt were as follows: 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amount $ 11,152 11,120 11,093 11,055 11,024 181,920 Total debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $237,364 Senior Notes On December 13, 2017, we issued $150,000,000 of 10-year senior notes (the Senior Notes) that will mature on December 15, 2027 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 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 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 or after that date, we may redeem the Senior Notes at par. 92 UNITED INSURANCE HOLDINGS CORP. Notes to Consolidated Financial Statements December 31, 2019 Florida State Board of Administration Note On September 22, 2006, we issued a $20,000,000, 20-year note payable to the Florida State Board of Administration (the SBA Note). For the first three years of the SBA note we were required to pay interest only. On October 1, 2009, we began to repay the principal in addition to interest. The SBA Note bears an annual interest rate equivalent to the 10-year Constant Maturity Treasury rate (as defined in the SBA Note agreement), which resets quarterly. BB&T Term Note 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 principal executive office. The BB&T Note bears interest at 1.65% in excess of the one-month LIBOR which resets monthly. LIBOR is expected to be discontinued sometime after 2021. 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 principal executive office, which has been pledged to the bank as security for the loan. Financial Covenants Senior Notes—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 securing 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 Senior 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, 2019, we were in compliance with the covenants in the Senior Notes. 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, which was 1.69% at the end of December 2019. Any other writing ratio deficiencies result in an interest rate penalty of 25 basis points above the stated rate of the note. Our SBA Note further provides that the Florida State Board of Administration may, among other things, declare its loan immediately due and payable upon any default existing under the SBA Note; however, any payment is subject to approval by the insurance regulatory authority. At December 31, 2019, we were in compliance with the covenants in the SBA Note. BB&T Note—Our BB&T Note requires that, at all times while there has been no losses from our insurance subsidiaries’ operations (non-recurring losses), we will maintain a minimum cash flow coverage ratio of 1.2:1. The cash flow coverage ratio is defined as the ratio of our cash flow to debt service charges. This ratio will be 93 UNITED INSURANCE HOLDINGS CORP. Notes to Consolidated Financial Statements December 31, 2019 tested annually, based on our audited financial statements. For the one-year period following a non-recurring loss, we are required to maintain a minimum cash flow coverage ratio of 1.0:1. This covenant will only be effective if the pre non-recurring losses test is failed, and is only available and effective for one annual test period. Thereafter, the non-recurring loss cash flow coverage ratio of 1.2:1 will immediately apply. At the time of the most recent annual test period, December 31, 2019, we were not in compliance with the minimum cash flow coverage ratio covenant in the BB&T Note. As a result, the Company has obtained a waiver for the period ending December 31, 2019. In addition, the BB&T Note requires that we establish and maintain with BB&T at all times during the term of the loan a non-interest bearing demand deposit account with a minimum balance of $500,000, and an interest- bearing account with a minimum balance of $1,500,000. 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, 2019, we were in compliance with the remaining covenant in the BB&T Note. 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, 2019 and 2018: Balance at January 1, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,010 — (337) $3,287 63 (340) Balance at December 31, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,673 $3,010 2019 2018 12) COMMITMENTS AND CONTINGENCIES Litigation We are involved in claims-related legal actions arising in the ordinary course of business. We accrue amounts resulting from claims-related legal actions in unpaid losses and LAE during the period that we determine an unfavorable outcome becomes probable and we can estimate the amounts. Management makes revisions to our estimates based on its analysis of subsequent information that we receive regarding various factors, including: (i) per claim information; (ii) company and industry historical loss experience; (iii) judicial decisions and legal developments in the awarding of damages, and (iv) trends in general economic conditions, including the effects of inflation. At December 31, 2019, we were not involved in any material non-claims-related legal actions. Commitments to fund partnership investments We have fully funded two limited partnership investments and have committed to fund our remaining four limited partnership investments. The amount of unfunded commitments was $2,201,000 and $2,454,000 at December 31, 2019 and 2018, respectively. 94 UNITED INSURANCE HOLDINGS CORP. Notes to Consolidated Financial Statements December 31, 2019 Leases We, as lessee, have entered into leases of commercial office space of various term lengths. In addition to office space, we lease office equipment and a parking lot under operating leases and vehicles under finance leases. We evaluate if a leasing arrangement exists upon inception of a contract. A contract contains a lease if the contract conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. Identified property, plant or equipment for all of our leases are physically distinct and explicitly identified. In addition, we assess whether a contract implicitly contains the right to control the use of a tangible asset that is not already owned. Our leases expire at various dates and may contain renewal options. Our leases do not contain termination options. The exercise of lease renewal options are at our sole discretion and are only included in the determination of the lease term if we are reasonably certain to exercise the option. Our lease agreements do not contain any material residual value guarantees or restrictive covenants. Right-of-use assets and lease liabilities are based on the present value of the minimum lease payments over the lease term. As stated in Note 2 to these Notes to Consolidated Financial Statements, we have elected the practical expedient related to lease and non-lease components, as an accounting policy election for our office equipment leases, which allows a lessee to not separate non-lease from lease components and instead account for consideration received in a contract as a single lease component. We have also elected the practical expedients to exclude leases considered to be short-term and with values that fall under our capitalization threshold. A portion of our lease agreements include variable lease payments which are not recorded in the initial measurement of the lease liability and right-of-use asset balances. For our parking lot lease, base rental payments may be escalated according to annual changes in the Consumer Price Index (CPI). The escalated rental payments based on the estimated CPI at the lease commencement date are included within minimum rental payments; however, changes in CPI are considered variable in nature and are recognized as variable lease costs in the period in which the obligation is incurred. Our office equipment lease agreements may include variable payments based on usage of the equipment. We utilized discount rates to determine the present value of the lease payments based on information available at the commencement date of the lease. We used an incremental borrowing rate based on factors such as lease term to determine the appropriate present value of future lease payments as the rate implicit in the lease is not always readily available. When determining the incremental borrowing rate, we considered the rate of interest we would pay on a secured borrowing in an amount equal to the lease payments for the underlying asset under similar terms. 95 UNITED INSURANCE HOLDINGS CORP. Notes to Consolidated Financial Statements December 31, 2019 The classification of operating and finance lease asset and liability balances within the Consolidated Balance Sheets was as follows: Financial Statement Line December 31, 2019 Assets Operating lease assets . . . . . . . . . . . . . . Other assets Financing lease assets . . . . . . . . . . . . . . Property and equipment, net Total lease assets . . . . . . . . . . . . . . Liabilities Operating lease liabilities . . . . . . . . . . . . Operating lease liability Financing lease liabilities . . . . . . . . . . . . Other liabilities Total lease liabilities . . . . . . . . . . . The components of lease expenses were as follows: $ 335 1,263 $1,598 $ 324 34 $ 358 Year Ended December 31, 2019 Operating lease expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financing lease expense: Amortization of leased assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest on lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Short-term lease expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net lease expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $183 396 1 139 $719 At December 31, 2019, future minimum gross lease payments relating to these non-cancellable operating and finance lease agreements were as follows: Operating Leases Finance Leases Total 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 179 136 47 22 19 1,199 $ 16 16 6 — — — $ 195 152 53 22 19 1,199 Total undiscounted future minimum lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Imputed interest 1,602 (1,278) 38 (4) 1,640 (1,282) Present value of lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 324 $ 34 $ 358 96 UNITED INSURANCE HOLDINGS CORP. Notes to Consolidated Financial Statements December 31, 2019 Weighted average remaining lease term and discount rate related to operating and finance leases were as follows: Weighted average remaining lease term (months) Operating leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financing leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Weighted average discount rate Operating leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financing leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 176 28 4.00% 3.27% December 31, 2019 Other cash and non-cash related activities were as follows: Year Ended December 31, 2019 Cash paid for amounts included in the measurement of lease liabilities Investing cash flows from financing leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Right-of-use assets obtained in exchange for new operating lease liabilities . . . . . . . . . . . . Right-of-use assets obtained in exchange for new financing lease liabilities . . . . . . . . . . . . $1,081 $ 7 $1,111 Capital lease amortization expenses are included in depreciation expense in our Consolidated Statements of Comprehensive Income (Loss). See Note 7 for information regarding depreciation expense. 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 Company files a consolidated federal income tax return with all eligible subsidiaries. Since we have less than an 80% interest in JIC, JIC is not eligible to file on a consolidated basis with UIHC. The following table summarizes the provision for income taxes: Year Ended December 31, 2018 2019 2017 Federal: Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 58 (4,520) $(1,510) $ (1,147) (9,911) (1,240) Benefit for Federal income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . (4,462) (2,750) (11,058) State: Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision (benefit) for State income tax expense . . . . . . . . . . . . . . . . . . 1,100 241 1,341 (654) (1,229) (1,883) 496 1,327 1,823 Benefit for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(3,121) $(4,633) $ (9,235) 97 UNITED INSURANCE HOLDINGS CORP. Notes to Consolidated Financial Statements December 31, 2019 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: Year Ended December 31, 2018 2019 2017 Expected income tax expense at federal rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State tax expense, net of federal deduction benefit Dividend received deduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other permanent items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prior period accrual adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Municipal tax-exempt interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in enacted tax rate (1) Change in special loss discount account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other, net $(6,847) $ (875) $ (882) (195) 1,349 3,415 (587) 989 — — (363) (1,205) (170) 564 (1,391) (735) — — (821) — 319 366 (294) 128 (2,263) (1,398) — (6,777) — 684 Reported income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(3,121) $(4,633) $(9,235) (1) Pursuant to the recently enacted 2017 Tax Act legislation. On December 22, 2017, the 2017 Tax Act was signed into law. At the time it was enacted, the Tax Act was subject to further clarification and interpretation by the U.S. Treasury Department and Internal Revenue Service. For example, the 2017 Tax Act changed the methodology used by insurance companies to calculate their insurance claims and reserves for tax purposes, including revaluing those tax basis liabilities as of January 1, 2018, based on a methodology and discount factors that had not been published. In November 2018, the U.S. Treasury issued proposed regulations providing the interest rate to be used in determining the tax-related discount on insurance claims and reserves. In June 2019, the U.S Treasury issued final regulations providing for updated discount factors to account for the revised interest rate to be used in determining the discount on insurance claims and reserves. The 2017 Tax Act provided a transitional deferred tax liability (taxes payable over an 8-year period). Since the established transition liability was completely offset by an increase in related deferred tax asset, the adjustment to the final amount when the factors were published in 2018 did not impact the Company’s effective tax rate. In accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 118 (SAB 118), initial changes in deferred taxes resulting from clarification and interpretation of the 2017 Tax Act were recorded in 2018, the period in which the guidance was published. 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. 98 UNITED INSURANCE HOLDINGS CORP. Notes to Consolidated Financial Statements December 31, 2019 The table below summarizes the significant components of our net deferred tax liability: December 31, 2019 2018 Deferred tax assets: Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrealized loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax-related discount on loss reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dual consolidated loss carryforward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net operating loss carryforward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 19,482 — 2,300 2,181 8,709 1,451 Total pre-allowance deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Valuation allowance 34,123 (989) Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,134 $ 19,661 2,145 2,055 — — 999 24,860 — 24,860 Deferred tax liabilities: Deferred acquisitions costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrealized gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (27,939) (10,484) (5,631) (762) (152) (2,728) (26,966) — (7,397) (665) (221) (1,864) Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (47,696) (37,113) Net deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(14,562) $(12,253) 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 considered taxable income (loss), reversals of temporary items, projected future taxable income and tax planning strategies in making this assessment. At December 31, 2019, we carried a valuation allowance of $842,000 related to net loss carryforwards and $147,000 related to equity compensation. 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 2015; therefore, only the 2016 through 2019 tax years remain subject to examination by taxing authorities. We are currently being examined by the Internal Revenue Service (IRS) regarding our 2016 income tax return and there are no issues or concerns to date. UPC Insurance’s reinsurance subsidiaries, which are based in the Cayman Islands and Bermuda, 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 subsidiaries are subject to United States income tax on its worldwide income as if it were a U.S. corporation. As of December 31, 2019, we have not deemed any uncertain tax positions to be material at the consolidated level with regard to our tax returns. 99 UNITED INSURANCE HOLDINGS CORP. Notes to Consolidated Financial Statements December 31, 2019 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 subsidiaries. The various laws and regulations require that insurers maintain minimum amounts of statutory surplus and risk-based capital, restrict insurers’ ability to pay dividends, specify allowable investment types and investment mixes, and subject insurers to assessments. Our insurance subsidiaries, UPC, ACIC, and JIC are domiciled in Florida, while FSIC and IIC are domiciled in Hawaii and New York, respectively. At December 31, 2019, and during the year then ended, our insurance subsidiaries met all regulatory requirements of the states in which they operate. We did not receive any significant assessments from regulatory authorities in the states in which our insurance subsidiaries operate in 2019. The NAIC has 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(r) 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 Louisiana Citizens Property Insurance Corporation in the amount of 2.65% of written premium and on behalf of Connecticut Healthy Homes Fund in the amount of $12.00 per each homeowners policy. 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. At December 31, 2019, we met these requirements. The amount of surplus as regards policyholders for our regulated entities at December 31, 2019 and 2018, was $415,948,000, and $437,449,000, respectively. The amount of restricted net assets of UPC, ACIC, FSIC, IIC, and JIC at December 31, 2019 was $156,673,000, $150,699,000, $20,916,000, $51,394,000, and $61,148,000, respectively. 100 UNITED INSURANCE HOLDINGS CORP. Notes to Consolidated Financial Statements December 31, 2019 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, 2019 and 2018. 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 unauthorized reinsurers. Under GAAP there is no charge for uncollateralized amounts ceded to a company not licensed in the insurance subsidiary’s domiciliary state and a reserve for uncollectable reinsurance is charged through earnings rather than surplus or equity. Statutory accounting requires an additional admissibility test and the change in deferred income tax is reported directly in capital and surplus, rather than being reported as a component of income tax expense under GAAP. Our insurance subsidiaries must file with the various insurance regulatory authorities an “Annual Statement” which reports, among other items, statutory net income (loss) and surplus as regards policyholders, which is called stockholders’ equity under GAAP. For the years ended December 31, 2019, 2018 and 2017, our combined recorded statutory net income (loss) was $(38,507,000), $(5,199,000), and $832,000, respectively. 101 UNITED INSURANCE HOLDINGS CORP. Notes to Consolidated Financial Statements December 31, 2019 15) RELATED PARTY TRANSACTIONS Groelle & Salmon, PA One of our former executive officers who acted as an executive officer during a portion of the year ended December 31, 2018, Ms. Kimberly 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, 2018 and 2017, while Ms. Salmon was employed at the Company, Groelle & Salmon, PA billed us approximately $2,407,000 and $3,188,000, respectively. Ms. Salmon’s spouse has a 50% interest in these billings, or approximately $1,204,000 and $1,594,000 for the years ended December 31, 2018 and 2017, respectively. Effective September 7, 2018, Ms. Salmon stepped down from her role at UPC Insurance. 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 owned approximately 7.7% of AmRisc and was also the Chief Executive Officer of AmRisc during 2018. On December 31, 2018, Mr. Peed sold his interest in AmRisc and, effective January 1, 2019, became Non-Executive Vice Chairman of AmRisc. Effective December 31, 2019, Mr. Peed resigned from his position as Non-Executive Vice Chairman. In accordance with the managing general agency contract with AmRisc, we recorded $406,914,000, $361,904,000, and $220,150,000 of gross written premiums for the years ended December 31, 2019, 2018, and 2017, respectively, resulting in gross fees and commission (including a profit commission) of $107,577,000, $95,920,000, and $60,016,000 due to AmRisc, respectively. Receivables are stated net of the fees and commission due under the contract. In addition to the direct premiums written, we recorded $6,253,000, $5,146,000, and $3,564,000 in ceded premiums to AmRisc as a reinsurance intermediary for the years ended December 31, 2019, 2018, and 2017, respectively. Net premiums receivable (net of commissions) of $38,921,000 were due from AmRisc as of December 31, 2019. 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. 16) 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, 2019, 2018, and 2017, our contributions to the plan on behalf of the participating employees were $787,000, $861,000, and $604,000, respectively. 17) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) We report changes in other comprehensive income items within comprehensive income (loss) on the Consolidated Statements of Comprehensive Income (Loss), and we include accumulated other comprehensive income (loss) as a component of stockholders’ equity on the Consolidated Balance Sheets. 102 UNITED INSURANCE HOLDINGS CORP. Notes to Consolidated Financial Statements December 31, 2019 The table below details the components of accumulated other comprehensive income (loss) at year end: 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 $ 1,464 10,647 (67) — December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reclassification due to adoption of ASU 2016-01 . . . . . . . . . . . . . . . . . . 12,044 (12,300) Adjusted balance at January 1, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Changes in net unrealized gain on investments . . . . . . . . . . . . . . . . . . . . Reclassification adjustment for net realized gains . . . . . . . . . . . . . . . . . . December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Changes in net unrealized gain on investments . . . . . . . . . . . . . . . . . . . . Reclassification adjustment for net realized gains . . . . . . . . . . . . . . . . . . (256) (9,999) (1,655) (11,910) 28,089 (1,217) Tax (Expense) Benefit $ (642) (3,747) 17 1,549 (2,823) 2,962 139 2,327 414 2,880 (6,219) (304) Net-of-Tax Amount $ 822 6,900 (50) 1,549 9,221 (9,338) (117) (7,672) (1,241) (9,030) 21,870 (1,521) December 31, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,962 $(3,643) $11,319 18) STOCKHOLDERS’ EQUITY Our Board of Directors declared dividends on our outstanding shares of common stock to stockholders of record as follows for the periods presented (in thousands, except per share amounts): 2019 Year Ended December 31, 2018 2017 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 $2,569 $2,570 $2,571 $2,570 $0.06 $0.06 $0.06 $0.06 $2,565 $2,565 $2,569 $2,569 $0.06 $0.06 $0.06 $0.06 $1,301 $2,561 $2,564 $2,565 On November 6, 2018, ACIC and IIC paid dividends of $50,000,000 and $1,764,000, respectively, to the Company. In 2019, the Company returned the $1,764,000 paid by IIC in 2018. In July 2019, our Board of Directors authorized a stock repurchase plan of up to $25,000,000 of our common stock. As of December 31, 2019, we had not yet repurchased any shares under this stock repurchase plan. The timing and volume of repurchases are at the discretion of management, based on the capital needs of the business, the market price of UIHC common stock, and general market conditions. The plan has no expiration date, and the plan may be suspended or discontinued at any time. See Note 19 for information regarding our stock-based compensation activity. 103 UNITED INSURANCE HOLDINGS CORP. Notes to Consolidated Financial Statements December 31, 2019 19) STOCK-BASED COMPENSATION We account for stock-based compensation under the fair value recognition provisions of ASC Topic 718— Compensation—Stock Compensation. We recognize stock-based compensation cost over the award’s requisite service period on a straight-line basis for time-based restricted stock grants and performance-based restricted stock grants. We record forfeitures as they occur for all stock-based compensation. Under the Company’s 2013 Omnibus Incentive Plan, 1,000,000 shares were authorized for issuance at December 31, 2019. The following table presents our total stock-based compensation expense: Year ended December 31, 2017 2018 2019 Employee stock-based compensation expense Pre-tax (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Post-tax (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,019 1,595 $1,095 865 $1,616 1,277 Director stock-based compensation expense Pre-tax (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Post-tax (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 988 781 1,319 1,042 996 787 (1) (2) This table does not include withholding of vested shares for tax liabilities, which totaled $296,000, $418,000, and $287,000 in 2019, 2018, and 2017, respectively. The after tax amounts are determined using the 21% corporate federal tax rate. We had approximately $3,560,000 of unrecognized stock compensation expense at December 31, 2019 related to non-vested stock-based compensation granted, which we expect to recognize over a weighted-average period of approximately 1.9 years. We had approximately $246,000 of unrecognized director stock-based compensation expense at December 31, 2019 related to non-vested director stock-based compensation granted, which we expect to recognize over a weighted-average period of approximately 0.4 years. Restricted stock, restricted stock units and performance stock units Stock-based compensation cost for restricted stock awards, restricted stock units and performance stock units is measured based on the closing fair market value of our common stock on the date of grant, which vest in equal installments over the requisite service period of typically three years. Restricted stock awards granted to non-employee directors vest over a one-year period. Each restricted stock unit and performance stock unit represents our obligation to deliver to the holder one share of common stock upon vesting. Performance stock units vest based on the Company’s return on average equity compared to a defined group of peer companies. On the grant date, we issue the target number of performance stock units. They are subject to forfeitures if performance goals are not met. The actual number of performance stock units earned can vary from zero to 150 percent of the target for the 2018 and 2019 awards. We granted 134,231, 174,602, and 167,622 shares of restricted common stock, which had a weighted- average grant date fair value of $16.24, $20.07, and $15.62 per share during the years ended December 31, 2019, 2018, and 2017, respectively. Additionally, during the year ended December 31, 2019, the Company granted 45,000 shares of restricted common stock, with a fair value of $15.70 per share, which is contingent upon stockholder approval of the 2020 Omnibus Incentive Plan. Stockholders will vote on this matter at our 2020 annual meeting of stockholders. 104 UNITED INSURANCE HOLDINGS CORP. Notes to Consolidated Financial Statements December 31, 2019 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, 2016 . . . . . . . . . . . . . . . . . . . . . . Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Outstanding as of December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Outstanding as of December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . Granted (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Outstanding as of December 31, 2019 . . . . . . . . . . . . . . . . . . . . . . (1) Contingent shares have been excluded from the calculations in the table above. 169,642 167,622 17,537 107,633 212,094 174,602 21,502 147,258 217,936 134,231 6,059 131,613 214,495 $16.87 15.62 14.07 16.24 $16.44 20.07 18.82 16.68 $18.96 16.24 20.15 19.22 $17.49 Stock options Stock option fair value was estimated on the grant date using the Black-Scholes-Merton formula. Stock options vest in equal installments over the requisite service period of typically three years. The following weighted-average assumptions were used to value the stock options granted: Expected annual dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2019 1.28% 41.07% 3.11% 6 years Expected annual dividend yield is based on the current quarterly dividend of $0.06 per share and the stock price on the grant date. The expected volatility is a historical volatility calculated based on the daily closing prices over a period equal to the expected term. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the grant date. Expected term takes into account the three-year graded vesting term and the 10-year contractual term of the option. We granted 99,181 stock options during the year ended December 31, 2019, which had a weighted average grant date fair value of $5.96 per share. We granted 107,888 stock options during the year ended December 31, 2018 which had a weighted-average grant date fair value of $8.26 per share. 105 UNITED INSURANCE HOLDINGS CORP. Notes to Consolidated Financial Statements December 31, 2019 The following table presents certain information related to the activity of our non-vested stock option grants: Outstanding as of December 31, 2017 . . . . . . . . . . . . . . . . . . Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Number of Stock Options — 107,888 — — Outstanding as of December 31, 2018 . . . . . . . . . . . . . . . . . . 107,888 Vested as of December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . Exercisable as of December 31, 2018 . . . . . . . . . . . . . . . . . . Outstanding as of December 31, 2018 . . . . . . . . . . . . . . . . . . Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 107,888 99,181 — — Outstanding as of December 31, 2019 . . . . . . . . . . . . . . . . . . 207,069 Vested as of December 31, 2019 . . . . . . . . . . . . . . . . . . . . . . Exercisable as of December 31, 2019 . . . . . . . . . . . . . . . . . . 35,965 35,965 Weighted Average Remaining Contractual Term (years) Weighted Average Exercise Prices Aggregate Intrinsic Value $ — 20.94 — — $20.94 $ — $ — $20.94 16.25 — — $18.69 $20.94 $20.94 — — — — 9.76 — — — — — — 9.00 8.76 8.76 $— — — — $— $— $— $— — — — $— $— $— 106 UNITED INSURANCE HOLDINGS CORP. Notes to Consolidated Financial Statements December 31, 2019 20) QUARTERLY RESULTS (UNAUDITED) Three Months Ended March 31, June 30, September 30, December 31, (In thousands, except per share data) 2019 Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income (loss) before income taxes . . . . . . . . . . . . . . . Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Net income attributable to NCI . . . . . . . . . . . . . Net income (loss) attributable to UIHC . . . . . . . . . . . Earnings per common share—Basic (2) . . . . . . . . . . . . Earnings per common share—Diluted (2) . . . . . . . . . . 2018 Revenues (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income (loss) before income taxes . . . . . . . . . . . . . . . Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Net income (loss) attributable to NCI . . . . . . . . Net income (loss) attributable to UIHC . . . . . . . . . . . Earnings per common share—Basic (2) . . . . . . . . . . . . . . . . . . . . . . Earnings per common share—Diluted (2) $202,321 $ 12,333 9,578 $ 109 $ 9,469 $ 0.22 $ 0.22 $ $204,776 $ (3,605) $ (2,797) $ 106 $ (2,903) (0.07) $ (0.07) $ $183,148 $180,127 $ 19,332 $ 11,716 $ $ 14,701 8,369 $ — $ — $ 14,701 $ 0.34 $ $ 0.34 $ $ 8,369 0.20 0.20 $207,598 $ (36,074) $ (28,215) $ 65 $ (28,280) (0.66) $ (0.66) $ $187,652 $ (15,870) $ (11,707) $ 1 $ (11,708) (0.27) $ (0.27) $ $210,421 $ (5,260) $ (8,051) $ 107 $ (8,158) (0.19) $ (0.19) $ $181,089 $ (19,416) $ (10,968) $ 103 $ (11,071) (0.26) $ (0.26) $ (1) (2) The sum of the quarterly reported amounts does not equal the full year due to a presentation change in ceding commission income incurred during the second quarter of 2018. Earnings per common share is calculated based on the earnings attributable to UIHC. The sum of the quarterly reported amounts may not equal the full year, as each is computed independently. 21) SUBSEQUENT EVENTS We evaluate all subsequent events and transactions for potential recognition or disclosure in our financial statements. The Company announced that its Board of Directors declared a $0.06 per share quarterly cash dividend which was paid on March 11, 2020 to stockholders of record as of March 4, 2020. On January 24, 2020, our insurance subsidiary, IIC, paid a $12,000,000 dividend to the Company. On February 20, 2020, the Company made a $12,000,000 capital contribution to our insurance subsidiary, UPC. 107 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, 2019, the end of the period covered by this report. Based on our evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of the end of the period covered by this report. Management’s Annual 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, 2019. 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. Based on our evaluation under that framework, management concluded that our internal control over our financial reporting was effective as of December 31, 2019. Deloitte & Touche LLP, our independent registered public accounting firm that audited the consolidated financial statements included in this Form 10K, has issued their attestation report on our internal control over financial reporting, which is included herein. Changes in Internal Control over Financial Reporting During the quarter ended December 31, 2019, other than described below, there was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) 108 UNITED INSURANCE HOLDINGS CORP. identified in connection with the evaluation of our internal control performed during the fiscal year ended December 31, 2019, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Remediation of Material Weakness Identified in 2018 In 2018, our management concluded that our disclosure controls and procedures were not effective as of December 31, 2018 due to a material weakness in internal control over financial reporting. During 2019, our management with the oversight of the Audit Committee of the Board of Directors, was engaged in efforts to remediate the material weakness identified and disclosed in Item 9A of the annual report on Form 10-K for the year ended December 31, 2018. We have designed, implemented and tested enhancements to our intern control for operational effectiveness after adding finance and accounting personnel. Based on the results of our testing, management has concluded that the controls are adequately designed and have operated effectively for a sufficient period of time during 2019. Accordingly, the material weakness was considered to be remediated. 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 At our 2019 Annual Meeting of Stockholders, the Board of Directors recommended, and the majority of the shares represented at the meeting voted in favor of, holding an advisory say-on-pay vote every three years. In light of the voting results, the Board of Directors has determined that it will hold such advisory say-on-pay vote every three years until the next required advisory vote on the frequency of future advisory say-on-pay votes. 109 UNITED INSURANCE HOLDINGS CORP. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the shareholders and the Board of Directors of United Insurance Holdings Corp. Opinion on Internal Control over Financial Reporting We have audited the internal control over financial reporting of United Insurance Holdings Corp. and subsidiaries (the “Company”) as of December 31, 2019, based on criteria established in Internal Control— Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control—Integrated Framework (2013) issued by COSO. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2019, of the Company and our report dated March 12, 2020, expressed an unqualified opinion on those 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, included in the accompanying Management’s Annual 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 the 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 aspects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and 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. 110 UNITED INSURANCE HOLDINGS CORP. Because of its inherent limitations, internal control over financial reporting may not prevent or detect 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. /s/ DELOITTE & TOUCHE LLP Tampa, Florida March 12, 2020 111 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 2020 Annual Meeting of our Stockholders to be filed with the SEC within 120 days after the end of our fiscal year ended December 31, 2019 (the 2020 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 under the “Governance Documents” tab. 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 2020 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 2020 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 2020 Proxy Statement. Item 14. Principal Accountant Fees and Services The information required by this Item is incorporated herein by reference to our 2020 Proxy Statement. 112 UNITED INSURANCE HOLDINGS CORP. Item 15. Exhibits and Financial Statement Schedules The following documents are filed as part of this Form 10-K: 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, Schedule V— Valuation and Qualifying Accounts and Schedule VI—Supplemental Information Concerning Consolidated Property and Casualty Insurance Operations are filed as a part of this Form 10-K 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. 113 UNITED INSURANCE HOLDINGS CORP. Exhibit Description EXHIBIT INDEX 2.1 3.1 3.2 3.3 4.1 4.2 4.3 4.4 4.5 10.1 10.2 10.3 10.4 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.) (included as exhibit 3.1 to the Form 10-Q filed on August 8, 2012, 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). Amended and Restated Bylaws (included as exhibit 3.1 to the Quarterly Report on Form 10-Q filed on November 5, 2019, 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 8-K, filed on October 12, 2007, 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). First Supplemental Indenture, dated as of December 13, 2017, by and between the Company and Deutsche Bank Trust Company Americas, as trustee (including form of Note) (included as exhibit 4.2 to the Form 8-K filed on December 13, 2017, and incorporated herein by reference). Description of the Registrant’s Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934. 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 on 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 on 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 on 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 on November 12, 2008, and incorporated herein by reference). 114 UNITED INSURANCE HOLDINGS CORP. Exhibit Description 10.5 10.6 10.7 10.8 10.9 10.10 10.11 10.12 10.13 10.14 10.15 10.16 10.17 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 (included as exhibit 10.11 to the Form 10-Q filed on August 8, 2012, and incorporated herein by reference). Form of Indemnification Agreement between United Insurance Holdings Corp. and its Directors (included as exhibit 10.1 to the Form 8-K, filed on October 10, 2012, and incorporated herein by reference). 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 on September 30, 2013, and incorporated herein by reference). United Insurance Holdings Corp. 2013 Omnibus Incentive Plan (included as Appendix A to the Company’s Definitive Proxy statement for its 2013 Annual Meeting, filed on April 16, 2013, and incorporated herein by reference). 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). 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). 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). Form of Stock Option Award under the United Insurance Holdings Corp. 2013 Omnibus Incentive Plan (included as exhibit 10.1 to the Form 10-Q, filed on November 7, 2018, and incorporated herein by reference). Form of Restricted Stock Unit Award under the United Insurance Holdings Corp. 2013 Omnibus Incentive Plan (included as exhibit 10.2 to the Form 10-Q, filed on November 7, 2018, and incorporated herein by reference). Form of Performance Stock Unit Award under the United Insurance Holdings Corp. 2013 Omnibus Incentive Plan (included as exhibit 10.3 to the Form 10-Q, filed on November 7, 2018, and incorporated herein by reference). 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). Amended and Restated 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 on April 24, 2017, and incorporated herein by reference). Amendment to Employment Agreement, dated October 10, 2018, between United Insurance Holdings Corp. and John Forney (included as exhibit 10.1 to the Form 8-K filed on October 16, 2018, and incorporated herein by reference) 21.1 Subsidiaries of United Insurance Holdings Corp. 115 UNITED INSURANCE HOLDINGS CORP. Exhibit Description 23.1 23.2 31.1 31.2 32.1 32.2 Consent of Deloitte & Touche LLP. Consent of RSM US LLP for 2017 financial statements. 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 116 UNITED INSURANCE HOLDINGS CORP. SCHEDULE I. SUMMARY OF INVESTMENTS December 31, 2019 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mortgage backed 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $120,260 3,975 131,203 24,660 281,892 248,206 56,487 2,915 869,598 52,298 3,098 32,669 2,960 91,025 8,067 $ 120,816 4,071 133,751 25,334 288,872 251,903 57,129 2,985 884,861 65,453 3,663 44,492 3,002 116,610 10,252 $ 120,816 4,071 133,751 25,334 288,872 251,903 57,129 2,985 884,861 65,453 3,663 44,492 3,002 116,610 10,252 Total investments . . . . . . . . . . . . . . . . . . . . . . . . . $968,690 $1,011,723 $1,011,723 117 UNITED INSURANCE HOLDINGS CORP. SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT Condensed Balance Sheets December 31, 2018 2019 Assets Fixed maturities, available for sale, at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity securities, at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment in subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 15,020 18,594 3,160 79 644,015 10,157 12,010 4,187 $ 45,372 14,178 4,567 192 643,526 10,157 8,054 14,163 Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $707,222 $740,209 Liabilities Intercompany payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lease Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 31,401 421 64 186 151,285 $ 48,103 443 — — 151,294 Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 183,357 199,840 Stockholders’ Equity Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 391,852 (431) 11,319 100,394 4 389,141 (431) (9,030) 140,546 Total UIHC Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 503,138 520,230 Noncontrolling Interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,727 20,139 Total Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 523,865 540,369 Total Liabilities and Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $707,222 $740,209 118 UNITED INSURANCE HOLDINGS CORP. SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT, CONTINUED Condensed Statements of Comprehensive Income (Loss) Years Ended December 31, 2017 2018 2019 REVENUE: Net income (loss) from subsidiaries (equity method) . . . . . . . . . . . . . . . . . . Net realized investment gain (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net unrealized gain (loss) on equity securities . . . . . . . . . . . . . . . . . . . . . . . $(24,131) $ 10,124 (160) 2,353 (1,223) 63 1,156 4,036 $14,000 — 53 — Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (18,876) 11,094 14,053 EXPENSES: Operating and underwriting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income (loss) before other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income (loss) before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 219 3,042 9,499 12,760 (31,636) — (31,636) (2,151) Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(29,485) $ Less: Net income attributable to NCI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 387 Net income (loss) attributable to UIHC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(29,872) $ 198 3,416 9,557 13,171 (2,077) 11 (2,066) (2,460) 348 9,078 2,939 12,365 1,688 75 1,763 (8,382) 394 104 290 $10,145 — $10,145 Unrealized gain (loss) on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reclassification adjustments—gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax benefit (expense) related to other items of comprehensive 28,366 (1,228) (22,264) (1,655) 10,647 (67) income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6,588) 5,703 (2,181) Total comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (8,935) $(17,822) $18,544 Less: Comprehensive income attributable to NCI . . . . . . . . . . . . . . . . . . . . . . . . . 588 139 — Total comprehensive income (loss) attributable to UIHC . . . . . . . . . . . . . . . . . . . $ (9,523) $(17,961) $18,544 119 UNITED INSURANCE HOLDINGS CORP. SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT, CONTINUED Condensed Statements of Cash Flows OPERATING ACTIVITIES Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Year Ended December 31, 2017 2018 2019 $(29,485) $ 394 $ 10,145 Dividends received from (returned to) subsidiaries . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bond amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrealized losses (gains) on equities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net realized investment losses (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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,764) 1,131 66 (4,036) (63) (511) 3,007 113 9,976 (22) (16,702) 64 313 51,764 1,079 (6) 1,223 160 (570) 2,414 (192) (908) (524) 21,975 — — — 1,208 — — — (777) 2,613 — 359 447 11,597 — (1,905) Net cash provided by (used in) operating activities . . . . . . . . . . . . . . . . . . . . . (37,913) 76,809 23,687 INVESTING ACTIVITIES Proceeds from sales of investments available for sale . . . . . . . . . . . . . . . Purchases of investments available for sale . . . . . . . . . . . . . . . . . . . . . . . Investment in subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of property and equipment acquired . . . . . . . . . . . . . . . . . . . . . . . . . 35,036 (3,567) 20,709 (4,749) 37,315 (72,635) (104,125) (1,032) — (26,584) (23,283) (449) Net cash provided by (used) in investing activities . . . . . . . . . . . . . . . . . . . . . . 47,429 (140,477) (50,316) FINANCING ACTIVITIES Tax withholding payment related to net settlement of equity awards . . . . Proceeds from borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Repayments of borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payments of debt issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (296) — (347) — (10,280) (418) — (347) (63) (10,268) Net cash provided by (used in) financing activities . . . . . . . . . . . . . . . . . . . . . (10,923) (11,096) Increase (decrease) in cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . . . . . . . . (1,407) 4,567 (74,764) 79,331 (287) 150,000 (38,897) (3,264) (8,991) 98,561 71,932 7,399 Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,160 $ 4,567 $ 79,331 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 contained in Part II, Item 8 of this Form 10-K. 120 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, 2019 . . . . . . . . . . . . . . . . . . . . . 2018 . . . . . . . . . . . . . . . . . . . . . 2017 . . . . . . . . . . . . . . . . . . . . . $ 1,278,504 1,148,190 989,525 $ 633,275 512,270 447,329 $ 101,764 104,211 51,323 $ 746,993 740,131 593,519 13.6% 14.1% 8.6% SCHEDULE V. VALUATION AND QUALIFYING ACCOUNTS Uncollectible Premium Receivable Balance at Beginning of Period Charged to Costs and Expenses Deductions Balance at End of Period Years Ended December 31, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 405 384 144 $ 216 597 294 $(319) (576) (54) $ 302 405 384 Years Ended December 31, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $— 989 — $989 Deferred Tax Valuation Allowance Balance at Beginning of Period Charged to Costs and Expenses Deductions Balance at End of Period 121 UNITED INSURANCE HOLDINGS CORP. SCHEDULE VI. SUPPLEMENTAL INFORMATION CONCERNING CONSOLIDATED PROPERTY AND CASUALTY INSURANCE OPERATIONS Year As of December 31, Reserves for Unpaid Losses and LAE 2019 . . . . . . 2018 . . . . . . 2017 . . . . . . $760,357 661,203 482,232 For the Year Ended December 31, Incurred Losses and LAE Current Year Incurred Losses and LAE Prior Years Paid Losses and LAE Net Investment Income $466,359 404,271 368,148 $33,134 4,318 (2,613) $404,784 401,815 351,406 $30,145 26,170 17,126 Year As of December 31, Deferred Policy Acquisition Costs (DPAC) Amortization of DPAC, Net Net Premiums Written For the Year Ended December 31, Net Premiums Earned $752,400 689,276 585,490 Unearned Premiums $674,055 627,313 555,873 2019 . . . . . . . 2018 . . . . . . . 2017 . . . . . . . $104,572 105,582 103,882 $278,161 225,900 171,915 $746,993 740,131 593,519 122 UNITED INSURANCE HOLDINGS CORP. Item 16. Form 10-K Summary Not applicable. 123 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 12, 2020 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) Chairman of the Board March 12, 2020 March 12, 2020 March 12, 2020 Vice Chairman of the Board March 12, 2020 Lead Director Director Director Director Director Director Director 124 March 12, 2020 March 12, 2020 March 12, 2020 March 12, 2020 March 12, 2020 March 12, 2020 March 12, 2020 [THIS PAGE INTENTIONALLY LEFT BLANK] 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 Deloitte & Touche LLP 201 N Franklin Street Suite 3600 Tampa, FL 33602 INVESTOR RELATIONS The Equity Group, Inc. 800 Third Avenue 36th Floor New York, NY 10022 STOCK LISTING NASDAQ; symbol UIHC ANNUAL MEETING The 2020 Annual Meeting will be held on Tuesday, May 5, 2020 at 1:00 p.m. EDT via live audio webcast. DIRECTORS Gregory C. Branch, Chairman — Chairman and President of Branch Properties, Inc. R. Daniel Peed, Vice Chairman — Non-Executive Vice Chairman 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 Brad Kalter — General Counsel, Chief Legal Officer and Corporate Secretary Scott St John — Chief Claims Officer Chris Griffith — Vice President and Chief Information Officer (cid:45)(cid:39)(cid:39)(cid:50)(cid:43)(cid:48)(cid:41)(cid:2)(cid:54)(cid:42)(cid:39)(cid:2)(cid:50)(cid:52)(cid:49)(cid:47)(cid:43)(cid:53)(cid:39)(cid:2)(cid:43)(cid:53)(cid:2)(cid:53)(cid:47)(cid:35)(cid:52)(cid:54)(cid:2)(cid:36)(cid:55)(cid:53)(cid:43)(cid:48)(cid:39)(cid:53)(cid:53) MT 18TH LARGEST WRITER OF HOMEOWNERS AND RELATED LINES (cid:75)(cid:80)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:55)(cid:16)(cid:53)(cid:16)(cid:2)(cid:72)(cid:81)(cid:84)(cid:2)(cid:20)(cid:18)(cid:19)(cid:27) WY ND SD NE T CO (cid:55)(cid:50)(cid:37)(cid:2)(cid:43)(cid:53)(cid:2)(cid:35)(cid:37)(cid:42)(cid:43)(cid:39)(cid:56)(cid:43)(cid:48)(cid:41)(cid:2)(cid:41)(cid:52)(cid:49)(cid:57)(cid:54)(cid:42)(cid:14)(cid:2) (cid:41)(cid:39)(cid:49)(cid:41)(cid:52)(cid:35)(cid:50)(cid:42)(cid:43)(cid:37)(cid:2)(cid:38)(cid:43)(cid:56)(cid:39)(cid:52)(cid:53)(cid:43)(cid:40)(cid:43)(cid:37)(cid:35)(cid:54)(cid:43)(cid:49)(cid:48)(cid:14)(cid:2) AND PROFITABILITY (cid:55)(cid:50)(cid:37)(cid:2)(cid:75)(cid:85)(cid:2)(cid:78)(cid:75)(cid:69)(cid:71)(cid:80)(cid:85)(cid:71)(cid:70)(cid:2)(cid:75)(cid:80)(cid:2)(cid:19)(cid:26)(cid:2)(cid:69)(cid:81)(cid:67)(cid:85)(cid:86)(cid:67)(cid:78) (cid:85)(cid:86)(cid:67)(cid:86)(cid:71)(cid:85)(cid:14)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:89)(cid:84)(cid:75)(cid:86)(cid:75)(cid:80)(cid:73)(cid:2)(cid:75)(cid:80)(cid:2)(cid:19)(cid:20)(cid:2)(cid:85)(cid:86)(cid:67)(cid:86)(cid:71)(cid:85) MI MN WI (cid:25)(cid:15)(cid:91)(cid:71)(cid:67)(cid:84)(cid:2)(cid:69)(cid:81)(cid:79)(cid:82)(cid:81)(cid:87)(cid:80)(cid:70)(cid:71)(cid:70)(cid:2)(cid:67)(cid:80)(cid:80)(cid:87)(cid:67)(cid:78)(cid:75)(cid:92)(cid:71)(cid:70)(cid:2) (cid:73)(cid:84)(cid:81)(cid:89)(cid:86)(cid:74)(cid:2)(cid:84)(cid:67)(cid:86)(cid:71)(cid:2)(cid:81)(cid:72)(cid:2)(cid:68)(cid:81)(cid:81)(cid:77)(cid:2)(cid:88)(cid:67)(cid:78)(cid:87)(cid:71)(cid:2)(cid:82)(cid:71)(cid:84) (cid:85)(cid:74)(cid:67)(cid:84)(cid:71)(cid:2)(cid:75)(cid:85)(cid:2)(cid:19)(cid:18)(cid:16)(cid:27)(cid:7)(cid:14)(cid:2)(cid:70)(cid:71)(cid:85)(cid:82)(cid:75)(cid:86)(cid:71)(cid:2)(cid:74)(cid:75)(cid:85)(cid:86)(cid:81)(cid:84)(cid:75)(cid:69)(cid:2) IL (cid:78)(cid:71)(cid:88)(cid:71)(cid:78)(cid:85)(cid:2)(cid:81)(cid:72)(cid:2)(cid:37)(cid:35)(cid:54)(cid:2)(cid:67)(cid:69)(cid:86)(cid:75)(cid:88)(cid:75)(cid:86)(cid:91) IN IA KS MO KY TN OH WV PA NJ DC VA NC VT NH MA CT NY NM OK TX HI AR LA MS AL GA SC FL Writing Licensed OUR CORE VALUES (cid:114)(cid:2)(cid:54)(cid:71)(cid:67)(cid:79)(cid:89)(cid:81)(cid:84)(cid:77) (cid:114)(cid:2)(cid:54)(cid:84)(cid:87)(cid:85)(cid:86) (cid:114)(cid:2)(cid:35)(cid:69)(cid:69)(cid:81)(cid:87)(cid:80)(cid:86)(cid:67)(cid:68)(cid:75)(cid:78)(cid:75)(cid:86)(cid:91) (cid:114)(cid:2)(cid:43)(cid:80)(cid:86)(cid:71)(cid:73)(cid:84)(cid:75)(cid:86)(cid:91) (cid:114)(cid:2)(cid:36)(cid:75)(cid:67)(cid:85)(cid:2)(cid:54)(cid:81)(cid:2)(cid:35)(cid:69)(cid:86)(cid:75)(cid:81)(cid:80) (cid:114)(cid:2)(cid:50)(cid:71)(cid:84)(cid:85)(cid:75)(cid:85)(cid:86)(cid:71)(cid:80)(cid:69)(cid:71) OUR VISION (cid:54)(cid:81)(cid:2)(cid:68)(cid:71)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:82)(cid:84)(cid:71)(cid:79)(cid:75)(cid:71)(cid:84)(cid:2)(cid:82)(cid:84)(cid:81)(cid:88)(cid:75)(cid:70)(cid:71)(cid:84)(cid:2)(cid:81)(cid:72)(cid:2)(cid:82)(cid:84)(cid:81)(cid:82)(cid:71)(cid:84)(cid:86)(cid:91) (cid:75)(cid:80)(cid:85)(cid:87)(cid:84)(cid:67)(cid:80)(cid:69)(cid:71)(cid:2)(cid:75)(cid:80)(cid:2)(cid:69)(cid:67)(cid:86)(cid:67)(cid:85)(cid:86)(cid:84)(cid:81)(cid:82)(cid:74)(cid:71)(cid:15)(cid:71)(cid:90)(cid:82)(cid:81)(cid:85)(cid:71)(cid:70)(cid:2)(cid:67)(cid:84)(cid:71)(cid:67)(cid:85)(cid:16)