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EX-32.2 - EXHIBIT 32.2 - UNITED INSURANCE HOLDINGS CORP.exh32230sep16.htm
EX-32.1 - EXHIBIT 32.1 - UNITED INSURANCE HOLDINGS CORP.exh32130sep16.htm
EX-31.2 - EXHIBIT 31.2 - UNITED INSURANCE HOLDINGS CORP.exh31230sep16.htm
EX-31.1 - EXHIBIT 31.1 - UNITED INSURANCE HOLDINGS CORP.exh31130sep16.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, 2016
Commission File Number 001-35761  
_____________________
United Insurance Holdings Corp.
(Exact name of Registrant as specified in its charter)
  _______________________
 
Delaware
 
75-3241967
 
 
(State of Incorporation)
 
(IRS Employer Identification Number)
 
800 2nd Avenue S
St. Petersburg, Florida 33701
(Address, including zip code, of principal executive offices)
727-895-7737
(Registrant's telephone number, including area code)
 _______________________

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer 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 9, 2016; 21,643,714 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, 2016, and for the three and nine months ended September 30, 2016 and in documents incorporated by reference that do not reflect historical facts 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,” the negative variations of those words, or comparable terminology are intended to identify forward-looking statements. Forward-looking statements are not guarantees of future performance and involve certain known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. The risks and uncertainties include, without limitation:

the regulatory, economic and weather conditions in the states in which we operate;
the impact of new federal or state regulations that affect the property and casualty insurance market;
the cost and availability of reinsurance;
assessments charged by various governmental agencies;
pricing competition and other initiatives by competitors;
our ability to attract and retain the services of senior management;
the outcome of litigation pending against us, including the terms of any settlements;
dependence on investment income and the composition of our investment portfolio and related market risks;
our exposure to catastrophic events and severe weather conditions;
downgrades in our financial strength ratings;
risks and uncertainties relating to our acquisitions including our ability to successfully integrate the acquired companies; and
other risks and uncertainties described in the section entitled "Risk Factors" in Part I, Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2015.

We caution you not to place reliance on these forward-looking statements, which are valid only as of the date they were made. In addition, we prepare our financial statements in accordance with U.S. generally accepted accounting principles (GAAP), which prescribes when we may reserve for particular risks, including litigation exposures. Accordingly, our results for a given reporting period could be significantly affected if and when we establish a reserve for a major contingency. Therefore, the results we report in certain accounting periods may appear to be volatile and past results may not be indicative of results in future periods.

Our forward-looking statements are subject to numerous risks, uncertainties and assumptions that are described in our filings with the SEC. The forward-looking events that we discuss in this Form 10-Q are valid only as of the date of this Form 10-Q and may not occur, or may have different consequences, in light of the risks, uncertainties and assumptions that we describe from time to time in our filings with the SEC. A detailed discussion of these and other risks and uncertainties that could cause actual results and events to differ materially from our forward-looking statements is included in the section entitled “RISK FACTORS” in Part I, Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2015. 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,
2016

December 31, 2015
ASSETS

(Unaudited)

 
Investments available for sale, at fair value:

 

 
Fixed maturities (amortized cost of $464,107 and $396,415, respectively)

$
472,668


$
396,698

Equity securities (adjusted cost of $44,094 and $48,679, respectively)

47,748


50,806

Other investments (amortized cost of $5,438 and $4,980, respectively)

5,690


5,210

Total investments

$
526,106


$
452,714

Cash and cash equivalents

139,556


84,786

Accrued investment income

3,408


2,915

Property and equipment, net
 
18,041

 
17,135

Premiums receivable, net

42,038


41,170

Reinsurance recoverable on paid and unpaid losses

17,389


2,961

Prepaid reinsurance premiums

135,289


79,399

Goodwill
 
13,519

 
3,413

Deferred policy acquisition costs

64,896


46,732

Other assets

14,173


8,796

Total Assets

$
974,415


$
740,021

LIABILITIES AND STOCKHOLDERS' EQUITY




Liabilities:




Unpaid losses and loss adjustment expenses

$
122,660


$
76,792

Unearned premiums

387,342


304,653

Reinsurance payable

122,536


64,542

Other liabilities

57,268


42,470

Notes payable

25,134

 
12,353

Total Liabilities

$
714,940


$
500,810

Commitments and contingencies (Note 9)






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; 21,855,797 and 21,736,431 issued; 21,643,714 and 21,524,348 outstanding for 2016 and 2015, respectively

2


2

Additional paid-in capital

98,836


97,163

Treasury shares, at cost; 212,083 shares

(431
)

(431
)
Accumulated other comprehensive income

7,671


1,620

Retained earnings

153,397


140,857

Total Stockholders' Equity

$
259,475


$
239,211

Total Liabilities and Stockholders' Equity

$
974,415


$
740,021








See accompanying Notes to Unaudited Consolidated Financial Statements.

4

UNITED INSURANCE HOLDINGS CORP.


Consolidated Statements of Comprehensive Income
(Unaudited)


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


2016

2015
 
2016
 
2015
REVENUE:




 
 
 
 
Gross premiums written

$
194,341

 
$
155,985

 
$
541,053

 
$
425,183

Increase in gross unearned premiums

(20,821
)
 
(27,252
)
 
(56,446
)
 
(60,286
)
Gross premiums earned

173,520

 
128,733

 
484,607

 
364,897

Ceded premiums earned

(53,299
)
 
(44,730
)
 
(148,837
)
 
(122,394
)
Net premiums earned

120,221

 
84,003

 
335,770

 
242,503

Investment income

2,663

 
2,413

 
7,786

 
6,725

Net realized gains

106

 
323

 
478

 
312

Other revenue

4,212

 
3,067

 
11,650

 
8,002

Total revenue

127,202

 
89,806

 
355,684

 
257,542

EXPENSES:




 
 
 
 
Losses and loss adjustment expenses

72,746

 
40,432

 
199,615

 
137,030

Policy acquisition costs

31,333

 
23,756

 
84,086

 
64,140

Operating expenses

5,558

 
4,329

 
15,326

 
12,679

General and administrative expenses

12,329

 
8,331

 
31,759

 
22,244

Interest expense

206

 
81

 
397

 
232

Total expenses

122,172

 
76,929

 
331,183

 
236,325

Income before other income

5,030

 
12,877

 
24,501

 
21,217

Other income

11

 
107

 
80

 
292

Income before income taxes

5,041

 
12,984

 
24,581

 
21,509

Provision for income taxes

1,618

 
4,901

 
8,366

 
7,953

Net income

$
3,423

 
$
8,083

 
$
16,215

 
$
13,556

OTHER COMPREHENSIVE INCOME:




 
 
 
 
Change in net unrealized gains (losses) on investments

(3,495
)
 
641

 
10,305

 
(1,722
)
Reclassification adjustment for net realized investment gains

(106
)
 
(323
)
 
(478
)
 
(312
)
Income tax benefit (expense) related to items of other comprehensive income

1,298

 
(123
)
 
(3,776
)
 
786

Total comprehensive income

$
1,120

 
$
8,278

 
$
22,266

 
$
12,308






 
 
 
 
Weighted average shares outstanding




 
 
 
 
Basic

21,448,892

 
21,290,759

 
21,406,599

 
21,193,825

Diluted
 
21,643,401

 
21,528,546

 
21,604,135

 
21,427,398






 
 
 
 
Earnings per share




 
 
 
 
Basic

$
0.16

 
$
0.38

 
$
0.76

 
$
0.64

Diluted
 
$
0.16

 
$
0.38

 
$
0.75

 
$
0.63



 
 
 
 
 
 
 
Dividends declared per share

$
0.06

 
$
0.05

 
$
0.17

 
$
0.15






See accompanying Notes to Unaudited Consolidated Financial Statements.

5

UNITED INSURANCE HOLDINGS CORP.


Consolidated Statements of Cash Flows
(Unaudited)
 
 
Nine Months Ended
September 30,
 
 
2016
 
2015
OPERATING ACTIVITIES
 
 
 
 
Net income
 
$
16,215

 
$
13,556

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
8,640

 
2,093

Bond amortization and accretion
 
2,621

 
(286
)
Net realized gains
 
(478
)
 
(312
)
Provision for uncollectable premiums/over and short
 
57

 
314

Deferred income taxes, net
 
1,575

 
3,892

Stock based compensation
 
1,429

 
1,525

Changes in operating assets and liabilities:
 
 
 
 
Accrued investment income
 
155

 
(326
)
Premiums receivable
 
2,260

 
(13,838
)
Reinsurance recoverable on paid and unpaid losses
 
(11,097
)
 
(736
)
Prepaid reinsurance premiums
 
(55,890
)
 
(56,830
)
Deferred policy acquisition costs, net
 
(18,164
)
 
(15,003
)
Other assets
 
(2,301
)
 
(9,581
)
Unpaid losses and loss adjustment expenses
 
20,901

 
15,117

Unearned premiums
 
56,446

 
60,286

Reinsurance payable
 
59,036

 
72,188

Other liabilities
 
7,914

 
11,136

Net cash provided by operating activities
 
$
89,319

 
$
83,195

INVESTING ACTIVITIES
 
 
 
 
Proceeds from sales and maturities of investments available for sale
 
147,266

 
113,377

Purchases of investments available for sale
 
(146,535
)
 
(173,336
)
Cash from acquisition
 

 
14,467

Purchase of subsidiary, net of cash acquired
 
(32,840
)
 

Cost of property, equipment and capitalized software acquired
 
(2,726
)
 
(8,218
)
Net cash used in investing activities
 
$
(34,835
)
 
$
(53,710
)
FINANCING ACTIVITIES
 
 
 
 
Tax withholding payment related to net settlement of equity awards
 
(270
)
 
(181
)
Proceeds from borrowings
 
5,200

 

Repayments of borrowings
 
(969
)
 
(3,128
)
Dividends
 
(3,675
)
 
(3,226
)
Net cash provided by (used in) financing activities
 
$
286

 
$
(6,535
)
Increase in cash
 
54,770

 
22,950

Cash and cash equivalents at beginning of period
 
84,786

 
61,391

Cash and cash equivalents at end of period
 
$
139,556

 
$
84,341

 
 
 
 
 
Supplemental Cash Flows Information
 
 
 
 
Interest paid
 
$
201

 
$
230

Income taxes paid
 
$
7,199

 
$
6,920



See accompanying Notes to Unaudited Consolidated Financial Statements.

6

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
September 30, 2016



1)    ORGANIZATION, CONSOLIDATION AND PRESENTATION

(a)Business

United Insurance Holdings Corp. (referred to in this document as we, our, us, the Company or UPC Insurance) is a property and casualty insurance holding company that sources, writes, and services residential and commercial property and casualty insurance policies using a network of agents and three wholly-owned insurance subsidiaries. Our primary insurance subsidiary is United Property & Casualty Insurance Company (UPC), which was formed in Florida in 1999 and has operated continuously since that time. Our other subsidiaries include United Insurance Management, L.C., the managing general agent that manages substantially all aspects of UPC's business; Skyway Claims Services, LLC (our claims adjusting affiliate) that provides services to our insurance affiliates; and UPC Re (our reinsurance affiliate) that provides a portion of the reinsurance protection purchased by our insurance affiliates. On February 3, 2015, we acquired Family Security Holdings, LLC (FSH) and its two wholly-owned subsidiaries, Family Security Insurance Company, Inc. (FSIC) and Family Security Underwriters, LLC, via merger. On April 29, 2016, we acquired Interboro Insurance Company (IIC) via merger. See Note 4 in our Notes to Unaudited Consolidated Financial Statements for additional information regarding these acquisitions.

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

We conduct our operations under one business segment.

(b)Consolidation and Presentation

We prepare our financial statements in conformity with U.S. 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 consolidated financial statements, as well as reported amounts of revenues and expenses during the reporting period. 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. Actual results could differ from those estimates. Except for the captions on our Unaudited Consolidated Balance Sheets and Unaudited Consolidated Statements of Comprehensive Income, we generally use the term loss(es) to collectively refer to both loss and loss adjustment expenses.

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

We prepared the accompanying Unaudited Consolidated Balance Sheet as of September 30, 2016, with the Audited Consolidated Balance Sheet amounts as of December 31, 2015, 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.


7

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
September 30, 2016


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, 2016, 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 in our Annual Report filed on Form 10-K for the year ended December 31, 2015.


2)    SIGNIFICANT ACCOUNTING POLICIES

(a) Changes to significant accounting policies

We have made one change to our significant accounting policies as reported in our 2015 Form 10-K.

In September 2015, the FASB issued Accounting Standards Update No. 2015-16, Business Combinations (Topic 805), Simplifying the Accounting for Measurement-Period Adjustments (ASU 2015-16). This update requires that adjustments to provisional amounts identified during the one-year period following the acquisition date be recognized in the reporting period in which the adjustment amounts are determined. We have adopted ASU 2015-16 prospectively on January 1, 2016, and applied the standard when making adjustments this quarter. See Note 4 in our Notes to Unaudited Consolidated Financial Statements for additional information regarding our acquisitions and the measurement-period adjustments made.

(b) Fair value assumptions

The carrying amounts for the following financial instrument categories approximate their fair values at September 30, 2016 and December 31, 2015, 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 and the Branch Banking & Trust Corporation (BB&T) approximate fair value as the interest rates are variable. The carrying amount of our note payable with Interboro, LLC approximates fair value due to the short term nature of the loan.

(c) Pending Accounting Pronouncements

We have evaluated recent accounting pronouncements that have had or may have a significant effect on our financial statements or on our disclosures.

In August 2016, the FASB issued Accounting Standards Update No. 2016-15, Statement of Cash Flows (Topic 230) (ASU 2016-15). This update is intended to address eight specific cash flow issues with the objective of reducing the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230.     The cash flow issues impacting our company include the presentation and classification of debt prepayment or debt extinguishment costs and contingent consideration payments made after a business combination. ASU 2016-15 is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods, with early adoption permitted. We do not intend to early adopt and are assessing the impact of adopting this new accounting standard on our consolidated financial statements and related disclosures.

In June 2016, the FASB issued Accounting Standards Update 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 do not intend to early adopt and are assessing the impact of adopting this new accounting standard on our consolidated financial statements and related disclosures.


8

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
September 30, 2016


In March 2016, the FASB issued Accounting Standards Update No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (ASU 2016-09). This update is intended to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2016, including interim periods within those annual periods, with early adoption permitted for certain requirements. We do not intend to early adopt and are assessing the impact of adopting this new accounting standard on our consolidated financial statements and related disclosures.

9

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
September 30, 2016


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, 2016 and December 31, 2015:

 
Cost or Adjusted/Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
September 30, 2016
 
 
 
 
 
 
 
U.S. government and agency securities
$
121,952

 
$
1,014

 
$
197

 
$
122,769

Foreign government
2,032

 
84

 

 
2,116

States, municipalities and political subdivisions
169,433

 
3,723

 
166

 
172,990

Public utilities
7,292

 
237

 
2

 
7,527

Corporate securities
161,957

 
3,911

 
24

 
165,844

Redeemable preferred stocks
1,441

 
55

 
74

 
1,422

Total fixed maturities
464,107

 
9,024

 
463

 
472,668

Mutual fund
20,036

 

 

 
20,036

Public utilities
1,342

 
182

 

 
1,524

Other common stocks
19,803

 
3,811

 
408

 
23,206

Non-redeemable preferred stocks
2,913

 
97

 
28

 
2,982

Total equity securities
44,094

 
4,090

 
436

 
47,748

Other long-term investments
5,438

 
273

 
21

 
5,690

Total investments
$
513,639

 
$
13,387

 
$
920

 
$
526,106

 
 
 
 
 
 
 
 
December 31, 2015
 
 
 
 
 
 
 
U.S. government and agency securities
$
81,973

 
$
148

 
$
474

 
$
81,647

Foreign government
2,038

 
37

 

 
2,075

States, municipalities and political subdivisions
154,004

 
2,391

 
490

 
155,905

Public utilities
8,398

 
128

 
33

 
8,493

Corporate securities
148,170

 
880

 
2,292

 
146,758

Redeemable preferred stocks
1,832

 
37

 
49

 
1,820

Total fixed maturities
396,415

 
3,621

 
3,338

 
396,698

Mutual fund
26,357

 

 
14

 
26,343

Public utilities
1,342

 
44

 
34

 
1,352

Other common stocks
18,624

 
2,615

 
545

 
20,694

Non-redeemable preferred stocks
2,356

 
67

 
6

 
2,417

Total equity securities
48,679

 
2,726

 
599

 
50,806

Other long-term investments
4,980

 
230

 

 
5,210

Total investments
$
450,074

 
$
6,577

 
$
3,937

 
$
452,714



10

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
September 30, 2016


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, 2016 and 2015:

 
2016
 
2015
 
Gains
(Losses)
 
Fair Value at Sale
 
Gains
(Losses)
 
Fair Value at Sale
Three Months Ended September 30,
 
 
 
 
 
 
 
Fixed maturities
$
508

 
$
11,009

 
$
315

 
$
24,168

Equity securities

 

 
778

 
2,469

Total realized gains
508

 
11,009

 
1,093

 
26,637

Fixed maturities
(396
)
 
7,635

 
(95
)
 
4,131

Equity securities
(6
)
 
17

 
(675
)
 
2,106

Total realized losses
(402
)
 
7,652

 
(770
)
 
6,237

Net realized investment gains (losses)
$
106

 
$
18,661

 
$
323

 
$
32,874

 
 
 
 
 
 
 
 
Nine Months Ended September 30,
 
 
 
 
 
 
 
Fixed maturities
$
1,806

 
$
47,391

 
$
542

 
$
45,392

Equity securities
24

 
10,769

 
817

 
3,441

Total realized gains
1,830

 
58,160

 
1,359

 
48,833

Fixed maturities
(1,170
)
 
20,663

 
(364
)
 
22,159

Equity securities
(182
)
 
17,025

 
(683
)
 
2,264

Total realized losses
(1,352
)
 
37,688

 
(1,047
)
 
24,423

Net realized investment gains (losses)
$
478

 
$
95,848

 
$
312

 
$
73,256


The table below summarizes our fixed maturities at September 30, 2016 by contractual maturity periods. Actual results may differ as issuers may have the right to call or prepay obligations, with or without penalties, prior to the contractual maturity of those obligations.

 
September 30, 2016
 
Cost or Amortized Cost
 
Percent of Total
 
Fair Value
 
Percent of Total
Due in one year or less
$
33,218

 
7.2
%
 
$
33,232

 
7.0
%
Due after one year through five years
250,847

 
54.0

 
253,958

 
53.7

Due after five years through ten years
131,831

 
28.4

 
135,305

 
28.6

Due after ten years
48,211

 
10.4

 
50,173

 
10.7

Total
$
464,107

 
100.0
%
 
$
472,668

 
100.0
%


11

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
September 30, 2016


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

 
Three Months Ended September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Fixed maturities
$
2,251

 
$
2,078

 
$
6,693

 
$
5,879

Equity securities
259

 
222

 
726

 
656

Cash, cash equivalents and short-term investments
38

 
4

 
87

 
9

Other investments
110

 
105

 
266

 
171

Other assets
5

 
4

 
14

 
10

Investment income
2,663

 
2,413

 
7,786

 
6,725

Investment expenses
(155
)
 
(92
)
 
(360
)
 
(181
)
Net investment income
$
2,508

 
$
2,321

 
$
7,426

 
$
6,544


Portfolio monitoring

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

For each fixed income security in an unrealized loss position, we determine if the loss is temporary or other-than-temporary. If our management decides to sell the security or determines that it is more likely than not that we will be required to sell the security before recovery of the cost or amortized cost basis for reasons such as liquidity needs or 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 uncertain whether or not we will be required to sell the fixed income security before recovery of its amortized cost basis, we evaluate whether we expect the security to receive cash flows sufficient to recover the entire cost or amortized cost basis of the security. We calculate the estimated recovery value by discounting the best estimate of future cash flows at the security's original or current effective rate, as appropriate, and compare this to the cost or amortized cost of the security. If we do not expect to receive cash flows sufficient to recover the entire cost or amortized cost basis of the fixed income security, the credit loss component of the impairment is recorded in earnings, with the remaining amount of the unrealized loss related to other factors recognized in other comprehensive income.

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

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

12

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
September 30, 2016


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, 2016
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency securities
75

 
$
197

 
$
51,848

 

 
$

 
$

States, municipalities and political subdivisions
53

 
166

 
42,276

 

 

 

Public utilities
4

 
2

 
651

 

 

 

Corporate securities
48

 
14

 
9,925

 
3

 
10

 
3,038

Redeemable preferred stocks
3

 
36

 
312

 
2

 
38

 
230

Total fixed maturities
183

 
415

 
105,012

 
5

 
48

 
3,268

Other common stocks
31

 
269

 
5,486

 
17

 
139

 
1,887

Non-redeemable preferred stocks
5

 
8

 
835

 
7

 
20

 
379

Total equity securities
36

 
277

 
6,321

 
24

 
159

 
2,266

Other long-term investments
1

 
21

 
987

 

 

 

Total
220

 
$
713

 
$
112,320

 
29

 
$
207

 
$
5,534

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency securities
73

 
$
265

 
$
44,786

 
21

 
$
209

 
$
11,250

States, municipalities and political subdivisions
61

 
463

 
56,971

 
5

 
27

 
7,620

Public utilities
8

 
4

 
1,961

 
1

 
29

 
1,015

Corporate securities
242

 
2,025

 
92,429

 
9

 
267

 
10,047

Redeemable preferred stocks
7

 
49

 
746

 

 

 

Total fixed maturities
391

 
2,806

 
196,893

 
36

 
532

 
29,932

Mutual Funds
1

 
14

 
26,343

 

 

 

Public utilities
4

 
34

 
697

 

 

 

Other common stocks
63

 
497

 
6,665

 
3

 
48

 
118

Non-redeemable preferred stocks
19

 
6

 
1,161

 

 

 

Total equity securities
87

 
551

 
34,866

 
3

 
48

 
118

Total
478

 
$
3,357

 
$
231,759

 
39

 
$
580

 
$
30,050

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

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

During the three and nine months ended September 30, 2016 and 2015, we recorded no other-than-temporary impairment charges.


13

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
September 30, 2016


Fair value measurement

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

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

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

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

We estimate the fair value of our investments using the closing prices on the last business day of the reporting period, obtained from active markets such as the NYSE, NASDAQ, and NYSE MKT. For securities for which quoted prices in active markets are unavailable, we use a third-party pricing service that utilizes quoted prices in active markets for similar instruments, benchmark interest rates, broker quotes and other relevant inputs to estimate the fair value of those securities for which quoted prices are unavailable. Our estimates of fair value reflect the interest rate environment that existed as of the close of business on September 30, 2016 and December 31, 2015. Changes in interest rates subsequent to September 30, 2016 may affect the fair value of our investments.

The fair value of our fixed-maturities is initially calculated by a third-party pricing service. Valuation service providers typically obtain data about market transactions and other key valuation model inputs from multiple sources and, through the use of proprietary models, produce valuation information in the form of a single fair value for individual fixed income and other securities for which a fair value has been requested. The inputs used by the valuation service providers include, but are not limited to, market prices from recently completed transactions and transactions of comparable securities, interest rate yield curves, credit spreads, liquidity spreads, currency rates, and other information, as applicable. Credit and liquidity spreads are typically implied from completed transactions and transactions of comparable securities. Valuation service providers also use proprietary discounted cash flow models that are widely accepted in the financial services industry and similar to those used by other market participants to value the same financial information. The valuation models take into account, among other things, market observable information as of the measurement date, as described above, as well as the specific attributes of the security being valued, including its term, interest rate, credit rating, industry sector and, where applicable, collateral quality and other issue or issuer specific information. Executing valuation models effectively requires seasoned professional judgment and experience.

For our Level 3 assets, our internal pricing methods are primarily based on models using discounted cash flow methodologies that determine a single best estimate of fair value for individual financial instruments. In addition, our models use a discount rate and internally assigned credit ratings as inputs (which are generally consistent with any external ratings) and those we use to report our holdings by credit rating. Market related inputs used in these fair values, which we believe are representative of inputs other market participants would use to determine fair value of the same instruments include: interest rate yield curves, quoted market prices of comparable securities, credit spreads, and other applicable market data. As a result of the significance of non-market observable inputs, including internally assigned credit ratings as described above, judgment is required in developing these fair values. The fair value of these financial assets may differ from the amount actually received if we were to sell the asset. Moreover, the use of different valuation assumptions may have a material effect on the fair values on the financial assets.



14

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
September 30, 2016


Any change in the estimated fair value of our securities would impact the amount of unrealized gain or loss we have recorded, which could change the amount we have recorded for our investments and other comprehensive income on our Unaudited Consolidated Balance Sheet as of September 30, 2016.

The following table presents the fair value of our financial instruments measured on a recurring basis by level at September 30, 2016 and December 31, 2015:

 
Total
 
Level 1
 
Level 2
 
Level 3
September 30, 2016
 
 
 
 
 
 
 
U.S. government and agency securities
$
122,769

 
$

 
$
122,769

 
$

Foreign government
2,116

 

 
2,116

 

States, municipalities and political subdivisions
172,990

 

 
172,990

 

Public utilities
7,527

 

 
7,527

 

Corporate securities
165,844

 

 
165,844

 

Redeemable preferred stocks
1,422

 
1,422

 

 

Total fixed maturities
472,668

 
1,422

 
471,246

 

Mutual fund
20,036

 
20,036

 

 

Public utilities
1,524

 
1,524

 

 

Other common stocks
23,206

 
23,206

 

 

Non-redeemable preferred stocks
2,982

 
2,982

 

 

Total equity securities
47,748

 
47,748

 

 

Other long-term investments
5,690

 
300

 
3,635

 
1,755

Total investments
$
526,106

 
$
49,470

 
$
474,881

 
$
1,755

 
 
 
 
 
 
 
 
December 31, 2015
 
 
 
 
 
 
 
U.S. government and agency securities
$
81,647

 
$

 
$
81,647

 
$

Foreign government
2,075

 

 
2,075

 

States, municipalities and political subdivisions
155,905

 

 
155,905

 

Public utilities
8,493

 

 
8,493

 

Corporate securities
146,758

 

 
146,758

 

Redeemable preferred stocks
1,820

 
1,820

 

 

Total fixed maturities
396,698

 
1,820

 
394,878

 

Mutual Funds
26,343

 
26,343

 

 

Public utilities
1,352

 
1,352

 

 

Other common stocks
20,694

 
20,694

 

 

Non-redeemable preferred stocks
2,417

 
2,417

 

 

Total equity securities
50,806

 
50,806

 

 

Other long-term investments
5,210

 
300

 
3,055

 
1,855

Total investments
$
452,714

 
$
52,926

 
$
397,933

 
$
1,855





15

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
September 30, 2016


The table below presents the rollforward of our Level 3 investments held at fair value during the nine months ended September 30, 2016:
 
 
Other Investments
December 31, 2015
 
$
1,855

Transfers in
 

Partnership income
 
115

Return of capital
 
(237
)
Unrealized gains in accumulated other comprehensive income
 
22

September 30, 2016
 
$
1,755



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

At the end of each quarter, we determine whether we need to transfer the fair values of any securities between levels of the fair value hierarchy and, if so, we report the transfer as of the end of the quarter. During the first nine months of 2016, we transferred no investments between levels. We used unobservable inputs to derive our estimated fair value for Level 3 investments, and the unobservable inputs are significant to the overall fair value measurement.

For our investments in U.S. government securities that do not have prices in active markets, agency securities, state and municipal governments, and corporate bonds, we obtain the fair values from our investment custodians, which use a third-party valuation service. The valuation service calculates prices for our investments in the aforementioned security types on a month-end basis by using several matrix-pricing methodologies that incorporate inputs from various sources. The model the valuation service uses to price U.S. government securities and securities of states and municipalities incorporates inputs from active market makers and inter-dealer brokers. To price corporate bonds and agency securities, the valuation service calculates non-call yield spreads on all issuers, uses option-adjusted yield spreads to account for any early redemption features, 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.


16

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
September 30, 2016


Other investments

We acquired investments in limited partnerships, recorded in the other investments line of our Unaudited Consolidated Balance Sheets, that are currently being accounted for at fair value utilizing a discounted cash flow methodology. The estimated fair value of our investments in the limited partnership interests was $5,390,000. We have fully funded our investments in DCR Mortgage Partners VI, L.P. (DCR VI), DCR Mortgage Partners VII, L.P. (DCR VII), and RCH Mortgage Fund VI Investors, L.P. (RCH); however, we are still obligated to fund an additional $511,000 and $780,000 for our investments in Kayne Anderson Senior Credit Fund II, L.P. (Kayne) and Blackstone Alternative Solutions 2015 Trust (Blackstone), respectively. The information presented in the table below is as of September 30, 2016.

 
 
Initial Investment
 
Book Value
 
Unrealized Gains (Losses)
 
Fair Value
DCR Mortgage Partners VI, L.P.
 
$
450

 
$
495

 
$
273

 
$
768

RCH Mortgage Fund VI Investors, LP
 
1,000

 
1,008

 
(21
)
 
987

         Total Level 3 limited partnership investments
 
1,450

 
1,503

 
252

 
1,755

Kayne Senior Credit Fund II, L.P.
 
1,489

 
1,366

 

 
1,366

DCR Mortgage Partners VII, L.P.
 
2,000

 
2,049

 

 
2,049

Blackstone Alternative Solutions 2015 Trust
 
220

 
220

 

 
220

         Total Level 2 limited partnership investments
 
3,709

 
3,635

 

 
3,635

Total limited partnership investments
 
$
5,159

 
$
5,138

 
$
252

 
$
5,390

Other short-term investments
 
300

 
300

 

 
300

Total other investments
 
$
5,459

 
$
5,438

 
$
252

 
$
5,690


The following table summarizes the quantitative impact that the significant unobservable inputs used to estimate the fair value of our Level 3 investments has on the estimated fair value on our investments shown in the tables above. Due to Kayne, DCR VII, and Blackstone being carried at cost, we have excluded them from the table below. The DCR VI and RCH investments were valued using a duration of 60 months for both periods presented below.
 
 
Fair Value
 
Valuation
 
 
 
Rate
 
 
Impact
 
Technique
 
Unobservable Input
 
Adjustment
September 30, 2016
 
 
 
 
 
 
 
 
DCR VI
 
$
(65
)
 
Discounted cash flow
 
Discount rate based on D&B paydex scale
 
2.35%
RCH
 
$
(341
)
 
Discounted cash flow
 
Discount rate based on D&B paydex scale
 
7.35%
 
 
 
 
 
 
 
 
 
December 31, 2015
 
 
 
 
 
 
 
 
DCR VI
 
$
(88
)
 
Discounted cash flow
 
Discount rate based on D&B paydex scale
 
2.35%
RCH
 
$
(341
)
 
Discounted cash flow
 
Discount rate based on D&B paydex scale
 
7.35%


4)
ACQUISITIONS

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

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

17

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
September 30, 2016


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

The purchase price consisted of the following amounts:
Cash
$
48,450

Notes Payable
8,550

Accrued Liability
3,471

Total purchase price
$
60,471


The operations of Interboro and its subsidiaries are included in our Consolidated Statements of Comprehensive Income effective April 29, 2016. We have one year from the acquisition date to finalize the allocation of the purchase price of Interboro and its subsidiaries. The fair value of the net liabilities assumed, the intangible assets and the related goodwill are preliminary and may be subject to change upon completing the final valuation assessment. The preliminary purchase price allocation is as follows:
Cash and cash equivalents
$
15,610

Investments
66,440

Premium and agents' receivable
3,185

Reinsurance receivable
1,042

Intangible assets
6,241

Insurance contract asset
8,366

Goodwill
10,106

Other assets
4,971

Unpaid losses and loss adjustment expenses
(24,967
)
Unearned premiums
(26,243
)
Deferred taxes
(352
)
Other liabilities
(3,928
)
Total purchase price
$
60,471


The unaudited pro forma financial information below has been prepared as if the IIC acquisition had taken place on January 1, 2016. The unaudited pro forma information is not necessarily indicative of the results that we would have achieved had the transaction taken place on January 1, 2016, and the unaudited pro forma information does not purport to be indicative of future financial operating results.

 
For the nine months ended
 September 30, 2016
 
 
 
Pro Forma
 
 
 
As Reported
 
Adjustments
 
Pro Forma
Revenues
$
355,684

 
$
18,963

 
$
374,647

 
 
 
 
 
 
Net income
$
16,215

 
$
8,187

 
$
24,402

 
 
 
 
 
 
Diluted earnings per share
$
0.75

 
$
0.38

 
$
1.13




18

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
September 30, 2016


On February 3, 2015, we completed the acquisition of Family Security Holdings, LLC and its two wholly-owned subsidiaries. The acquisition of FSIC supports the Company's growth strategy and further strengthens the Company's overall position in the property and casualty insurance market in the states of Louisiana and Hawaii. The total purchase price paid to acquire the companies was $13,507,000 that was paid in shares of our common stock in two installments. The first payment occurred at the closing of the transaction when we issued 503,857 shares of our common stock that had a fair value of $12,994,000 on the date of the closing of the transaction. One year after the closing of the transaction, we issued an additional 32,943 shares of our common stock as payment of $513,000 of contingent consideration that we owed to the former shareholders of Family Security Holdings, LLC pursuant to the terms of the purchase agreement.

5)    EARNINGS PER SHARE

Basic earnings per share (EPS) is based on the weighted average number of common shares outstanding for the period, excluding any dilutive common share equivalents. Diluted EPS reflects the potential dilution resulting from vesting of restricted stock awards. The following table shows the computation of basic and diluted EPS for the three and nine month periods ended September 30, 2016 and September 30, 2015, respectively:

 
 
Three Months Ended September 30,
 
Nine Months Ended
September 30,
 
 
2016
 
2015
 
2016
 
2015
Numerator:
 
 
 
 
 
 
 
 
Net income attributable to common stockholders
 
$
3,423

 
$
8,083

 
$
16,215

 
$
13,556

 
 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
 
Weighted-average shares outstanding
 
21,448,892

 
21,290,759

 
21,406,599

 
21,193,825

Effect of dilutive securities
 
194,509

 
237,787

 
197,536

 
233,573

Weighted-average diluted shares
 
21,643,401

 
21,528,546

 
21,604,135

 
21,427,398

 
 
 
 
 
 
 
 
 
Basic earnings per share
 
$
0.16

 
$
0.38

 
$
0.76

 
$
0.64

Diluted earnings per share
 
$
0.16

 
$
0.38

 
$
0.75

 
$
0.63


See Note 14 for additional information on the stock grants related to dilutive securities.


6)    PROPERTY AND EQUIPMENT, NET

Property and equipment, net consists of the following:
 
 
September 30,
2016
 
December 31,
2015
Land
 
$
2,114

 
$
2,114

Building and building improvements
 
5,503

 
4,298

Computer hardware and software
 
14,468

 
13,574

Office furniture and equipment
 
2,458

 
1,831

Leasehold improvements
 

 
141

Total, at cost
 
24,543

 
21,958

Less: accumulated depreciation and amortization
 
(6,502
)
 
(4,823
)
Property and equipment, net
 
$
18,041

 
$
17,135



19

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
September 30, 2016


Depreciation and amortization expense under property and equipment was $605,000 and $446,000 for the three months ended September 30, 2016 and 2015, respectively and $1,820,000 and $897,000 for the nine months ended September 30, 2016 and 2015, respectively.


7)    REINSURANCE

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

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

During the second quarter of 2016, we placed our reinsurance program for the 2016 treaty year beginning June 1, 2016 and ending on May 31, 2017. 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 treaty year beginning June 1, 2016 and ending on May 31, 2017, UPC Insurance has obtained reinsurance protection of $1,515,197,000 excess $10,000,000 providing sufficient protection for a 1-in-100 year hurricane event and a second 1-in-50 year hurricane event in the same year as calculated using a blended model result predominately based on our licensed modeling software, AIR model version 17, using long-term event rates including demand surge. For a single first event hurricane or tropical storm, UPC Insurance will pay, or “retain”, 100% of losses up to $30,000,000 including the $20,000,000 layer funded by UPC Re. The catastrophe excess of loss reinsurance program provides our insurance subsidiaries 100% coverage for all losses in excess of $10,000,000 up to $1,415,197,000 for a first event and $1,515,197,000 for any number of subsequent events until all limit is exhausted.

For the 2016 contract year, UPC Insurance elected a 45% participation rate with the FHCF and purchased replacement coverage from private reinsurers for the remaining 45%. Of the $1,515,197,000 in excess of $10,000,000, we estimate the mandatory FHCF layer will provide approximately $354,015,000 (45% of $786,700,000) of aggregate coverage for losses in excess of $246,002,000. The private market FHCF replacement coverage provides another $346,182,000 of aggregate protection (45% of $769,293,000) in excess of $244,206,000 layer for Florida only on a fully collateralized basis that also inures to the benefit of all other private reinsurance coverage.

In addition to the FHCF and FHCF replacement coverage, we purchased $685,000,000 of aggregate catastrophe reinsurance coverage in excess of $10,000,000 from 55 unaffiliated private reinsurers and catastrophe bond investors who either carry A.M. Best financial strength ratings of A- or higher, or have fully collateralized their maximum potential obligations in dedicated trusts for the benefit of UPC Insurance. Our 2016 agreements with these private reinsurers structure coverage into 5 layers, with a cascading feature such that all layers attach at $10,000,000. 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, ensuring there are no potential gaps in coverage up to the $1,415,197,000 first event program exhaustion point. The company also secured up to $100,000,000 of limit that can be utilized at our option for second and subsequent events at an additional cost, but the Company is under no obligation to activate this layer.

The total cost of the 2016-17 catastrophe reinsurance program is estimated to be $191,500,000.


20

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
September 30, 2016


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,
 
2016
 
2015
 
2016
 
2015
Excess-of-loss
$
(476
)
 
$
1,898

 
$
(182,503
)
 
$
(163,221
)
Equipment & identity theft
(2,359
)
 
(1,723
)
 
(6,136
)
 
(4,521
)
Novation of Auto Policies (1)

 

 
(2,396
)
 

Flood
(5,006
)
 
(4,505
)
 
(12,969
)
 
(11,461
)
Ceded premiums written
$
(7,841
)
 
$
(4,330
)
 
$
(204,004
)
 
$
(179,203
)
Increase (decrease) in ceded unearned premiums
(45,458
)
 
(40,400
)
 
55,167

 
56,809

Ceded premiums earned
$
(53,299
)
 
$
(44,730
)
 
$
(148,837
)
 
$
(122,394
)
(1) Reflects ceding of auto policy premiums to Maidstone Insurance Company as part of the settlement of the novation agreement entered into at the closing of the Interboro Insurance Company transaction.

Current year catastrophe losses by the event magnitude are shown in the following table for the three and nine months ended September 30, 2016 and 2015.

 
 
2016
 
2015
 
 
Number of Events
 
Incurred Loss and LAE (1) 
 
Combined Ratio Impact
 
Number of Events
 
Incurred Loss and LAE (1) 
 
Combined Ratio Impact
Three Months Ended September 30,
 
 
 
 
 
 
 
 
 
 
 
 
Current period catastrophe losses incurred
 
 
 
 
 
 
 
 
 
 
 
 
$ 1 million to $5 million (2)
 
1

 
$
2,483

 
2.1
%
 
1

 
$
2,420

 
2.8
%
Less than $1 million (3)(4)
 
17

 
2,626

 
2.1
%
 
12

 
1,388

 
1.7
%
Total
 
18

 
$
5,109

 
4.2
%
 
13

 
$
3,808

 
4.5
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30,
 
 
 
 
 
 
 
 
 
 
 
 
Current period catastrophe losses incurred
 
 
 
 
 
 
 
 
 
 
 
 
$ 5 million to $10 million (7)
 

 
$

 
%
 
2

 
$
11,342

 
4.7
%
$ 1 million to $5 million (5)
 
9

 
16,500

 
4.9
%
 
6

 
12,275

 
5.1
%
Less than $1 million (6) (4)
 
9

 
7,385

 
2.2
%
 
5

 
1,968

 
0.8
%
Total
 
18

 
$
23,885

 
7.1
%
 
13

 
$
25,585

 
10.6
%
(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. During the third quarter of 2016, we incurred losses and LAE from three new storms, while the remainder is from the development of fifteen storms occurring during the first six months of 2016.
(2)
Reflects losses from Hurricane Hermine during the third quarter of 2016 and losses from a wind storm in 2015.
(3)
Reflects losses from Tropical Storms Colin and Julia during 2016 which were fully retained, as well as development from Texas flooding, spring and hail storms, Winter Storm Olympia, and Florida tornadoes which occurred during the first three months of 2016, all net of losses ceded to reinsurers.
(4) Reflects losses from winter storms, hail storms, Texas flooding, Hurricane Anna and Tropical Storm Bill in 2015.
(5) Reflects losses from Hurricane Hermine and Tropical Storm Colin during 2016 which were fully retained, as well as development from Texas flooding, spring and hail storms, Winter Storm Olympia, and Florida tornadoes, all net of losses ceded to reinsurers. Reflects losses from winter storms, hail storms and wind storms in 2015.
(6) Reflects losses from Tropical Storm Julia during 2016 which were fully retained, as well as development from Texas flooding and hail storms, Florida tornadoes and Louisiana flooding, all net of losses ceded to reinsurers.

21

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Consolidated Financial Statements
September 30, 2016


(7) Reflects losses from winter storms in 2015.

We collected cash recoveries under our reinsurance agreements totaling $9,747,000 and $7,608,000 for the three month periods ended September 30, 2016 and 2015, respectively, and $10,604,000 and $8,535,000 for the nine month periods ended September 30, 2016 and 2015, respectively.

Effective January 1, 2016, we entered into a new reinsurance agreement with several private reinsurers. This agreement provides coverage against accumulated losses from all catastrophe events in all states in which we operate except against those windstorms named by the National Hurricane Center. We will retain the first $15,000,000 of aggregate catastrophe losses and then transfer the next $20,000,000 of catastrophe losses in the aggregate, excluding named windstorms. The $20,000,000 of aggregate limit is intended to provide additional protection against the Company's modeled expected loss from the catastrophe perils of winter storms, severe convection storms, tornadoes and hail.
 
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 $270,000 and $239,000 for the three month periods ended September 30, 2016 and 2015, respectively and $772,000 and $721,000 for the nine month periods ended September 30, 2016 and 2015, respectively.


8)    LONG-TERM DEBT

Florida State Board of Administration Note Payable

Our long-term debt at September 30, 2016 included a note payable to the Florida State Board of Administration (SBA note). At September 30, 2016 and December 31, 2015, we owed $11,471,000 and $12,353,000, respectively, on the note and the interest rate was 1.50% and 2.05%, respectively. All other terms and conditions of the note remain as described in our 2015 Form 10-K.

The $11,471,000 SBA note requires UPC to maintain surplus as regards policyholders at or above a calculated level, which was $31,471,000 at September 30, 2016. Each quarter, we monitor the surplus as regards policyholders for both of our insurance affiliates and, for various reasons, we occasionally provide additional capital to our insurance affiliates. During the three month period ended September 30, 2016, we contributed no capital to our insurance affiliates. During the nine month period ended September 30, 2016, we contributed $11,000,000 of capital to our insurance affiliates. During the three and nine month periods ended September 30, 2015, no contributions were made to our insurance affiliates. We may make future contributions of capital to our insurance affiliates as circumstances require.

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. At September 30, 2016, UPC's net written premium to surplus ratio was 6.6:1, which is well above the 2:1 required ratio. UPC's gross written premium to surplus ratio was