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EX-32.2 - EXHIBIT 32.2 - UNITED INSURANCE HOLDINGS CORP.exh32230sep17.htm
EX-32.1 - EXHIBIT 32.1 - UNITED INSURANCE HOLDINGS CORP.exh32130sep17.htm
EX-31.2 - EXHIBIT 31.2 - UNITED INSURANCE HOLDINGS CORP.exh31230sep17.htm
EX-31.1 - EXHIBIT 31.1 - UNITED INSURANCE HOLDINGS CORP.exh31130sep17.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, 2017
Commission File Number 001-35761  
_____________________
United Insurance Holdings Corp.
(Exact name of Registrant as specified in its charter)
  _______________________
 
Delaware
 
75-3241967
 
 
(State of Incorporation)
 
(IRS Employer Identification Number)
 
800 2nd Avenue S
St. Petersburg, Florida 33701
(Address, including zip code, of principal executive offices)
727-895-7737
(Registrant's telephone number, including area code)
 _______________________

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
£
 
Accelerated filer
þ
Non-accelerated filer
£
 
Smaller reporting company
£
 
 
 
Emerging growth company
£
If an emerging growth company, indicate by check mark if the registrant has elected to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. £
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  £    No  R
As of November 8, 2017; 42,753,504 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, 2017 and for the three and nine months then ended or in documents incorporated by reference, contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements about anticipated revenues, earnings per share, estimated unpaid losses on insurance policies, investment returns and expectations about our liquidity, and our ability to meet our investment objectives and to manage and mitigate market risk with respect to our investments. These statements are based on current expectations, estimates and projections about the industry and market in which we operate, and management’s beliefs and assumptions. Without limiting the generality of the foregoing, words such as “may,” “will,” “expect,” “endeavor,” “project,” “believe,” “anticipate,” “intend,” “could,” “would,” “estimate,” or “continue” or the negative variations there of, or comparable terminology are intended to identify forward-looking statements. Forward-looking statements are not guarantees of future performance and involve certain known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. The risks and uncertainties include, without limitation:

the regulatory, economic and weather conditions in the states in which we operate;
the impact of new federal or state regulations that affect the property and casualty insurance market;
the cost, variability and availability of reinsurance;
assessments charged by various governmental agencies;
pricing competition and other initiatives by competitors;
our ability to attract and retain the services of senior management;
the outcome of litigation pending against us, including the terms of any settlements;
dependence on investment income and the composition of our investment portfolio and related market risks;
our exposure to catastrophic events and severe weather conditions;
downgrades in our financial strength ratings;
risks and uncertainties relating to our acquisitions including our ability to successfully integrate the acquired companies; and
other risks and uncertainties described in the section entitled "Risk Factors" in Part I, Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2016.

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

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

3

UNITED INSURANCE HOLDINGS CORP.


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets


September 30,
2017

December 31, 2016
ASSETS

(Unaudited)

 
Investments available for sale, at fair value:

 

 
Fixed maturities (amortized cost of $715,374 and $497,616, respectively)

$
718,785


$
494,516

Equity securities (adjusted cost of $52,845 and $24,074, respectively)

61,639


28,398

Other investments (amortized cost of $7,835 and $5,493, respectively)

8,157


5,733

Total investments

$
788,581


$
528,647

Cash and cash equivalents

280,268


150,688

Accrued investment income

5,229


3,735

Property and equipment, net
 
19,344

 
17,860

Premiums receivable, net

70,019


38,883

Reinsurance recoverable on paid and unpaid losses

489,348


24,028

Prepaid reinsurance premiums

285,121


132,564

Goodwill
 
59,679

 
14,254

Deferred policy acquisition costs

101,314


65,473

Intangible assets
 
55,109

 
12,371

Other assets

29,210


11,183

Total Assets

$
2,183,222


$
999,686

LIABILITIES AND STOCKHOLDERS' EQUITY




Liabilities:




Unpaid losses and loss adjustment expenses

$
682,161


$
140,855

Unearned premiums

577,805


372,223

Reinsurance payable

241,768


99,891

Other liabilities

127,153


91,215

Notes payable

53,119

 
54,175

Total Liabilities

$
1,682,006


$
758,359

Commitments and contingencies (Note 11)






Stockholders' Equity:




Preferred stock, $0.0001 par value; 1,000,000 shares authorized; none issued or outstanding




Common stock, $0.0001 par value; 50,000,000 shares authorized; 42,953,087 and 21,858,697 issued; 42,741,004 and 21,646,614 outstanding for 2017 and 2016, respectively

4


2

Additional paid-in capital

375,666


99,353

Treasury shares, at cost; 212,083 shares

(431
)

(431
)
Accumulated other comprehensive income

7,678


822

Retained earnings

118,299


141,581

Total Stockholders' Equity

$
501,216


$
241,327

Total Liabilities and Stockholders' Equity

$
2,183,222


$
999,686







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,


2017

2016
 
2017
 
2016
REVENUE:




 
 
 
 
Gross premiums written

$
267,219

 
$
194,341

 
$
788,408

 
$
541,053

Decrease (increase) in gross unearned premiums

782

 
(20,821
)
 
(76,758
)
 
(56,446
)
Gross premiums earned

268,001

 
173,520

 
711,650

 
484,607

Ceded premiums earned

(115,507
)
 
(53,299
)
 
(292,355
)
 
(148,837
)
Net premiums earned

152,494

 
120,221

 
419,295

 
335,770

Investment income

4,901

 
2,663

 
12,489

 
7,786

Net realized gains (losses)

(71
)
 
106

 
(554
)
 
478

Other revenue

13,804

 
4,212

 
40,604

 
11,650

Total revenue

171,128

 
127,202

 
471,834

 
355,684

EXPENSES:




 
 
 
 
Losses and loss adjustment expenses

143,127

 
72,746

 
293,398

 
199,615

Policy acquisition costs

46,546

 
31,333

 
125,302

 
84,086

Operating expenses

6,891

 
5,558

 
19,020

 
15,326

General and administrative expenses

19,316

 
12,329

 
58,825

 
31,759

Interest expense

771

 
206

 
2,282

 
397

Total expenses

216,651

 
122,172

 
498,827

 
331,183

Income (loss) before other income

(45,523
)
 
5,030

 
(26,993
)
 
24,501

Other income

36

 
11

 
94

 
80

Income (loss) before income taxes

(45,487
)
 
5,041

 
(26,899
)
 
24,581

Provision for income taxes

(17,475
)
 
1,618

 
(10,043
)
 
8,366

Net income (loss)

$
(28,012
)
 
$
3,423

 
$
(16,856
)
 
$
16,215

OTHER COMPREHENSIVE INCOME:




 
 
 
 
Change in net unrealized gains (losses) on investments

2,672

 
(3,495
)
 
10,509

 
10,305

Reclassification adjustment for net realized investment losses (gains)

71

 
(106
)
 
554

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

(1,050
)
 
1,298

 
(4,207
)
 
(3,776
)
Total comprehensive income

$
(26,319
)
 
$
1,120

 
$
(10,000
)
 
$
22,266






 
 
 
 
Weighted average shares outstanding




 
 
 
 
Basic

42,524,400

 
21,448,892

 
35,341,994

 
21,406,599

Diluted
 
42,741,004

 
21,643,401

 
35,563,032

 
21,604,135






 
 
 
 
Earnings per share




 
 
 
 
Basic

$
(0.66
)
 
$
0.16

 
$
(0.48
)
 
$
0.76

Diluted
 
$
(0.66
)
 
$
0.16

 
$
(0.47
)
 
$
0.75



 
 
 
 
 
 
 
Dividends declared per share

$
0.06

 
$
0.06

 
$
0.18

 
$
0.17






See accompanying Notes to Unaudited Consolidated Financial Statements.

5

UNITED INSURANCE HOLDINGS CORP.


Consolidated Statements of Cash Flows
(Unaudited)
 
 
Nine Months Ended
September 30,
 
 
2017
 
2016
OPERATING ACTIVITIES
 
 
 
 
Net income (loss)
 
$
(16,856
)
 
$
16,215

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
24,206

 
8,640

Bond amortization and accretion
 
3,663

 
2,621

Net realized gains (losses)
 
554

 
(478
)
Provision for uncollectable premiums/over and short
 
205

 
57

Deferred income taxes, net
 
380

 
1,575

Stock based compensation
 
1,931

 
1,429

Changes in operating assets and liabilities:
 
 
 
 
Accrued investment income
 
(183
)
 
155

Premiums receivable
 
98

 
2,260

Reinsurance recoverable on paid and unpaid losses
 
(445,090
)
 
(11,097
)
Prepaid reinsurance premiums
 
(130,013
)
 
(55,890
)
Deferred policy acquisition costs, net
 
(35,841
)
 
(18,164
)
Other assets
 
(12,354
)
 
(2,301
)
Unpaid losses and loss adjustment expenses
 
480,777

 
20,901

Unearned premiums
 
76,758

 
56,446

Reinsurance payable
 
119,471

 
59,036

Other liabilities
 
16,631

 
7,914

Net cash provided by operating activities
 
$
84,337

 
$
89,319

INVESTING ACTIVITIES
 
 
 
 
Proceeds from sales and maturities of investments available for sale
 
106,150

 
147,266

Purchases of investments available for sale
 
(136,319
)
 
(146,535
)
Cash from acquisition
 
95,284

 

Purchase of subsidiary, net of cash acquired
 

 
(32,840
)
Cost of property, equipment and capitalized software acquired
 
(4,243
)
 
(2,726
)
Net cash provided by (used in) investing activities
 
$
60,872

 
$
(34,835
)
FINANCING ACTIVITIES
 
 
 
 
Tax withholding payment related to net settlement of equity awards
 

 
(270
)
Proceeds from borrowings
 

 
5,200

Repayments of borrowings
 
(1,142
)
 
(969
)
Dividends
 
(6,426
)
 
(3,675
)
Bank overdrafts
 
(8,061
)
 

Net cash (used in) provided by financing activities
 
$
(15,629
)
 
$
286

Increase in cash
 
129,580

 
54,770

Cash and cash equivalents at beginning of period
 
150,688

 
84,786

Cash and cash equivalents at end of period
 
$
280,268

 
$
139,556

Supplemental Cash Flows Information
 
 
 
 
Interest paid
 
$
2,001

 
$
201

Income taxes paid
 
$
4,206

 
$
7,199

Non-cash transactions
 
 
 
 
Issuance of common stock in connection with acquisition
 
$
274,384

 
$


See accompanying Notes to Unaudited Consolidated Financial Statements.

6

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




1)    ORGANIZATION, CONSOLIDATION AND PRESENTATION

(a)Business

United Insurance Holdings Corp. (referred to in this document as we, our, us, the Company or UPC Insurance) is a property and casualty insurance holding company that sources, writes, and services residential and commercial property and casualty insurance policies using a network of agents and four wholly owned insurance subsidiaries. Our primary insurance subsidiary is United Property & Casualty Insurance Company (UPC), which was formed in Florida in 1999 and has operated continuously since that time. Our other subsidiaries include United Insurance Management, L.C. (UIM), (our managing general agent) that manages substantially all aspects of UPC's business; Skyway Claims Services, LLC (our claims adjusting affiliate) that provides services to our insurance affiliates; UPC Re (our reinsurance affiliate) that provides a portion of the reinsurance protection purchased by our insurance affiliates, Family Security Holdings, LLC (FSH), Family Security Insurance Company, Inc. (FSIC), Interboro Insurance Company (IIC), AmCo Holding Company (AmCo), American Coastal Insurance Company (ACIC) and BlueLine Cayman Holdings (BLUE).
 
On April 29, 2016, we acquired IIC via merger. On April 3, 2017, we merged with AmCo and its two wholly owned subsidiaries, ACIC and BLUE. See Note 4 in our Notes to Unaudited Consolidated Financial Statements for additional information regarding these acquisitions.

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

We conduct our operations under one business segment.

(b)Consolidation and Presentation

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

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

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

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

Management believes our unaudited consolidated interim financial statements include all the normal recurring adjustments necessary to fairly present our Unaudited Consolidated Balance Sheet as of September 30, 2017, our Unaudited Consolidated Statements of Comprehensive Income and our Unaudited Consolidated Statements of Cash Flows for all periods presented.

7

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



Our unaudited consolidated interim financial statements and footnotes should be read in conjunction with our consolidated financial statements and footnotes in our Annual Report filed on Form 10-K for the year ended December 31, 2016.


2)    SIGNIFICANT ACCOUNTING POLICIES

(a) Changes to significant accounting policies

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

(b) Fair value assumptions

The carrying amounts for the following financial instrument categories approximate their fair values at September 30, 2017 and December 31, 2016, because of their short-term nature: cash and cash equivalents, accrued investment income, premiums receivable, reinsurance recoverable, reinsurance payable, other assets, and other liabilities. The carrying amount of the notes payable to the Florida State Board of Administration, the Branch Banking & Trust Corporation (BB&T) and the senior notes payable approximate fair value as the interest rates are variable. The carrying amount of our note payable with Interboro, LLC approximates fair value due to the short-term nature of the loan.

(c) Recently Adopted Accounting Pronouncements

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 was intended to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 became effective for annual periods beginning after December 15, 2016. The new guidance did not impact the way in which we account for share-based payment transactions and therefore, the adoption as of January 1, 2017 had no impact on our results of operations or financial position.

(d) Pending Accounting Pronouncements

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

In May 2017, the FASB issued Accounting Standards Update (ASU) No. 2017-09, Compensation-Stock Compensation (Topic 718)-Scope of Modification Accounting (ASU 2017-09). This update provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. ASU 2017-09 is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods, with early adoption permitted for certain requirements. We do not intend to early adopt and are assessing the impact of adopting this new accounting standard on our consolidated financial statements and related disclosures.

In January 2017, the FASB issued Accounting Standards Update (ASU) No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (ASU 2017-04). This update simplifies the manner in which an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. ASU 2017-07 is effective for annual periods beginning after December 15, 2019, including interim periods within those annual periods, with early adoption permitted for certain requirements. We do not intend to early adopt and are assessing the impact of adopting this new accounting standard on our consolidated financial statements and related disclosures.

In May 2014, the FASB issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09). Insurance contracts are excluded from the scope of this guidance. Under the standard, guidance is provided on revenue recognition for entities that enter into contracts with customers to transfer goods or services or enter into contracts for the transfer of nonfinancial assets. The transaction price is attributed to underlying performance obligations in the contract and revenue is recognized as the entity satisfies the performance obligation and transfers control of the good or service to the customer. ASU 2014-09 is effective beginning in the first quarter of 2018, with early adoption permitted. We do not intend to early adopt and note that the standard is not applicable to our insurance contracts. We do not believe that the adoption

8

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



of this new accounting standard will have a material impact on our consolidated financial statements and related disclosures.

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, 2017 and December 31, 2016:

 
Cost or Adjusted/Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
September 30, 2017
 
 
 
 
 
 
 
U.S. government and agency securities
$
204,132

 
$
618

 
$
1,294

 
$
203,456

Foreign government
2,025

 
32

 

 
2,057

States, municipalities and political subdivisions
194,327

 
2,249

 
429

 
196,147

Public utilities
19,601

 
205

 
51

 
19,755

Corporate securities
277,481

 
2,692

 
580

 
279,593

Asset backed securities
16,711

 
11

 
8

 
16,714

Redeemable preferred stocks
1,097

 
29

 
63

 
1,063

Total fixed maturities
715,374

 
5,836

 
2,425

 
718,785

Mutual funds
28,949

 
858

 

 
29,807

Public utilities
1,342

 
300

 

 
1,642

Other common stocks
19,804

 
7,790

 
149

 
27,445

Non-redeemable preferred stocks
2,750

 
56

 
61

 
2,745

Total equity securities
52,845

 
9,004

 
210

 
61,639

Other long-term investments
7,835

 
322

 

 
8,157

Total investments
$
776,054

 
$
15,162

 
$
2,635

 
$
788,581

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

 
$
189

 
$
1,893

 
$
149,952

Foreign government
2,031

 
30

 

 
2,061

States, municipalities and political subdivisions
170,636

 
1,027

 
2,551

 
169,112

Public utilities
7,687

 
116

 
73

 
7,730

Corporate securities
164,424

 
1,238

 
1,126

 
164,536

Redeemable preferred stocks
1,182

 
5

 
62

 
1,125

Total fixed maturities
497,616

 
2,605

 
5,705

 
494,516

Public utilities
1,343

 
164

 

 
1,507

Other common stocks
19,815

 
4,552

 
319

 
24,048

Non-redeemable preferred stocks
2,916

 
10

 
83

 
2,843

Total equity securities
24,074

 
4,726

 
402

 
28,398

Other long-term investments
5,493

 
267

 
27

 
5,733

Total investments
$
527,183

 
$
7,598

 
$
6,134

 
$
528,647



9

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



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

 
2017
 
2016
 
Gains
(Losses)
 
Fair Value at Sale
 
Gains
(Losses)
 
Fair Value at Sale
Three Months Ended September 30,
 
 
 
 
 
 
 
Fixed maturities
$
123

 
$
11,368

 
$
508

 
$
11,009

Equity securities
1

 
156

 

 

Total realized gains
124

 
11,524

 
508

 
11,009

Fixed maturities
(195
)
 
10,517

 
(396
)
 
7,635

Equity securities

 

 
(6
)
 
17

Total realized losses
(195
)
 
10,517

 
(402
)
 
7,652

Net realized investment gains (losses)
$
(71
)
 
$
22,041

 
$
106

 
$
18,661

 
 
 
 
 
 
 
 
Nine Months Ended September 30,
 
 
 
 
 
 
 
Fixed maturities
$
263

 
$
30,264

 
$
1,806

 
$
47,391

Equity securities
8

 
175

 
24

 
10,769

Total realized gains
271

 
30,439

 
1,830

 
58,160

Fixed maturities
(815
)
 
47,913

 
(1,170
)
 
20,663

Equity securities
(10
)
 
100

 
(182
)
 
17,025

Total realized losses
(825
)
 
48,013

 
(1,352
)
 
37,688

Net realized investment gains (losses)
$
(554
)
 
$
78,452

 
$
478

 
$
95,848


The table below summarizes our fixed maturities at September 30, 2017 by contractual maturity periods. Actual results may differ, as issuers may have the right to call or prepay obligations, with or without penalties, prior to the contractual maturities of those obligations.

 
September 30, 2017
 
Cost or Amortized Cost
 
Percent of Total
 
Fair Value
 
Percent of Total
Due in one year or less
$
50,426

 
7.0
%
 
$
50,362

 
7.0
%
Due after one year through five years
332,620

 
46.5
%
 
334,135

 
46.5
%
Due after five years through ten years
192,314

 
26.9
%
 
194,266

 
27.0
%
Due after ten years
17,043

 
2.4
%
 
17,089

 
2.4
%
Asset and mortgage backed securities
122,971

 
17.2
%
 
122,933

 
17.1
%
Total
$
715,374

 
100.0
%
 
$
718,785

 
100.0
%


10

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



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

 
Three Months Ended September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Fixed maturities
$
4,111

 
$
2,251

 
$
10,696

 
$
6,693

Equity securities
375

 
259

 
940

 
726

Cash and cash equivalents
285

 
38

 
445

 
87

Other investments
124

 
110

 
385

 
266

Other assets
6

 
5

 
23

 
14

Investment income
4,901

 
2,663

 
12,489

 
7,786

Investment expenses
(213
)
 
(155
)
 
(482
)
 
(360
)
Net investment income
$
4,688

 
$
2,508

 
$
12,007

 
$
7,426


Portfolio monitoring

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

For each fixed income security in an unrealized loss position, we determine if the loss is temporary or other-than-temporary. If our management decides to sell the security or determines that it is more likely than not that we will be required to sell the security before recovery of the cost or amortized cost basis for reasons such as liquidity needs, contractual or regulatory requirements, then the security's decline in fair value is considered other-than-temporary and is recorded in earnings.

If we have not made the decision to sell the fixed income security and it is more likely than not that we will be required to sell the fixed income security before recovery of its amortized cost basis, we evaluate whether we expect the security to receive cash flows sufficient to recover the entire cost or amortized cost basis of the security. We calculate the estimated recovery value by discounting the best estimate of future cash flows at the security's original or current effective rate, as appropriate, and compare this to the cost or amortized cost of the security. If we do not expect to receive cash flows sufficient to recover the entire cost or amortized cost basis of the fixed income security, the credit loss component of the impairment is recorded in earnings, with the remaining amount of the unrealized loss related to other factors recognized in other comprehensive income.

For equity securities, we consider various factors, including whether we have the intent and ability to hold the equity security for a period of time sufficient to recover its cost basis. If we lack the intent or 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 information relevant to the collectability or recovery of the security that is reasonably available. Inherent in our evaluation of other-than-temporary impairment for these fixed income 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, 2017



The following table presents an aging of our unrealized investment losses by investment class:
 
 
Less Than Twelve Months
 
Twelve Months or More
 
Number of Securities(1)
 
Gross Unrealized Losses
 
Fair Value
 
Number of Securities(1)
 
Gross Unrealized Losses
 
Fair Value
September 30, 2017
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency securities
147

 
$
741

 
$
81,333

 
57

 
$
553

 
$
36,900

States, municipalities and political subdivisions
62

 
274

 
50,719

 
23

 
155

 
16,625

Public utilities
9

 
24

 
3,966

 
4

 
27

 
625

Corporate securities
152

 
515

 
77,334

 
21

 
65

 
3,531

Asset backed securities
16

 
8

 
10,367

 

 

 

Redeemable preferred stocks

 

 

 
3

 
63

 
308

Total fixed maturities
386

 
1,562

 
223,719

 
108

 
863

 
57,989

Other common stocks
9

 
87

 
765

 
4

 
62

 
429

Non-redeemable preferred stocks
5

 
6

 
347

 
6

 
55

 
877

Total equity securities
14

 
93

 
1,112

 
10

 
117

 
1,306

Total
400

 
$
1,655

 
$
224,831

 
118

 
$
980

 
$
59,295

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

 
$
1,893

 
$
111,216

 

 
$

 
$

States, municipalities and political subdivisions
201

 
2,551

 
136,360

 

 

 

Public utilities
8

 
73

 
2,222

 

 

 

Corporate securities
215

 
1,100

 
88,605

 
1

 
26

 
1,021

Redeemable preferred stocks
7

 
62

 
764

 

 

 

Total fixed maturities
617

 
5,679

 
339,167

 
1

 
26

 
1,021

Other common stocks
16

 
140

 
2,450

 
17

 
179

 
1,732

Non-redeemable preferred stocks
12

 
52

 
1,830

 
7

 
31

 
369

Total equity securities
28

 
192

 
4,280

 
24

 
210

 
2,101

Other long-term investments
1

 
27

 
987

 

 

 

Total
646

 
$
5,898

 
$
344,434

 
25

 
$
236

 
$
3,122

(1) This amount represents the actual number of discrete securities, not the number of shares or units of those securities. The numbers are not presented in thousands.

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

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


12

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



Fair value measurement

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

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

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

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

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

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

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



13

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



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

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

 
Total
 
Level 1
 
Level 2
 
Level 3
September 30, 2017
 
 
 
 
 
 
 
U.S. government and agency securities
$
203,456

 
$

 
$
203,456

 
$

Foreign government
2,057

 

 
2,057

 

States, municipalities and political subdivisions
196,147

 

 
196,147

 

Public utilities
19,755

 

 
19,755

 

Corporate securities
279,593

 

 
279,593

 

Asset backed securities
16,714

 

 
16,714

 

Redeemable preferred stocks
1,063

 
1,063

 

 

Total fixed maturities
718,785

 
1,063

 
717,722

 

Mutual funds
29,807

 
29,807

 

 

Public utilities
1,642

 
1,642

 

 

Other common stocks
27,445

 
27,445

 

 

Non-redeemable preferred stocks
2,745

 
2,745

 

 

Total equity securities
61,639

 
61,639

 

 

Other long-term investments
8,157

 
300

 
7,173

 
684

Total investments
$
788,581

 
$
63,002

 
$
724,895

 
$
684

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

 
$

 
$
149,952

 
$

Foreign government
2,061

 

 
2,061

 

States, municipalities and political subdivisions
169,112

 

 
169,112

 

Public utilities
7,730

 

 
7,730

 

Corporate securities
164,536

 

 
164,536

 

Redeemable preferred stocks
1,125

 
1,125

 

 

Total fixed maturities
494,516

 
1,125

 
493,391

 

Public utilities
1,507

 
1,507

 

 

Other common stocks
24,048

 
24,048

 

 

Non-redeemable preferred stocks
2,843

 
2,843

 

 

Total equity securities
28,398

 
28,398

 

 

Other long-term investments
5,733

 
300

 
3,735

 
1,698

Total investments
$
528,647

 
$
29,823

 
$
497,126

 
$
1,698





14

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



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

Transfers in
 

Transfers out
 
(990
)
Partnership income
 
35

Return of capital
 
(141
)
Unrealized gains in accumulated other comprehensive income
 
82

September 30, 2017
 
$
684



We are responsible for the determination of fair value and the supporting assumptions and methodologies. We have implemented a system of processes and controls designed to provide assurance that our assets and liabilities are appropriately valued. For fair values received from third parties, our processes are designed to provide assurance that the valuation methodologies and inputs are appropriate and consistently applied, the assumptions are reasonable and consistent with the objective of determining fair value, and the fair values are accurately recorded.

At the end of each quarter, we determine whether we need to transfer the fair values of any securities between levels of the fair value hierarchy and, if so, we report the transfer as of the end of the quarter. During the first nine months of 2017, we transferred one investment from a Level 3 to a Level 2 investment, due to changes in the availability of market observable inputs. We used unobservable inputs to derive our estimated fair value for Level 3 investments, and the unobservable inputs are significant to the overall fair value measurement.

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


15

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



Other investments

We acquired investments in limited partnerships, recorded in the other investments line of our Unaudited Consolidated Balance Sheets, that are currently being accounted for at fair value utilizing a discounted cash flow methodology. The estimated fair value of our investments in the limited partnership interests was $7,857,000. We have fully funded our investments in DCR Mortgage Partners VI, L.P. (DCR VI) and DCR Mortgage Partners VII, L.P. (DCR VII); however, we are still obligated to fund an additional $316,000, $802,000, and $495,000 for our investments in Kayne Anderson Senior Credit Fund II, L.P. (Kayne II), Kayne Anderson Senior Credit Fund III, L.P. (Kayne III), and Blackstone Alternative Solutions 2015 Trust (Blackstone), respectively. The information presented in the table below is as of September 30, 2017.

 
 
Initial Investment
 
Book Value
 
Unrealized Gain
 
Unrealized Loss
 
Fair Value
DCR Mortgage Partners VI, L.P.
 
$
301

 
$
362

 
$
322

 
$

 
$
684

         Total Level 3 limited partnership investments
 
301

 
362

 
322

 

 
684

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

 
4,056

 

 

 
4,056

Kayne Senior Credit Fund II, L.P.
 
1,684

 
1,444

 

 

 
1,444

Kayne Senior Credit Fund III, L.P.
 
1,198

 
1,198

 

 

 
1,198

Blackstone Alternative Solutions 2015 Trust
 
505

 
475

 

 

 
475

         Total Level 2 limited partnership investments
 
7,387

 
7,173

 

 

 
7,173

Total limited partnership investments
 
$
7,688

 
$
7,535

 
$
322

 
$

 
$
7,857

Other short-term investments
 
300

 
300

 

 

 
300

Total other investments
 
$
7,988

 
$
7,835

 
$
322

 
$

 
$
8,157


The following table summarizes the quantitative impact that the significant unobservable inputs used to estimate the fair value of our Level 3 investment has on the estimated fair value on our investment shown in the tables above. Due to Kayne II, Kayne III, DCR VII, and Blackstone being carried at cost, we have excluded them from the table below. The DCR VI investment was valued using a duration of 60 months for both periods presented below.
 
 
Fair Value
 
Valuation
 
 
 
Rate
 
 
Impact
 
Technique
 
Unobservable Input
 
Adjustment
September 30, 2017
 
 
 
 
 
 
 
 
DCR VI
 
$
(44
)
 
Discounted cash flow
 
Discount rate based on D&B paydex scale
 
2.35%
 
 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
 
DCR VI
 
$
(56
)
 
Discounted cash flow
 
Discount rate based on D&B paydex scale
 
2.35%
RCH
 
$
(341
)
 
Discounted cash flow
 
Discount rate based on D&B paydex scale
 
7.35%


4)
ACQUISITIONS AND MERGERS

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







16

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



AmCo Holding Company

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

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

Cash and cash equivalents
$
95,284

Investments
222,920

Premium and agents' receivable
31,439

Reinsurance recoverable
20,230

Prepaid reinsurance premiums
22,544

Intangible assets
30,286

Insurance contract asset
33,812

Goodwill
46,109

Other assets
25,932

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


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

 
Nine Months Ended September 30,
 
2017
 
2016
 
As
 
Pro Forma
 
 
 
As
 
Pro Forma
 
 
 
Reported
 
Adjustments
 
Pro Forma
 
Reported
 
Adjustments
 
Pro Forma
Revenues
$
471,834

 
$
38,096

 
$
509,930

 
$
355,684

 
$
135,087

 
$
490,771

 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
$
(16,856
)
 
$
6,712

 
$
(10,144
)
 
$
16,215

 
$
30,187

 
$
46,402

 
 
 
 
 
 
 
 
 
 
 
 
Diluted earnings per share
$
(0.47
)
 
$

 
$
(0.24
)
 
$
0.75

 
$

 
$
1.09


Interboro Insurance Company

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

17

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



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

The operations of IIC are included in our Unaudited Consolidated Statements of Comprehensive Income effective April 29, 2016. The final purchase price allocation is as follows:

Cash and cash equivalents
$
15,554

Investments
66,527

Premium and agents' receivable
3,186

Reinsurance receivable
1,042

Intangible assets
5,877

Insurance contract asset
8,334

Goodwill
10,157

Other assets
3,980

Deferred taxes
575

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



5)    EARNINGS PER SHARE

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

 
 
Three Months Ended September 30,
 
Nine Months Ended
September 30,
 
 
2017
 
2016
 
2017
 
2016
Numerator:
 
 
 
 
 
 
 
 
Net income (loss) attributable to common stockholders
 
$
(28,012
)
 
$
3,423

 
$
(16,856
)
 
$
16,215

 
 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
 
Weighted-average shares outstanding
 
42,524,400

 
21,448,892

 
35,341,994

 
21,406,599

Effect of dilutive securities
 
216,604

 
194,509

 
221,038

 
197,536

Weighted-average diluted shares
 
42,741,004

 
21,643,401

 
35,563,032

 
21,604,135

 
 
 
 
 
 
 
 
 
Basic earnings per share
 
$
(0.66
)
 
$
0.16

 
$
(0.48
)
 
$
0.76

Diluted earnings per share
 
$
(0.66
)
 
$
0.16

 
$
(0.47
)
 
$
0.75


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





18

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



6)    PROPERTY AND EQUIPMENT, NET

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

 
$
2,114

Building and building improvements
 
5,502

 
5,502

Computer hardware and software
 
18,346

 
14,699

Office furniture and equipment
 
3,248

 
2,652

Total, at cost
 
29,210

 
24,967

Less: accumulated depreciation and amortization
 
(9,866
)
 
(7,107
)
Property and equipment, net
 
$
19,344

 
$
17,860


Depreciation and amortization expense under property and equipment was $723,000 and $605,000 for the three months ended September 30, 2017 and 2016, respectively, and $2,759,000 and $1,820,000 for the nine months ended September 30, 2017 and 2016, respectively.


7) GOODWILL AND INTANGIBLE ASSETS

Goodwill

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

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

 
$
3,413

Acquisitions
 
46,109

 
10,841

Adjustments to finalize purchase price allocation
 
(684
)
 

Impairment
 

 

Balance at end of period
 
$
59,679

 
$
14,254


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

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


Intangible Assets

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


19

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



 
 
September 30, 2017
 
December 31, 2016
Intangible assets subject to amortization
 
$
51,554

 
$
9,064

Indefinite-lived intangible assets(1)
 
3,555

 
3,307

Total
 
$
55,109

 
$
12,371

(1) Indefinite-lived intangible assets are comprised of state insurance and agent licenses, as well as perpetual software licenses.


Intangible assets subject to amortization consisted of the following:
 
 
Weighted-average remaining amortization period (in years)
 
Gross carrying amount
 
Accumulated amortization
 
Net carrying amount
September 30, 2017
 
 
 
 
 
 
 
 
Value of Business Acquired
 
0.5
 
$
42,788

 
$
(25,882
)
 
$
16,906

Agency agreements acquired
 
8.2
 
34,661

 
(5,546
)
 
29,115

Trade names acquired
 
6.2
 
6,381

 
(848
)
 
5,533

Total
 
 
 
$
83,830

 
$
(32,276
)
 
$
51,554

 
 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
 
Value of Business Acquired
 
0.3
 
$
8,975

 
$
(7,867
)
 
$
1,108

Agency agreements acquired
 
3.8
 
10,284

 
(2,784
)
 
7,500

Trade names acquired
 
2.1
 
720

 
(264
)
 
456

Total
 
 
 
$
19,979

 
$
(10,915
)
 
$
9,064


No impairment in the value of amortizing or non-amortizing intangible assets was recognized during the three and nine months ended September 30, 2017 and September 30, 2016.
Amortization expense of our intangible assets was $9,839,000 and $21,361,000 for the three and nine months ended September 30, 2017, respectively. Amortization expense of our intangible assets was $3,439,000 and $6,791,000 for the three and nine months ended September 30, 2016, respectively.
Estimated amortization expense of our intangible assets to be recognized by the Company over the next five years is as follows:
Year ending December 31,
 
Estimated Amortization Expense
Remaining 2017
 
$
11,818

2018
 
13,920

2019
 
5,355

2020
 
4,267

2021
 
3,555

2022
 
3,246



20

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



8)    REINSURANCE

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

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

Effective June 1, 2017, UPC Insurance, through our wholly owned insurance subsidiaries UPC, ACIC, FSIC and IIC, entered into reinsurance agreements with several private reinsurers and with the Florida State Board of Administration (SBA), which administers the Florida Hurricane Catastrophe Fund (FHCF). These agreements provide coverage for catastrophe losses from named or numbered windstorms and earthquakes in all states UPC operates except for the FHCF agreement which only provides coverage in Florida against storms that the National Hurricane Center designates as hurricanes.

Highlights of the coverage embedded these contracts include:
More frequency and severity protection than in any prior year, with an overall program exhaustion point of $2,747,500,000;
Sufficient coverage for a single 1-in-400 year event (AIR Touchstone v3.1 Standard Event Set);
Sufficient coverage for a 1-in-100 year event followed by a 1-in-50 year event in the same season;