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EX-31.1 - EXHIBIT - UNITED INSURANCE HOLDINGS CORP.exh31130sept14.htm

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549  
_______________________

FORM 10-Q
_______________________

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014
Commission File Number 001-35761  
_____________________
United Insurance Holdings Corp.
(Exact name of Registrant as specified in its charter)
  _______________________
 
Delaware
 
75-3241967
 
 
(State of Incorporation)
 
(IRS Employer Identification Number)
 
360 Central Avenue, Suite 900
St. Petersburg, Florida 33701
(Address, including zip code, of principal executive offices)
727-895-7737
(Registrant's telephone number, including area code)
 _______________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  R    No  £

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  R    No  £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
£
 
Accelerated filer
þ
Non-accelerated filer
£
 
Smaller reporting company
£

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  £    No  R
As of November 4, 2014; 20,905,070 shares of common stock, par value $0.0001 per share, were outstanding.

 


UNITED INSURANCE HOLDINGS CORP.



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

2

UNITED INSURANCE HOLDINGS CORP.



FORWARD-LOOKING STATEMENTS

Statements in this Quarterly Report on Form 10-Q as of September 30, 2014, and for the three and nine months ended September 30, 2014 (Form 10-Q) or in documents incorporated by reference that are not historical fact are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements about anticipated growth in revenues, earnings per share, estimated unpaid losses on insurance policies, investment returns and expectations about our liquidity, and our ability to meet our investment objectives and to manage and mitigate market risk with respect to our investments. These statements are based on current expectations, estimates and projections about the industry and market in which we operate, and management’s beliefs and assumptions. Without limiting the generality of the foregoing, words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “would,” “estimate,” or “continue” or the negative variations thereof or comparable terminology are intended to identify forward-looking statements. Forward-looking statements are not guarantees of future performance and involve certain known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. The risks and uncertainties include, without limitation:

the regulatory, economic and weather conditions 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 and availability of reinsurance;
assessments charged by various governmental agencies;
pricing competition and other initiatives by competitors;
our ability to attract and retain the services of senior management;
the outcome of litigation pending against us, including the terms of any settlements;
dependence on investment income and the composition of our investment portfolio and related market risks;
our exposure to catastrophic events and severe weather conditions;
downgrades in our financial strength ratings; and
other risks and uncertainties described in the section entitled "Risk Factors" in Part I, Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2013 and in Part II, Item 1A of this Form 10-Q.

We caution you not to place reliance on these forward-looking statements, which are valid only as of the date they were made. We undertake no obligation to update or revise any forward-looking statements to reflect new information or the occurrence of unanticipated events or otherwise. In addition, we prepare our financial statements in accordance with U.S. generally accepted accounting principles (GAAP), which prescribes when we may reserve for particular risks, including litigation exposures. Accordingly, our results for a given reporting period could be significantly affected if and when we establish a reserve for a major contingency. Therefore, the results we report in certain accounting periods may appear to be volatile.

These forward-looking statements are subject to numerous risks, uncertainties and assumptions about us described in our filings with the SEC. The forward-looking events that we discuss in our Form 10-Q are valid only as of the date of our Form 10-Q and may not occur in light of the risks, uncertainties and assumptions that we describe from time to time in our filings with the SEC. A detailed discussion of these and other risks and uncertainties that could cause actual results and events to differ materially from our forward-looking statements is included in the section entitled “RISK FACTORS” in Part I, Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2013 and in Part II, Item 1A of this Form 10-Q. Except as required by applicable law, we undertake no obligation and disclaim any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

3

UNITED INSURANCE HOLDINGS CORP.


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets


September 30, 2014

December 31, 2013
ASSETS

(Unaudited)

 
Investments available for sale, at fair value:

 

 
Fixed maturities (amortized cost of $327,332 and $274,651, respectively)

$
329,120


$
273,024

Equity securities - common and preferred (adjusted cost of $19,389 and $13,825, respectively)

22,176


15,602

Other long-term investments

300


300

Total investments

$
351,596


$
288,926

Cash and cash equivalents

83,318


34,888

Accrued investment income

1,847


1,752

Premiums receivable, net

33,945


26,076

Reinsurance recoverable on paid and unpaid losses

3,697


2,426

Prepaid reinsurance premiums

97,243


55,268

Deferred policy acquisition costs

33,764


25,186

Other assets

7,260


6,708

Total Assets

$
612,670


$
441,230

LIABILITIES AND STOCKHOLDERS' EQUITY




Liabilities:




Unpaid losses and loss adjustment expenses

$
53,413


$
47,451

Unearned premiums

223,329


193,428

Reinsurance payable

95,460


39,483

Other liabilities

35,062


38,575

Notes payable

13,824

 
14,706

Total Liabilities

$
421,088


$
333,643

Commitments and contingencies (Note 7)






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; 21,124,554 and 16,421,398 issued; 20,905,070 and 16,209,315 outstanding for 2014 and 2013, respectively

2


2

Additional paid-in capital

81,961


27,800

Treasury shares, at cost; 212,083 shares

(431
)

(431
)
Accumulated other comprehensive income

2,807


92

Retained earnings

107,243


80,124

Total Stockholders' Equity

$
191,582


$
107,587

Total Liabilities and Stockholders' Equity

$
612,670


$
441,230


See accompanying Notes to Unaudited Consolidated Financial Statements.


4

UNITED INSURANCE HOLDINGS CORP.


Consolidated Statements of Comprehensive Income
(Unaudited)


Three Months Ended September 30,
 
Nine Months Ended
September 30,


2014

2013
 
2014
 
2013
REVENUE:




 
 
 
 
Gross premiums written

$
105,065


$
83,601

 
$
322,986

 
$
274,650

Increase in gross unearned premiums

(4,214
)

(3,463
)
 
(29,901
)
 
(49,736
)
Gross premiums earned

100,851


80,138

 
293,085

 
224,914

Ceded premiums earned

(35,741
)

(31,317
)
 
(99,757
)
 
(87,825
)
Net premiums earned

65,110


48,821

 
193,328

 
137,089

Investment income

1,807


1,089

 
4,891

 
2,644

Net realized losses

(69
)

(38
)
 
(24
)
 
(199
)
Other revenue

1,999


1,945

 
5,863

 
5,105

Total revenue

68,847


51,817

 
204,058

 
144,639

EXPENSES:




 
 
 
 
Losses and loss adjustment expenses

30,140


25,578

 
86,605

 
69,132

Policy acquisition costs

17,291


13,115

 
48,668

 
36,567

Operating expenses

3,086


2,265

 
8,453

 
6,944

General and administrative expenses

4,709


4,034

 
13,394

 
10,688

Interest expense

98


102

 
325

 
255

Total expenses

55,324


45,094

 
157,445

 
123,586

Income before other income

13,523


6,723

 
46,613

 
21,053

Other income



1

 
16

 
1

Income before income taxes

13,523


6,724

 
46,629

 
21,054

Provision for income taxes

4,883


2,593

 
17,010

 
8,063

Net income

$
8,640


$
4,131

 
$
29,619

 
$
12,991

OTHER COMPREHENSIVE INCOME:




 
 
 
 
Change in net unrealized gains (losses) on investments

(1,249
)

365

 
4,401

 
(4,011
)
Reclassification adjustment for net realized investment losses

69


38

 
24

 
199

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

456


(156
)
 
(1,710
)
 
1,470

Total comprehensive income

$
7,916


$
4,378

 
$
32,334

 
$
10,649






 
 
 
 
Weighted average shares outstanding




 
 
 
 
Basic

20,745,245


16,129,247

 
19,658,199

 
16,091,323

Diluted
 
20,843,603

 
16,186,178

 
19,756,411

 
16,167,316






 
 
 
 
Earnings per share




 
 
 
 
Basic

$
0.42


$
0.26

 
$
1.51

 
$
0.81

Diluted
 
$
0.41

 
$
0.26

 
$
1.50

 
$
0.80






 
 
 
 
Dividends declared per share

$
0.04


$
0.03

 
$
0.12

 
$
0.09


See accompanying Notes to Unaudited Consolidated Financial Statements.


5

UNITED INSURANCE HOLDINGS CORP.


Consolidated Statements of Cash Flows
(Unaudited)
 
 
Nine Months Ended
September 30,
 
 
2014
 
2013
OPERATING ACTIVITIES
 
 
 
 
Net income
 
$
29,619

 
$
12,991

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
518

 
525

Bond amortization and accretion
 
1,101

 
940

Net realized losses
 
24

 
199

Provision for uncollectible premiums/over and short
 
60

 
38

Deferred income taxes, net
 
(1,112
)
 
1,910

Stock based compensation
 
230

 
96

Changes in operating assets and liabilities:
 
 
 
 
Accrued investment loss
 
(95
)
 
(640
)
Premiums receivable
 
(7,929
)
 
(11,969
)
Reinsurance recoverable on paid and unpaid losses
 
(1,271
)
 
97

Prepaid reinsurance premiums
 
(41,975
)
 
(34,532
)
Deferred policy acquisition costs, net
 
(8,578
)
 
(9,319
)
Other assets
 
280

 
(1,079
)
Unpaid losses and loss adjustment expenses
 
5,962

 
5,034

Unearned premiums
 
29,901

 
49,736

Reinsurance payable
 
55,977

 
58,754

Other liabilities
 
(3,513
)
 
6,810

Net cash provided by operating activities
 
$
59,199

 
$
79,591

INVESTING ACTIVITIES
 
 
 
 
Proceeds from sales and maturities of investments available for sale
 
145,059

 
95,127

Purchases of investments available for sale
 
(204,429
)
 
(193,718
)
Cost of property, equipment and capitalized software acquired
 
(1,948
)
 
(1,108
)
Net cash used in investing activities
 
$
(61,318
)
 
$
(99,699
)
FINANCING ACTIVITIES
 
 
 
 
Tax withholding payment related to net settlement of equity awards

 
(110
)
 

Repayments of borrowings
 
(882
)
 
(882
)
Dividends
 
(2,500
)
 
(1,458
)
Bank overdrafts
 

 
1,970

Proceeds from issuance of common stock
 
54,041

 
3,591

Net cash provided by financing activities
 
$
50,549

 
$
3,221

Increase (decrease) in cash
 
48,430

 
(16,887
)
Cash and cash equivalents at beginning of period
 
34,888

 
71,205

Cash and cash equivalents at end of period
 
$
83,318

 
$
54,318

 
 
 
 
 
Supplemental Cash Flows Information
 
 
 
 
Interest paid
 
$
301

 
$
240

Income taxes paid
 
$
21,464

 
$
7,184

See accompanying Notes to Unaudited Consolidated Financial Statements.

6

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
September 30, 2014



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 property and casualty insurance policies using a network of agents and a group of wholly-owned insurance subsidiaries. Our primary insurance subsidiary is United Property & Casualty Insurance Company, our insurance affiliate, which was formed in Florida in 1999 and has operated continuously since that time. Our other subsidiaries include United Insurance Management, L.C., our management affiliate, the managing general agent that manages substantially all aspects of our insurance affiliate's business; Skyway Claims Services, LLC, our claims adjusting affiliate that provides services to our insurance affiliate; and UPC Re, our reinsurance affiliate that provides a portion of the reinsurance protection purchased by our insurance affiliate.

Our primary product is homeowners' insurance, which we currently offer in Florida, Massachusetts, New Jersey, North Carolina, Rhode Island, South Carolina and Texas under authorization from the insurance regulatory authorities in each state, and we are licensed to write in Connecticut, Delaware, Georgia, Louisiana, Maryland, Mississippi, New Hampshire and Virginia. Our insurance affiliate has also applied to insurance regulatory authorities to write property and casualty lines in two additional states.

We conduct our operations under one business segment.

(b)Consolidation and Presentation

We prepare our financial statements in conformity with U.S. generally accepted accounting principles (GAAP). While preparing our 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 financial statements, as well as reported amounts of revenues and expenses during the reporting period. Accordingly, actual results could differ from those estimates. Reported amounts that require us to make extensive use of estimates include our reserves for unpaid losses and loss adjustment expenses, reinsurance recoverable, deferred policy acquisition costs, and investments. Except for the captions on our Unaudited Consolidated Balance Sheets and Unaudited Consolidated Statements of Comprehensive Income, we generally use the term loss(es) to collectively refer to both loss and loss adjustment expenses.

We include all of our subsidiaries in our consolidated financial statements, eliminating all significant intercompany balances and transactions during consolidation.

We prepared the accompanying Unaudited Consolidated Balance Sheet as of September 30, 2014, with the Audited Consolidated Balance Sheet amounts as of December 31, 2013, presented for comparative purposes, and the related Unaudited Consolidated Statements of Comprehensive Income and Statements of Cash Flows in accordance with the instructions for Form 10-Q and Article 10-01 of Regulation S-X. In compliance with those instructions, we have omitted certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with GAAP, though management believes the disclosures made herein are sufficient to ensure that the information presented is not misleading.

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

We reclassified certain amounts in the 2013 financial statements to conform to the 2014 presentation. These reclassifications had no impact on our results of operations, cash flows or stockholders' equity as previously reported.

Management believes our unaudited consolidated interim financial statements include all the normal recurring adjustments necessary to fairly present our Unaudited Consolidated Balance Sheet as of September 30, 2014, our Unaudited Consolidated Statements of Comprehensive Income and our Unaudited Consolidated Statements of Cash Flows for all periods presented. Our unaudited consolidated interim financial statements and footnotes should be read in conjunction with our consolidated financial statements and footnotes included within our Annual Report filed on Form 10-K for the year ended December 31, 2013 (2013 Form 10-K).

7

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
September 30, 2014


2)    SIGNIFICANT ACCOUNTING POLICIES

(a) Changes to significant accounting policies

We have made no material changes to our significant accounting policies as reported in our 2013 Form 10-K.

(b) Fair value assumptions

The carrying amounts for the following financial instrument categories approximate their fair values at September 30, 2014 and December 31, 2013, because of their short-term nature: cash and cash equivalents, accrued investment income, premiums receivable, reinsurance recoverable, reinsurance payable, accounts payable and accrued expenses. The carrying amount of notes payable approximates fair value as the interest rate is variable.

(c) Pending Accounting Pronouncements

We have evaluated pending accounting pronouncements and do not believe they would have an impact on the operations or financial reporting of our Company.



8

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
September 30, 2014


3)    INVESTMENTS

The following table details the difference between cost or adjusted/amortized cost and estimated fair value, by major investment category, at September 30, 2014 and December 31, 2013:

 
Cost or Adjusted/Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
September 30, 2014
 
 
 
 
 
 
 
U.S. government and agency securities
$
123,666

 
$
101

 
$
822

 
$
122,945

Foreign government
3,278

 
41

 

 
3,319

States, municipalities and political subdivisions
80,077

 
1,477

 
227

 
81,327

Public utilities
9,059

 
229

 
41

 
9,247

Corporate securities
110,839

 
1,442

 
404

 
111,877

Redeemable preferred stocks
413

 

 
8

 
405

Total fixed maturities
327,332

 
3,290

 
1,502

 
329,120

Public utilities
996

 
62

 
8

 
1,050

Other common stocks
17,660

 
2,918

 
185

 
20,393

Non-redeemable preferred stocks
733

 
3

 
3

 
733

Total equity securities
19,389

 
2,983

 
196

 
22,176

Other long-term investments
300

 

 

 
300

Total investments
$
347,021

 
$
6,273

 
$
1,698

 
$
351,596

 
 
 
 
 
 
 
 
December 31, 2013
 
 
 
 
 
 
 
U.S. government and agency securities
$
98,621

 
$
28

 
$
1,169

 
$
97,480

Foreign government
3,287

 

 
60

 
3,227

States, municipalities and political subdivisions
45,556

 
654

 
433

 
45,777

Public utilities
9,103

 
122

 
92

 
9,133

Corporate securities
118,084

 
792

 
1,469

 
117,407

Total fixed maturities
274,651

 
1,596

 
3,223

 
273,024

Public utilities
804

 
23

 
20

 
807

Other common stocks
12,749

 
1,894

 
97

 
14,546

Non-redeemable preferred stocks
272

 

 
23

 
249

Total equity securities
13,825

 
1,917

 
140

 
15,602

Other long-term investments
300

 

 

 
300

Total investments
$
288,776

 
$
3,513

 
$
3,363

 
$
288,926


We classify all of our investments as available-for-sale. Our investments at September 30, 2014 and December 31, 2013 consisted mainly of U.S. government and agency securities, states, municipalities and political subdivisions and securities of investment-grade corporate issuers. Our equity holdings consisted mainly of securities issued by companies in the energy, consumer products, technology and industrial sectors.

9

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
September 30, 2014


When we sell investments, we calculate the gain or loss realized on the sale by comparing the sales price (fair value) to the cost or adjusted/amortized cost of the security sold. We determine the cost or adjusted/amortized cost of the security sold using the specific-identification method. The following table details our realized gains (losses) by major investment category for the three and nine month periods ended September 30, 2014 and 2013:

 
2014
 
2013
 
Gains
(Losses)
 
Fair Value at Sale
 
Gains
(Losses)
 
Fair Value at Sale
Three Months Ended September 30,
 
 
 
 
 
 
 
Fixed maturities
$
2

 
$
333

 
$
2

 
$
6,007

Equity securities
2

 
44,024

 

 

Total realized gains
4

 
44,357

 
2

 
6,007

Fixed maturities
(73
)
 
2,270

 
(40
)
 
4,078

Equity securities

 

 

 

Total realized losses
(73
)
 
2,270

 
(40
)
 
4,078

Net realized investment losses
$
(69
)
 
$
46,627

 
$
(38
)
 
$
10,085

 
 
 
 
 
 
 
 
Nine Months Ended September 30,
 
 
 
 
 
 
 
Fixed maturities
$
23

 
$
1,453

 
$
30

 
$
20,134

Equity securities
174

 
111,075

 
31

 
155

Total realized gains
197

 
112,528

 
61

 
20,289

Fixed maturities
(150
)
 
4,823

 
(258
)
 
42,725

Equity securities
(71
)
 
1,013

 
(2
)
 
28

Total realized losses
(221
)
 
5,836

 
(260
)
 
42,753

Net realized investment losses
$
(24
)
 
$
118,364

 
$
(199
)
 
$
63,042


The table below summarizes our fixed maturities by their contractual due dates at September 30, 2014. We summarize our fixed maturities by their contractual due dates with the exception of our collateralized mortgage obligations which we summarize by their effective maturity dates. Actual results may differ as issuers may have the right to call or prepay obligations, with or without penalties, prior to the contractual maturity of those obligations.

 
September 30, 2014
 
Cost or Amortized Cost
 
Percent of Total
 
Fair Value
 
Percent of Total
Due in one year or less
$
45,915

 
14.0
%
 
$
45,973

 
14.0
%
Due after one year through five years
160,295

 
49.0

 
160,318

 
48.7

Due after five years through ten years
113,271

 
34.6

 
114,693

 
34.8

Due after ten years
7,851

 
2.4

 
8,136

 
2.5

Total
$
327,332

 
100.0
%
 
$
329,120

 
100.0
%


10

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
September 30, 2014


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

 
Three Months Ended September 30,
 
Nine Months Ended
September 30,
 
2014
 
2013
 
2014
 
2013
Fixed maturities
$
1,611

 
$
983

 
$
4,237

 
$
2,426

Equity securities
171

 
93

 
537

 
174

Cash, cash equivalents and short-term investments
2

 
8

 
7

 
28

Other investments
23

 
5

 
110

 
16

Investment income
1,807

 
1,089

 
4,891

 
2,644

Investment expenses
(79
)
 
(40
)
 
(227
)
 
(159
)
Net investment income
$
1,728

 
$
1,049

 
$
4,664

 
$
2,485


Portfolio monitoring

We have a comprehensive portfolio monitoring process to identify and evaluate each fixed maturity and equity security whose carrying value may be other-than-temporarily impaired.

For each fixed maturity security in an unrealized loss position, we determine if the loss is temporary or other-than-temporarily impaired. 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, contractual or regulatory purposes, 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 maturity security and it is not more likely than not that we will be required to sell the fixed maturity 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 maturity security, the credit loss component of the impairment is recorded in earnings, with the remaining amount of the unrealized loss related to other factors recognized in other comprehensive income.

For equity securities, if we have decided to sell an equity security whose fair value is less than its cost and we do not expect the fair value to fully recover before the expected time of the sale, then the equity security’s decline in fair value is considered other-than-temporary and is recorded in earnings.

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

11

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
September 30, 2014


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*
 
Gross Unrealized Losses
 
Fair Value
 

Number of Securities*
 
Gross Unrealized Losses
 
Fair Value
September 30, 2014
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency securities
51

 
$
355

 
$
110,191

 
19

 
$
467

 
$
16,797

States, municipalities and political subdivisions
20

 
120

 
20,131

 
9

 
107

 
11,817

Public utilities

 

 

 
1

 
41

 
1,012

Corporate securities
12

 
45

 
12,151

 
16

 
359

 
20,199

Redeemable preferred stocks
3

 
8

 
304

 

 

 

Total fixed maturities
86

 
528

 
142,777

 
45

 
974

 
49,825

Public utilities
8

 
7

 
301

 
1

 
1

 
28

Common stocks
55

 
165

 
3,822

 
1

 
20

 
285

Non-redeemable preferred stocks
2

 
2

 
200

 
1

 
1

 
128

Total equity securities
65

 
174

 
4,323

 
3

 
22

 
441

Total
151

 
$
702

 
$
147,100

 
48

 
$
996

 
$
50,266

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2013
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency securities
47

 
$
850

 
$
64,369

 
7

 
$
319

 
$
5,913

Foreign governments
4

 
60

 
3,227

 

 

 

States, municipalities and political subdivisions
23

 
433

 
27,106

 

 

 

Public utilities
4

 
92

 
3,830

 

 

 

Corporate securities
49

 
1,469

 
60,348

 

 

 

Total fixed maturities
127

 
2,904

 
158,880

 
7

 
319

 
5,913

Public utilities
5

 
20

 
357

 

 

 

Common stocks
15

 
97

 
1,626

 

 

 

Non-redeemable preferred stocks
1

 
6

 
125

 
1

 
17

 
125

Total equity securities
21

 
123

 
2,108

 
1

 
17

 
125

Total
148

 
$
3,027

 
$
160,988

 
8

 
$
336

 
$
6,038


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

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

During the three and nine months ended September 30, 2014 and 2013, we recorded no other-than-temporary impairment charges related to our equity positions. We have never recorded an OTTI charge on our fixed maturity investments.


12

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
September 30, 2014


The following table presents the fair value of our financial instruments measured on a recurring basis by level at September 30, 2014 and December 31, 2013:

 
Total
 
Level 1
 
Level 2
September 30, 2014
 
 
 
 
 
U.S. government and agency securities
$
122,945

 
$

 
$
122,945

Foreign governments
3,319

 

 
3,319

States, municipalities and political subdivisions
81,327

 

 
81,327

Public utilities
9,247

 

 
9,247

Corporate securities
111,877

 

 
111,877

Redeemable preferred stocks
405

 
405

 

Total fixed maturities
329,120

 
405

 
328,715

Public utilities
1,050

 
1,050

 

Common stocks
20,393

 
20,393

 

Non-redeemable preferred stocks
733

 
733

 

Total equity securities
22,176

 
22,176

 

Other long-term investments
300

 
300

 

Total investments
$
351,596

 
$
22,881

 
$
328,715

 
 
 
 
 
 
December 31, 2013
 
 
 
 
 
U.S. government and agency securities
$
97,480

 
$

 
$
97,480

Foreign government
3,227

 

 
3,227

States, municipalities and political subdivisions
45,777

 

 
45,777

Public utilities
9,133

 

 
9,133

Corporate securities
117,407

 

 
117,407

Total fixed maturities
273,024

 

 
273,024

Public utilities
807

 
807

 

Common stocks
14,546

 
14,546

 

Non-redeemable preferred stocks
249

 
249

 

Total equity securities
15,602

 
15,602

 

Other long-term investments
300

 
300

 

Total investments
$
288,926

 
$
15,902

 
$
273,024


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

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

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


13

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
September 30, 2014


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

We estimate the fair value of our investments using the closing prices on the last business day of the reporting period, obtained from active markets such as the NYSE, NASDAQ, and NYSE MKT. For securities for which quoted prices in active markets are unavailable, we use 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. Our estimates of fair value reflect the interest rate environment that existed as of the close of business on September 30, 2014 and December 31, 2013, respectively. Changes in interest rates subsequent to September 30, 2014 may affect the fair value of our investments.

We are responsible for the determination of fair value and the supporting assumptions and methodologies. We gain assurance on the overall reasonableness and consistent application of valuation methodologies and inputs and compliance with accounting standards through the execution of various processes and controls designed to provide assurance that our assets and liabilities are appropriately valued. For fair values received from third parties, our processes are designed to provide assurance that the valuation methodologies and inputs are appropriate and consistently applied, the assumptions are reasonable and consistent with the objective of determining fair value, and the fair values are accurately recorded.

We do not hold any available for sale investments that require unobservable inputs to determine their fair value. 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. We made no such transfers during the three and nine months ended September 30, 2014.

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

Limited partnerships

On September 27, 2013, we acquired an investment in RCH Mortgage Fund VII Investors, LP (RCH), a limited partnership, recorded in other assets, that is currently being accounted for at cost. Our total investment in RCH of $1,000,000, which has been reduced by our proportionate share of the partnership's losses, is currently bifurcated between a capital contribution of $460,000 and a note receivable plus accrued interest of $525,000 that will be utilized to fund our future capital contributions. We are not required to fund any additional amounts in excess of our initial $1,000,000 commitment. As RCH is still in the acquisition phase, the cost basis of our investment approximated its fair value of $985,000 at September 30, 2014.

On October 10, 2014, RCH issued a capital call notice and applied our $500,000 note receivable to our capital account to fully fund our obligation to the limited partnership. RCH also remitted the $25,000 of unpaid interest on the note receivable.

On September 25, 2012, we acquired an investment in DCR Mortgage Partners VI, LP (DCR), a limited partnership, recorded in other assets, that is currently being accounted for at cost. Our total investment in DCR is $750,000, which has been increased by our proportional share of the partnership income, and reduced by return of capital and tax distributions received during the nine months ended September 30, 2014 totaling $8,000, is currently bifurcated between capital contributions of $562,000 and a note receivable of $188,000 that will be utilized to fund our future capital contribution. We are not required to fund any additional amounts in excess of our initial investment. As DCR is still in the acquisition phase, the cost basis of our investment approximated its fair value of $750,000 at September 30, 2014.

On October 15, 2014, DCR issued a capital call notice and applied our $188,000 note receivable to our capital account to fully fund our obligation to the limited partnership.

14

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
September 30, 2014



Other investments

On October 31, 2013, we entered into a participation agreement with United Capital Funding (UC Funding), that was recorded in other assets, at cost. We invested $1,000,000 in cash with UC Funding which they utilized to factor receivables from another company. During the first quarter of 2014, UC Funding returned our investment and all interest earned as they were unable to fully utilize our investment.


4)    EARNINGS PER SHARE

Basic earnings per share (EPS) is based on the weighted average number of common shares outstanding for the period, excluding any dilutive common share equivalents. Diluted EPS reflects the potential dilution resulting from vesting of restricted stock awards. The following table shows the computation of basic and diluted EPS for the three and nine month periods ended September 30, 2014 and September 30, 2013, respectively:

 
 
Three Months Ended September 30,
 
Nine Months Ended
September 30,
 
 
2014
 
2013
 
2014
 
2013
Numerator:
 
 
 
 
 
 
 
 
Net income attributable to common stockholders
 
$
8,640

 
$
4,131

 
$
29,619

 
$
12,991

 
 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
 
Weighted-average shares outstanding
 
20,745,245

 
16,129,247

 
19,658,199

 
16,091,323

Effect of dilutive securities
 
98,358

 
56,931

 
98,212

 
75,993

Weighted-average diluted shares
 
20,843,603

 
16,186,178

 
19,756,411

 
16,167,316

 
 
 
 
 
 
 
 
 
Basic earnings per share
 
$
0.42

 
$
0.26

 
$
1.51

 
$
0.81

Diluted earnings per share
 
$
0.41

 
$
0.26

 
$
1.50

 
$
0.80


See Note 11 for additional information on the stock grants related to dilutive securities.


5)    REINSURANCE

Our reinsurance program is designed, utilizing our risk management methodology, to address our exposure to catastrophes. According to the Insurance Service Office (ISO), a catastrophe loss is defined as a single unpredictable incident or series of closely related incidents that result in $25,000,000 or more in U.S. industry-wide direct insured losses to property and that affect a significant number of policyholders and insurers (ISO catastrophe). In addition to ISO catastrophes, we also include as catastrophes those events (non-ISO catastrophes), which may include losses, that we believe are, or will be, material to our operations, either in amount or in number of claims made.

Our program provides reinsurance protection for catastrophes including hurricanes, tropical storms, and tornadoes. These reinsurance agreements are part of our catastrophe management strategy, which is intended to provide our shareholders an acceptable return on the risks assumed in our property business, and to reduce variability of earnings, while providing protection to our policyholders.

During the second quarter of 2014, we placed our reinsurance program for the 2014 treaty year beginning June 1, 2014 and ending on May 31, 2015. The agreements incorporate the mandatory coverage required by and placed with the Florida Hurricane Catastrophe Fund (FHCF). The FHCF is a Florida State-sponsored trust fund that provides reimbursement in Florida against storms that the National Hurricane Center designates as hurricanes. The private agreements provide coverage against severe weather events such as hurricanes, tropical storms and tornadoes.
For the 2014 hurricane season, our insurance affiliate purchased catastrophe excess of loss reinsurance protection of $1,080,200,000 excess $25,000,000 providing sufficient protection for approximately a one-in-185 year hurricane event as calculated by our licensed modeling software, AIR model version 15 using long-term event rates excluding demand surge. For a single hurricane catastrophe, our insurance affiliate will pay, or “retain”, the first 70% of losses up to $25,000,000 ($17,500,000) and an affiliated reinsurer will pay the remaining 30% of losses up to $25,000,000 ($7,500,000). The catastrophe excess of loss reinsurance program provides 100% coverage for all losses in excess of $25,000,000 up to $1,080,200,000.

Our agreement with the FHCF consists of a single layer of coverage, the mandatory layer. Under the agreement, we estimate the FHCF will provide approximately $555,200,000 of aggregate coverage for covered losses in excess of $230,800,000. The initial premium for the FHCF agreement is approximately $41,700,000.

The 2014 private catastrophe excess of loss reinsurance agreements structure coverage into layers, with a cascading feature such that all layers attach at $25,000,000. If the aggregate limit of the preceding layer is exhausted, the next layer drops down (cascades) in its place. Additionally, any unused layer protection drops down for subsequent events until exhausted. The 2014 catastrophe excess of loss reinsurance agreements with unaffiliated private reinsurers provide $525,000,000 of aggregate coverage for covered losses in excess of $25,000,000. Additionally, our insurance affiliate purchased a dedicated second event cover with recovery potential in subsequent events providing 100% coverage for losses of $15,000,000 excess $10,000,000, subject to an annual aggregate deductible of $15,000,000. The total cost of the 2014 private catastrophe excess of loss reinsurance program is $90,600,000. Certain parts of the reinsurance program provide coverage for two years. All private insurers with whom our insurance affiliate contracted either carry A.M. Best financial strength ratings of A- or higher, or have fully collateralized their maximum potential obligations in dedicated trusts.

We amortize our prepaid reinsurance premiums over the annual agreement period, and we record that amortization in ceded premiums earned on our Unaudited Consolidated Statements of Comprehensive Income. The table below summarizes the amounts of our ceded premiums written under the various types of agreements, as well as the amortization of prepaid reinsurance premiums:

 
Three Months Ended September 30,
 
Nine Months Ended
September 30,
 
2014
 
2013
 
2014
 
2013
Excess-of-loss
$
4,642

 
$
1,190

 
$
(126,632
)
 
$
(109,893
)
Equipment & Identity Theft
(1,221
)
 
(707
)
 
(3,138
)
 
(1,862
)
Flood
(4,509
)
 
(3,951
)
 
(11,961
)
 
(10,602
)
Ceded premiums written
$
(1,088
)
 
$
(3,468
)
 
$
(141,731
)
 
$
(122,357
)
Increase (decrease) in ceded unearned premiums
(34,653
)
 
(27,849
)
 
41,974

 
34,532

Ceded premiums earned
$
(35,741
)
 
$
(31,317
)
 
$
(99,757
)
 
$
(87,825
)


15

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
September 30, 2014


Current year catastrophe losses by the event magnitude are shown in the following table.

 
 
2014
 
2013
 
 
Number of Events
 
Incurred Loss and LAE (4)
 
Combined Ratio Impact
 
Number of Events
 
Incurred Loss and LAE (4) 
 
Combined Ratio Impact
Three Months Ended September 30,
 
 
 
 
 
 
 
 
 
 
 
 
Current period catastrophe losses incurred
 
 
 
 
 
 
 
 
 
 
 
 
Less than $1 million
(1) 
3

 
$
714

 
1.1
%
 
3

 
$
127

 
0.3
%
Total
 
3

 
$
714

 
1.1
%
 
3

 
$
127

 
0.3
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30,
 
 
 
 
 
 
 
 
 
 
 
 
Current period catastrophe losses incurred
 
 
 
 
 
 
 
 
 
 
 
 
$ 1 million to $5 million
(2) 

 
$

 
%
 
1

 
$
1,904

 
1.4
%
Less than $1 million
(3) 
3

 
974

 
0.5
%
 
2

 
1,818

 
1.3
%
Total
 
3

 
$
974

 
0.5
%
 
3

 
$
3,722

 
2.7
%
(1) 
Reflects losses from the Richland hailstorm, Hurricane Arthur and the Revere Tornado in 2014 and Winterstorm Nemo, the Orlando weather event in March and Tropical Storm Andrea in June 2013.
(2) 
Reflects losses from Winterstorm Nemo.
(3) 
Reflects losses from the Richland hailstorm, Hurricane Arthur and the Revere Tornado in 2014, and the Orlando weather event and Tropical Storm Andrea in 2013.
(4) 
Incurred loss and Loss Adjustment Expenses (LAE) is equal to losses and LAE paid plus the change in case and incurred but not reported reserves.
 
We realized recoveries under our reinsurance agreements totaling $100,000 and $241,000 for the three-month periods ended September 30, 2014 and 2013, respectively, and $1,181,000 and $1,712,000 for the nine-month periods ended September 30, 2014 and 2013, respectively.

During the fourth quarter of 2013, we placed our non-catastrophe reinsurance agreement, which will expire on December 31, 2014. The non-catastrophe reinsurance agreement provides excess-of-loss coverage for losses arising out of our property business up to $500,000 in excess of $500,000 per risk. Should a loss recovery, or series of loss recoveries, exhaust the coverage provided under the agreement for losses arising out of property-only business, excluding catastrophes, three reinstatements of the full coverage amount are included at no additional premium.

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 $168,000 and $184,000 for the three-month periods ended September 30, 2014 and 2013, respectively, and $748,000 and $452,000 for the nine-month periods ended September 30, 2014 and 2013, respectively.


6)    LONG-TERM DEBT

Our long-term debt at September 30, 2014 consisted of a note payable to the Florida State Board of Administration. At September 30, 2014 and December 31, 2013, we owed $13,824,000 and $14,706,000, respectively, on the note and the interest rate was 2.54% and 2.64%, respectively. All other terms and conditions of the note remain as described in our 2013 Form 10-K.

The $13,824,000 note payable to the Florida State Board of Administration (SBA note) requires our insurance affiliate to maintain surplus as regards policyholders at or above a calculated level, which was $31,862,000 at September 30, 2014. We

16

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
September 30, 2014


monitor our insurance affiliate's surplus as regards policyholders each quarter and, for various reasons, we occasionally provide additional capital to our insurance affiliate. During the three and nine month periods ended September 30, 2014 and 2013, we did not contribute any capital to our insurance affiliate. We currently do not foresee a need for any material contributions of capital to our insurance affiliate; however, any future contributions of capital will depend on circumstances at the time.

Our SBA note requires that we 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 our insurance affiliate under the agreement plus the outstanding balance of the note. At September 30, 2014, our net written premium to surplus ratio was 4.7:1, which is well above the 2:1 required ratio. Our gross written premium to surplus ratio was 9.9:1, which exceeds the required ratio of 6:1. Should we fail to exceed either a net writing ratio of 1.5:1 or a gross writing ratio of 4.5:1, our interest rate will increase by 450 basis points above the 10-year Constant Maturity Treasury rate which was 2.52% at the end of September 2014. Any other writing ratio deficiencies result in an interest rate penalty of 25 basis points above the stated rate of the note, which is 2.54% at the end of September 2014. Our SBA note further provides that the SBA may, among other things, declare its loan immediately due and payable for all defaults existing under the SBA note; however, any payment is subject to approval by the insurance regulatory authority. At September 30, 2014, we were in compliance with the covenants of the SBA note.


7)    COMMITMENTS AND CONTINGENCIES

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

See Note 6 for information regarding commitments related to long-term debt, and Note 8 for commitments related to regulatory actions.


8)    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 affiliate. The various laws and regulations require that insurers maintain minimum amounts of statutory surplus and risk-based capital, they restrict insurers' ability to pay dividends, they specify allowable investment types and investment mixes, and they subject insurers to assessments. At September 30, 2014, and during the three and nine months then ended, our insurance affiliate met all regulatory requirements of the states in which it operates, and it did not incur any material assessments.

The National Association of Insurance Commissioners published risk-based capital guidelines for insurance companies that are designed to assess capital adequacy and to raise the level of protection that statutory surplus provides for policy holders. Most states, including Florida, 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. State insurance regulatory authorities could require an insurer to cease operations in the event the insurer fails to maintain the required statutory capital.

Florida law permits 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 law further provides calculations to determine the amount of dividends or distributions that can be made without the prior approval of the insurance regulatory authority and the amount of dividends or distributions that would require prior approval of the insurance regulatory authority. Statutory risk-based capital requirements may further restrict our insurance affiliate's 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.


17

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
September 30, 2014


The note payable to the SBA is considered a surplus note pursuant to statutory accounting principles. As a result, our insurance affiliate is subject to the authority of the Insurance Commissioner of the State of Florida with regard to its ability to repay principal and interest on the surplus note. Any payment of principal or interest requires permission from the insurance regulatory authority.

We have reported our insurance subsidiary’s assets, liabilities and results of operations in accordance with GAAP, which varies from statutory accounting principles prescribed or permitted by state laws and regulations, as well as by general industry practices. The following items are principal differences between statutory accounting and GAAP:
 
Statutory accounting requires that we exclude certain assets, called non-admitted assets, from the balance sheet.
 
Statutory accounting requires us to expense policy acquisition costs when incurred, while GAAP allows us to defer to the extent realizable, and amortize policy acquisition costs over the estimated life of the policies.

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

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

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

Statutory accounting requires that unearned premiums and loss reserves are presented net of related reinsurance rather than on a gross basis under GAAP.

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

Statutory accounting requires an additional admissibility test outlined in Statements on Statutory Accounting Principles, No. 101 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 subsidiary must file with the various insurance regulatory authorities an “Annual Statement” which reports, among other items, net income (loss) and surplus as regards policyholders, which is called stockholder’s equity under GAAP. For the three-month periods ended September 30, 2014 and 2013, our insurance affiliate recorded statutory net income of $4,720,000 and $2,258,000, respectively, and $15,981,000 and $2,888,000 for the nine-month periods ended September 30, 2014 and 2013, respectively. Since our insurance affiliate is domiciled in Florida, it remains subject to the laws of that state, one of which requires that our insurance affiliate maintain capital and surplus equal to the greater of 10% of its total liabilities or $5,000,000. At September 30, 2014 and December 31, 2013, our insurance affiliate's surplus as regards policyholders was $95,809,000 and $78,362,000, respectively.




18

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
September 30, 2014


9)    ACCUMULATED OTHER COMPREHENSIVE INCOME

We report changes in other comprehensive income items within comprehensive income on the Consolidated Statements of Comprehensive Income, and we include accumulated other comprehensive income as a component of stockholders' equity on our Consolidated Balance Sheets.

The table below details the components of accumulated other comprehensive income at period end:

  
Pre-Tax Amount
 
Tax (Expense)Benefit
 
Net-of-Tax Amount
December 31, 2013
$
150

 
$
(58
)
 
$
92

Changes in net unrealized gains on investments
4,401

 
(1,701
)
 
2,700

Reclassification adjustment for realized losses
24

 
(9
)
 
15

September 30, 2014
$
4,575

 
$
(1,768
)
 
$
2,807



10)    STOCKHOLDERS' EQUITY

We are authorized to issue 875,000 shares of "blank check" preferred stock, which may be issued from time to time in one or more series upon authorization by our Board of Directors (Board). Our Board, without further approval of the stockholders, is authorized to fix the designations, powers, including voting powers, preferences and the relative, participating optional or other special rights of the shares of each series and any qualifications, limitations and restrictions thereof. As of September 30, 2014, we had not issued any shares of preferred stock.

On September 25, 2014, our Board awarded 65,000 shares of restricted common stock to non-employee Board members under the terms of our 2013 Omnibus Incentive Plan that was approved by our stockholders at our 2013 Annual Stockholders Meeting. The awards will vest on the earlier of (i) the first anniversary of the grant date or (ii) immediately prior to the first annual meeting of stockholders of the Company that occurs in 2015.

On August 1, 2014, our Board declared a $0.04 per share quarterly cash dividend. We paid the $834,000 dividend on August 22, 2014, to stockholders of record on August 15, 2014.

On May 1, 2014, our Board declared a $0.04 per share quarterly cash dividend. We paid the $834,000 dividend on May 23, 2014, to stockholders of record on May 16, 2014.

On March 21, 2014, we awarded Kimberly Salmon, General Counsel and Chief Legal Officer, 1,270 shares of restricted common stock in connection with her employment with our Company. Ms. Salmon's shares will vest on the one-year anniversary of her grant date.

On March 18, 2014, we awarded 36,886 shares of restricted common stock to senior management and selected employees under the terms of our 2013 Omnibus Incentive Plan that was approved by our stockholders at our 2013 Annual Stockholders Meeting. The awards were granted as a result of our Company and management team meeting or exceeding the performance targets established by our Board for the fiscal year ended December 31, 2013. The grants will vest in equal installments over the next three years on the anniversary date of the grant date.

On March 5, 2014, we closed an underwritten public offering of 4,600,000 shares of our common stock. Our total net proceeds from the offering were approximately $54,041,000.

On February 24, 2014, our Board declared a $0.04 per share quarterly cash dividend. We paid the $832,000 dividend on March 21, 2014, to stockholders of record on March 14, 2014.

On November 5, 2013, our Board declared a $0.03 per share quarterly cash dividend. We paid the $486,000 dividend on December 13, 2013, to stockholders of record on November 29, 2013.

19

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
September 30, 2014



On October 1, 2013, we awarded Jay Williams, Vice President - Marketing, 2,299 shares of restricted common stock in connection with his employment with our Company. Mr. Williams' shares vested on October 1, 2014.

On September 13, 2013, we awarded Andy Swenson, Chief Information Officer, and Deepak Menon, Vice President - Operations and Business Development, 2,167 and 2,110 shares of restricted common stock, respectively, in connection with their employment with our Company. Messrs. Swenson and Menon's shares vested on September 13, 2014.

On August 7, 2013, our Board declared a $0.03 per share quarterly cash dividend. We paid the $486,000 dividend on September 13, 2013, to stockholders of record on August 30, 2013.

On May 7, 2013, our Board declared a $0.03 per share quarterly cash dividend. We paid the $486,000 dividend on June 14, 2013, to stockholders of record on May 31, 2013.

On March 6, 2013, our Board declared a $0.03 per share quarterly cash dividend. We paid the $486,000 dividend on March 27, 2013, to stockholders of record on March 20, 2013.

On January 11, 2013, Raymond James, the lead underwriter on our public offering, exercised their over-allotment option to purchase 750,000 shares of our common stock and we received net proceeds less underwriting expenses of $3,591,000 from the exercise.


11) STOCK-BASED COMPENSATION

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

We granted zero and 38,156 restricted stock awards to management and selected employees during the three and nine months ended September 30, 2014, respectively. The year to date restricted stock awards had a weighted-average grant date fair value of $15.24 per share. During the nine months ended September 30, 2014, 7,401 shares were forfeited. We granted 4,277 and 8,177 restricted stock awards during the three and nine month periods ended September 30, 2013, which had a weighted-average grant date fair value of $8.77 and $7.34 per share, respectively.

We also granted 65,000 shares to the non-employee members of the Board during the three and nine months ended September 30, 2014, which had a weighted average grant date fair value of $13.05 per share.

The following table shows a summary of the shares awarded during the nine month period ended September 30, 2014:

 
 
Number of Shares
 
Weighted Average Grant Date Fair Value
Outstanding as of December 31, 2013
 
80,068

 
$
5.56

Granted
 
103,156

 
13.86

Forfeited
 
7,401

 
7.02

Vested
 
19,485

 
6.13

Outstanding as of September 30, 2014
 
156,338

 
$
10.90



20

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
September 30, 2014


We had approximately $700,000 and $385,000 of unrecognized stock compensation expense on September 30, 2014 and 2013, respectively, related to non-vested employee compensation granted, which we expect to recognize ratably over the next three years. We recognized $88,000 and $40,000 of compensation expense during the three months ended September 30, 2014 and 2013, respectively, and $209,000 and $96,000 of compensation expense during the nine months ended September 30, 2014 and 2013, respectively.

We had approximately $826,000 of unrecognized director compensation expense on September 30, 2014, related to non-vested director compensation granted, which we expect to recognize ratably until the 2015 annual meeting of stockholders. We recognized $23,000 of director compensation expense during the three and nine months ended September 30, 2014.


12)    SUBSEQUENT EVENTS

We evaluate all subsequent events and transactions for potential recognition or disclosure in our financial statements.

On November 4, 2014, our Board of Directors declared a $0.04 per share quarterly cash dividend payable on November 28, 2014, to stockholders of record on November 21, 2014.

No additional events required disclosure.


21

UNITED INSURANCE HOLDINGS CORP.


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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Unaudited Consolidated Financial Statements and related notes appearing elsewhere in this Form 10-Q.


OUR BUSINESS

United Insurance Holdings Corp. serves as the holding company for United Property & Casualty Insurance Company and its affiliated companies. Our business is conducted principally through four wholly-owned subsidiaries: United Property & Casualty Insurance Company (our insurance affiliate), United Insurance Management, L.C. (our management affiliate), Skyway Claims Services, LLC (our claims adjusting affiliate) and UPC Re (our reinsurance affiliate). Collectively, including United Insurance Holdings Corp., we refer to these entities as “UPC Insurance,” which is the preferred brand identification we are establishing for our Company.

UPC Insurance is primarily engaged in the homeowners property and casualty insurance business in the United States. We currently write in Florida, Massachusetts, New Jersey, North Carolina, Rhode Island, South Carolina and Texas, and we are licensed to write in Connecticut, Delaware, Georgia, Louisiana, Maryland, Mississippi, New Hampshire and Virginia. Our target market currently consists of areas where the perceived threat of natural catastrophe has caused large national insurance carriers to reduce their concentration of policies. In such areas we believe an opportunity exists for UPC Insurance to write profitable business. We manage our risk of catastrophic loss primarily through sophisticated pricing algorithms, avoidance of policy concentration, and the use of a comprehensive catastrophe reinsurance program. UPC Insurance has been operating continuously in Florida since 1999, and has successfully managed its business through various hurricane and other tropical storm events. We believe our record of successful risk management and experience in writing business in catastrophe-exposed areas provides us a competitive advantage as we grow our business in other states facing similar perceived threats.

Overview

The following discussion highlights significant factors influencing the consolidated financial position and results of operations of UPC Insurance. This discussion should be read in conjunction with the consolidated financial statements and related notes found under Part II. Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2013 (2013 Form 10-K).

The most important factors we monitor to evaluate the financial condition and performance of our Company include:

For Results of Operations: premiums written, policies in-force, premiums earned, retention, price changes, claim frequency (rate of claim occurrence per policies in-force), severity (average cost per claim), catastrophes, loss ratio, expenses, combined ratio, underwriting results, reinsurance costs, premium to probable maximum loss, and geographic concentration;

For Investments: credit quality, maximizing total return, investment income, cash flows, realized gains and losses, unrealized gains and losses, asset diversification, and portfolio duration; and

For Financial Condition: liquidity, reserve strength, financial strength, ratings, operating leverage, book value per share, capital preservation, return on investment, and return on equity.

Recent Events

On November 4, 2014, our Board of Directors declared a $0.04 per share quarterly cash dividend payable on November 28, 2014, to stockholders of record on November 21, 2014.



22

UNITED INSURANCE HOLDINGS CORP.


2014 Highlights

Consolidated net income was $8,640,000 and $29,619,000 for the three and nine months ended September 30, 2014, respectively, compared to $4,131,000 and $12,991,000 for the three and nine months ended September 30, 2013, respectively.
Net income per diluted share was $0.41 and $1.50 for the three and nine months ended September 30, 2014, respectively, compared to $0.26 and $0.80 for the three and nine months ended September 30, 2013, respectively.
Our combined ratio (calculated as operating expenses less interest expense relative to net premiums earned) was 84.8% and 81.3% for the three and nine months ended September 30, 2014, respectively, compared to 92.2% and 89.9% for the three and nine months ended September 30, 2013, respectively.
Total revenues were $68,847,000 and $204,058,000 for the three and nine months ended September 30, 2014, respectively, compared to $51,817,000 and $144,639,000 for the three and nine months ended September 30, 2013, respectively.
Investment and cash holdings were $434,914,000 at September 30, 2014, compared to $323,814,000 at December 31, 2013.
Investment income was $1,807,000 and $4,891,000 for the three and nine months ended September 30, 2014, respectively, compared to $1,089,000 and $2,644,000 for the three and nine months ended September 30, 2013, respectively.
Net realized losses were $(69,000) and $(24,000) for the three and nine months ended September 30, 2014, respectively, compared to net realized losses of $(38,000) and $(199,000) for the three and nine months ended September 30, 2013, respectively.
Book value per share was $9.16 at September 30, 2014, a 38.0% increase from $6.64 at December 31, 2013.
Return on average equity for the trailing twelve months ended September 30, 2014 was 27.4% compared to 17.4% for the trailing twelve months ended September 30, 2013.
Policies in-force were 224,304 at September 30, 2014, a 25.6% increase from 178,605 at September 30, 2013.
 

23

UNITED INSURANCE HOLDINGS CORP.


Consolidated Net Income
($ in thousands)
 
Three Months Ended September 30,
 
Nine Months Ended
September 30,
 
 
2014
 
2013
 
2014
 
2013
REVENUE:
 
 
 
 
 
 
 
 
Gross premiums written
 
$
105,065

 
$
83,601

 
$
322,986

 
$
274,650

Increase in gross unearned premiums
 
(4,214
)
 
(3,463
)
 
(29,901
)
 
(49,736
)
Gross premiums earned
 
100,851

 
80,138

 
293,085

 
224,914

Ceded premiums earned
 
(35,741
)
 
(31,317
)
 
(99,757
)
 
(87,825
)
Net premiums earned
 
65,110

 
48,821

 
193,328

 
137,089

Investment income
 
1,807

 
1,089

 
4,891

 
2,644

Net realized losses
 
(69
)
 
(38
)
 
(24
)
 
(199
)
Other revenue
 
1,999

 
1,945

 
5,863

 
5,105

Total revenue
 
68,847

 
51,817

 
204,058

 
144,639

EXPENSES:
 
 
 
 
 
 
 
 
Losses and loss adjustment expenses
 
30,140

 
25,578

 
86,605

 
69,132

Policy acquisition costs
 
17,291

 
13,115

 
48,668

 
36,567

Operating expenses
 
3,086

 
2,265

 
8,453

 
6,944

General and administrative expenses
 
4,709

 
4,034

 
13,394

 
10,688

Interest expense
 
98

 
102

 
325

 
255

Total expenses
 
55,324

 
45,094

 
157,445

 
123,586

Income before other income
 
13,523

 
6,723

 
46,613

 
21,053

Other income
 

 
1

 
16

 
1

Income before income taxes
 
13,523

 
6,724

 
46,629

 
21,054

Provision for income taxes
 
4,883

 
2,593

 
17,010

 
8,063

Net income
 
$
8,640

 
$
4,131

 
$
29,619

 
$
12,991

Net income per diluted share
 
$
0.41

 
$
0.26

 
$
1.50

 
$
0.80

Book value per share
 
 
 
 
 
$
9.16

 
$
6.22

Return on average equity, ttm
 
 
 
 
 
27.4
 %
 
17.4
%
Loss ratio, net1
 
46.3
 %
 
52.4
 %
 
44.8
 %
 
50.4
%
Expense ratio2
 
38.5
 %
 
39.8
 %
 
36.5
 %
 
39.5
%
Combined ratio (CR)3
 
84.8
 %
 
92.2
 %
 
81.3
 %
 
89.9
%
Effect of current year catastrophe losses on CR
 
1.1
 %
 
0.3
 %
 
0.5
 %
 
2.7
%
Effect of prior year (favorable) development on CR
 
(2.4
)%
 
(2.2
)%
 
(1.4
)%
 
1.8
%
Underlying combined ratio4
 
86.1
 %
 
94.1
 %
 
82.2
 %
 
85.4
%
1 Loss ratio, net is calculated as losses and loss adjustment expenses relative to net premiums earned.
2 Expense ratio is calculated as the sum of all operating expenses less interest expense relative to net premiums earned.
3 Combined ratio is the sum of the loss ratio, net and the expense ratio.
4 Underlying combined ratio, a measure that is not based on U.S. generally accepted accounting principles (GAAP), is reconciled above to the combined ratio, the most directly comparable GAAP measure. Additional information regarding non-GAAP financial measures presented in this document is in the "Definitions of Non-GAAP Measures" section of this document.

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 and prior year development (underlying combined ratio) is a non-GAAP ratio, which is computed as the difference between four GAAP operating ratios: the combined ratio, the effect of current year catastrophe losses on the combined ratio and prior year development on the combined ratio. We believe that this ratio is useful to investors and it is used by management to reveal the trends in our business that may be obscured by current year catastrophe losses and prior year development. Current year catastrophe losses cause our loss trends

24

UNITED INSURANCE HOLDINGS CORP.


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 unexpected loss development on historical reserves. We believe it is useful for investors to evaluate these components separately and in the aggregate when reviewing our performance. The most direct comparable GAAP measure is the combined ratio. The underlying combined ratio should not be considered as a substitute for the combined ratio and does not reflect the overall profitability of our business.

Net Loss and LAE excluding the effects of current year catastrophe losses and reserve development (underlying Loss and LAE) is a non-GAAP measure which is computed as the difference between loss and LAE, current year catastrophe losses and prior year reserve development. 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 three items can have a significant impact on our loss trend in a given period. The most direct comparable GAAP measure is net loss and LAE. The underlying loss and LAE measure should not be considered a substitute for net losses and LAE and does not reflect the overall profitability of our business.


CRITICAL ACCOUNTING POLICIES AND ESTIMATES

When we prepare our consolidated financial statements and accompanying notes in conformity with U.S. generally accepted accounting principles (GAAP), we must make estimates and assumptions about future events that affect the amounts we report. Certain of these estimates result from judgments that can be subjective and complex. As a result of that subjectivity and complexity, and because we continuously evaluate these estimates and assumptions based on a variety of factors, actual results could materially differ from our estimates and assumptions if changes in one or more factors require us to make accounting adjustments. During the three and nine months ended