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EX-32.2 - EXHIBIT 32.2 - UNITED INSURANCE HOLDINGS CORP.exh32230sep18.htm
EX-32.1 - EXHIBIT 32.1 - UNITED INSURANCE HOLDINGS CORP.exh32130sep18.htm
EX-31.2 - EXHIBIT 31.2 - UNITED INSURANCE HOLDINGS CORP.exh31230sep18.htm
EX-31.1 - EXHIBIT 31.1 - UNITED INSURANCE HOLDINGS CORP.exh31130sep18.htm
EX-10.3 - EXHIBIT 10.3 PERFORMANCE STOCK UNIT AWARD - UNITED INSURANCE HOLDINGS CORP.exh10330sep18.htm
EX-10.2 - EXHIBIT 10.2 RESTRICTED STOCK UNIT AWARD - UNITED INSURANCE HOLDINGS CORP.exh10230sep18.htm
EX-10.1 - EXHIBIT 10.1 STOCK OPTION AWARD - UNITED INSURANCE HOLDINGS CORP.exh10130sep18.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, 2018
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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  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 2, 2018, 42,984,578 shares of common stock, par value $0.0001 per share, were outstanding.

 


UNITED INSURANCE HOLDINGS CORP.



PART I. FINANCIAL INFORMATION
 
 
Item 1. Financial Statements
 
    Unaudited Condensed Consolidated Balance Sheets
 
    Unaudited Condensed Consolidated Statements of Comprehensive Income
 
    Unaudited Condensed Consolidated Statements of Stockholders' Equity
 
    Unaudited Condensed Consolidated Statements of Cash Flows
 
    Notes to Unaudited Condensed 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 Quarterly Report on Form 10-Q (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 Form 10-Q, we show full values rounded to the nearest thousand.

2

UNITED INSURANCE HOLDINGS CORP.



FORWARD-LOOKING STATEMENTS

Statements in this Form 10-Q contain “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, gross written premium, earnings per share, estimated unpaid losses on insurance policies, investment returns, and diversification and expectations about our liquidity, our ability to meet our investment objectives and to manage and mitigate market risk with respect to our investments. Without limiting the generality of the foregoing, words such as “may,” “will,” “expect,” “endeavor,” “project,” “believe,” "plan," “anticipate,” “intend,” “could,” “would,” “estimate,” or “continue” or the negative variations thereof or comparable terminology are intended to identify forward-looking statements. These statements are based on current expectations, estimates and projections about the industry and market in which we operate, and management's beliefs and assumptions. Forward-looking statements are not guarantees of future performance and involve certain known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. The risks and uncertainties include, without limitation:

our exposure to catastrophic events and severe weather conditions;
the regulatory, economic and weather conditions present in Florida, the state in which we are most concentrated;
the effectiveness of our diversification strategy;
our ability to cultivate and maintain agent relationships, particularly our relationship with AmRisc, LLC (AmRisc);
the possibility that actual claims incurred may exceed our loss reserves for claims;
assessments charged by various governmental agencies;
our ability to implement and maintain adequate internal controls over financial reporting;
our ability to maintain adequate technology, data security, and outsourcing relationships;
our reliance on key vendor relationships, and the ability of our vendors to protect the personal information of our customers;
our ability to attract and retain the services of senior management;
risks and uncertainties relating to our acquisitions, including our ability to successfully integrate the acquired companies:
our ability to increase or maintain our market share;
changes in the regulatory environment present in the states in which we operate;
the impact of new federal or state regulations that affect the property and casualty insurance market;
the cost, variability and availability of reinsurance;
our ability to collect from our reinsurers on our reinsurance claims;
dependence on investment income and the composition of our investment portfolio and related market risks;
the possibility of the pricing and terms for our products to decline due to the historically cyclical nature of the property and casualty insurance and reinsurance industry;
the outcome of litigation pending against us, including the terms of any settlements;
downgrades in our financial strength ratings;
the impact of future sales of substantial amounts of our common stock by us to our existing stockholders on our stock price;
our ability to pay dividends in the future;
the ability of R. Daniel Peed and his affiliates to exert significant control over us due to substantial ownership of our common stock, subject to certain restrictive covenants that may restrict our ability to pursue certain opportunities;
the ability of others to obtain control of us due to provisions in our charter documents; 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, 2017.

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.

3

UNITED INSURANCE HOLDINGS CORP.


PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited)


September 30,
2018

December 31, 2017
ASSETS



 
Investments, at fair value:

 

 
Fixed maturities, available-for-sale (amortized cost of $854,640 and $763,434, respectively)

$
836,390


$
762,855

Equity securities

93,092


63,295

Other investments (amortized cost of $8,069 and $8,057, respectively)

8,330


8,381

   Portfolio loans
 

 
20,000

Total investments

$
937,812


$
854,531

  Cash and cash equivalents

240,950


229,556

Restricted cash
 
65,131

 
46,719

Total cash, cash equivalents and restricted cash
 
$
306,081

 
$
276,275

Accrued investment income

5,771


5,577

Property and equipment, net
 
16,583

 
17,291

Premiums receivable, net

78,417


75,275

Reinsurance recoverable on paid and unpaid losses

433,554


395,774

Prepaid reinsurance premiums

319,916


201,904

Goodwill
 
73,045

 
73,045

Deferred policy acquisition costs

105,764


103,882

Intangible assets
 
32,716

 
45,271

Other assets

12,570


11,096

Total Assets

$
2,322,229


$
2,059,921

LIABILITIES AND STOCKHOLDERS' EQUITY




Liabilities:




Unpaid losses and loss adjustment expenses

$
528,842


$
482,232

Unearned premiums

643,540


555,873

Reinsurance payable

297,173


149,117

Payments outstanding
 
50,789

 
41,786

Accounts payable and accrued expenses
 
52,100

 
46,594

Other liabilities

40,199


85,830

Notes payable

160,708

 
161,364

Total Liabilities

$
1,773,351


$
1,522,796

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; 43,034,270 and 42,965,137 issued, respectively; 42,910,579 and 42,753,054 outstanding, respectively

4


4

Additional paid-in capital

388,820


387,145

Treasury shares, at cost: 212,083 shares

(431
)

(431
)
Accumulated other comprehensive income (loss)

(13,702
)

9,221

Retained earnings

154,186


141,186

Total shareholders' equity attributable to United Insurance Holdings Corp. (UIHC) shareholders
 
$
528,877

 
$
537,125

Noncontrolling interests (NCI)
 
20,001

 

Total Stockholders' Equity

$
548,878


$
537,125

Total Liabilities and Stockholders' Equity

$
2,322,229


$
2,059,921

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

4

UNITED INSURANCE HOLDINGS CORP.


Condensed Consolidated Statements of Comprehensive Income
(Unaudited)


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


2018

2017
 
2018
 
2017
REVENUE:




 
 
 
 
Gross premiums written

$
295,935

 
$
267,219

 
$
960,214

 
$
788,408

Change in gross unearned premiums

8,021

 
782

 
(87,667
)
 
(76,758
)
Gross premiums earned

303,956

 
268,001

 
872,547

 
711,650

Ceded premiums earned

(132,626
)
 
(115,507
)
 
(365,011
)
 
(292,355
)
Net premiums earned

171,330

 
152,494

 
507,536

 
419,295

Investment income

6,888

 
4,901

 
19,665

 
12,489

Net realized investment losses

(447
)
 
(71
)
 
(674
)
 
(554
)
Net unrealized gains on equity securities

6,109

 

 
5,046

 

Other revenue

3,772

 
13,804

 
11,280

 
40,604

Total revenue

187,652

 
171,128

 
542,853

 
471,834

EXPENSES:




 
 
 
 
Losses and loss adjustment expenses

120,552

 
143,127

 
286,393

 
293,398

Policy acquisition costs

54,200

 
46,546

 
153,716

 
125,302

Operating expenses

10,976

 
6,891

 
28,976

 
19,020

General and administrative expenses

15,358

 
19,316

 
51,326

 
58,825

Interest expense

2,455

 
771

 
7,371

 
2,282

Total expenses

203,541

 
216,651

 
527,782

 
498,827

Income (loss) before other income

(15,889
)
 
(45,523
)
 
15,071

 
(26,993
)
Other income

19

 
36

 
106

 
94

Income (loss) before income taxes

(15,870
)
 
(45,487
)
 
15,177

 
(26,899
)
Provision for income taxes

(4,163
)
 
(17,475
)
 
3,815

 
(10,043
)
Net income (loss)

$
(11,707
)
 
$
(28,012
)
 
$
11,362

 
$
(16,856
)
Less: Net income attributable to noncontrolling interests
 
$
1

 
$

 
$
1

 
$

Net income (loss) attributable to UIHC
 
$
(11,708
)
 
$
(28,012
)
 
$
11,361

 
$
(16,856
)
OTHER COMPREHENSIVE INCOME:




 
 
 
 
Change in net unrealized gains (losses) on investments

(3,354
)
 
2,672

 
(30,706
)
 
10,509

Reclassification adjustment for net realized investment losses

447

 
71

 
674

 
554

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

699

 
(1,050
)
 
7,110

 
(4,207
)
Total comprehensive loss

$
(13,915
)
 
$
(26,319
)
 
$
(11,560
)
 
$
(10,000
)
Less: Comprehensive income attributable to NCI
 
1

 

 
1

 

Comprehensive loss attributable to UIHC

$
(13,916
)

$
(26,319
)
 
$
(11,561
)
 
$
(10,000
)
 
 
 
 
 
 
 
 
 
Weighted average shares outstanding




 
 
 
 
Basic

42,677,893

 
42,524,400

 
42,636,515

 
35,341,994

Diluted
 
42,677,893

 
42,741,004

 
42,791,208

 
35,563,032






 
 
 
 
Earnings available to UIHC common shareholders per share




 
 
 
 
Basic

$
(0.27
)
 
$
(0.66
)
 
$
0.27

 
$
(0.48
)
Diluted
 
$
(0.27
)
 
$
(0.66
)
 
$
0.27

 
$
(0.47
)


 
 
 
 
 
 
 
Dividends declared per share

$
0.06

 
$
0.06

 
$
0.18

 
$
0.18

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

5

UNITED INSURANCE HOLDINGS CORP.



Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)
 
Common Stock
 
Additional Paid-in Capital
 
Treasury Stock
 
Accumulated Other Comprehensive Income (loss)
 
Retained Earnings
 
Stockholders' Equity Attributable to UIHC
 
NCI
 
Total Stockholders’ Equity
 
Number of Shares
 
Dollars
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
21,646,614

 
2

 
99,353

 
(431
)
 
822

 
141,581

 
241,327

 

 
241,327

Net income

 

 

 

 

 
(16,856
)
 
(16,856
)
 

 
(16,856
)
Other comprehensive income


 

 

 

 
6,856

 

 
6,856

 

 
6,856

Stock Compensation
138,035

 

 
1,931

 

 

 

 
1,931

 

 
1,931

Issuance of common stock
20,956,355

 
2

 
274,382

 

 

 

 
274,384

 

 
274,384

Cash dividends on common stock

 

 

 

 

 
(6,426
)
 
(6,426
)
 

 
(6,426
)
September 30, 2017
42,741,004

 
$
4

 
$
375,666

 
$
(431
)
 
$
7,678

 
$
118,299

 
$
501,216

 
$

 
$
501,216

 
Common Stock
 
Additional Paid-in Capital
 
Treasury Stock
 
Accumulated Other Comprehensive Income (loss)
 
Retained Earnings
 
Stockholders' Equity Attributable to UIHC
 
NCI
 
Total Stockholders’ Equity
 
Number of Shares
 
Dollars
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
42,753,054

 
4

 
387,145

 
(431
)
 
9,221

 
141,186

 
537,125

 

 
537,125

Net income

 

 

 

 

 
11,361

 
11,361

 
1

 
11,362

Other comprehensive income


 

 

 

 
(22,923
)
 

 
(22,923
)
 

 
(22,923
)
Reclassification due to adoption of ASU 2016-01

 

 

 

 

 
9,338

 
9,338

 

 
9,338

Stock Compensation
157,525

 

 
1,675

 

 

 

 
1,675

 

 
1,675

Cash dividends on common stock

 

 

 

 

 
(7,699
)
 
(7,699
)
 

 
(7,699
)
Net increase due to new subsidiary

 

 

 

 

 

 

 
20,000

 
20,000

September 30, 2018
42,910,579

 
$
4

 
$
388,820

 
$
(431
)
 
$
(13,702
)
 
$
154,186

 
$
528,877

 
$
20,001

 
$
548,878


See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.


6

UNITED INSURANCE HOLDINGS CORP.


Condensed Consolidated Statements of Cash Flows (Unaudited)
 
 
Nine Months Ended September 30,
 
 
2018
 
2017
OPERATING ACTIVITIES
 
 
 
 
Net income (loss)
 
$
11,362

 
$
(16,856
)
Adjustments to reconcile net income to net cash used by operating activities:
 
 
 
 
Depreciation and amortization
 
16,192

 
24,206

Bond amortization and accretion
 
3,822

 
3,663

Net realized losses on investments
 
674

 
554

Net unrealized gains on equity securities
 
(5,046
)
 

Provision for uncollectable premiums
 
112

 
205

Deferred income taxes, net
 
3,232

 
380

Stock based compensation
 
1,675

 
1,931

Changes in operating assets and liabilities:
 
 
 
 
Accrued investment income
 
(194
)
 
(183
)
Premiums receivable
 
(3,254
)
 
98

Reinsurance recoverable on paid and unpaid losses
 
(37,780
)
 
(445,090
)
Prepaid reinsurance premiums
 
(118,012
)
 
(130,013
)
Deferred policy acquisition costs, net
 
(1,882
)
 
(35,841
)
Other assets
 
(1,473
)
 
(12,354
)
Unpaid losses and loss adjustment expenses
 
46,610

 
480,777

Unearned premiums
 
87,667

 
76,758

Reinsurance payable
 
148,056

 
119,471

Payments outstanding
 

 
165

Accounts payable and accrued expenses
 
5,506

 
10,492

Other liabilities
 
(44,715
)
 
5,974

Net cash provided by operating activities
 
$
112,552

 
$
84,337

INVESTING ACTIVITIES
 
 
 
 
Proceeds from sales, maturities and repayments of investments
 
176,019

 
106,150

Purchases of investments
 
(276,483
)
 
(136,319
)
Proceeds from acquisition
 

 
95,284

Cost of property, equipment and capitalized software acquired
 
(2,675
)
 
(4,243
)
Net cash provided by (used in) investing activities
 
$
(103,139
)
 
$
60,872

FINANCING ACTIVITIES
 
 
 
 
Investment in subsidiary - NCI
 
20,000

 

Repayments of borrowings
 
(849
)
 
(1,142
)
Payments of debt issuance costs
 
(62
)
 

Dividends
 
(7,699
)
 
(6,426
)
Outstanding checks in excess of funds on deposit
 
9,003

 
(8,061
)
Net cash provided by (used in) financing activities
 
$
20,393

 
$
(15,629
)
Increase in cash, cash equivalents and restricted cash
 
29,806

 
129,580

Cash, cash equivalents and restricted cash at beginning of period
 
276,275

 
150,688

Cash, cash equivalents and restricted cash at end of period
 
$
306,081

 
$
280,268

Supplemental Cash Flows Information
 
 
 
 
Interest paid
 
$
4,990

 
$
2,001

Income taxes paid
 
$
4,673

 
$
4,206

Non-cash transactions
 
 
 
 
Issuance of common stock
 
$

 
$
274,384

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

7

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2018


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, four wholly-owned insurance subsidiaries, and one majority-owned insurance subsidiary. Our largest insurance subsidiary is United Property & Casualty Insurance Company (UPC), which was formed in Florida in 1999 and has operated continuously since that time. Our four other insurance subsidiaries are Family Security Insurance Company, Inc. (FSIC), acquired via merger on February 3, 2015, Interboro Insurance Company (IIC), acquired via merger on April 29, 2016, American Coastal Insurance Company (ACIC), acquired via merger on April 3, 2017, and Journey Insurance Company (JIC). See Note 4 in these Notes to Unaudited Condensed Consolidated Financial Statements for additional information regarding acquisitions. JIC was formed in strategic partnership with a subsidiary of Tokio Marine Kiln Group Limited on August 30, 2018. This subsidiary holds a noncontrolling interest in JIC.

Our other subsidiaries include United Insurance Management L.C. (UIM), a managing general agent that manages
substantially all aspects of UPC, FSIC and IIC's business; Skyway Claims Services, LLC, which provides claims adjusting services to UPC, FSIC and IIC; AmCo Holding Company (AmCo) and Family Security Holdings (FSH), which are holding company subsidiaries that consolidate their respective insurance companies; BlueLine Cayman Holdings (BlueLine) which reinsures portfolios of excess and surplus policies; UPC Re which provides a portion of the reinsurance protection purchased by our insurance subsidiaries when needed; and Skyway Reinsurance Services which provides reinsurance brokerage services for our insurance companies.

Our primary product is homeowners' insurance, which we currently offer in 12 states, under authorization from the insurance regulatory authorities in each state. In addition, we write commercial residential insurance in the state of Florida. We are also licensed to write property and casualty insurance in an additional six states; however, we have not commenced writing in these states.

We conduct our operations under one business segment.

(b)Consolidation and Presentation

We prepare our unaudited condensed consolidated interim financial statements in conformity with U.S. generally accepted accounting principles (GAAP). We have condensed or omitted certain information and footnote disclosures normally included in annual consolidated financial statements presented in accordance with GAAP. In management's opinion, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, including normal recurring items, considered necessary for a fair presentation of interim periods. All intercompany balances and transactions have been eliminated. Our unaudited condensed consolidated interim financial statements and footnotes should be read in conjunction with our consolidated financial statements and footnotes in our Annual Report on Form 10-K for the year ended December 31, 2017.

While preparing our unaudited condensed 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 unaudited condensed consolidated financial statements, as well as reported amounts of revenues and expenses during the reporting period. Accordingly, actual results could differ from those estimates. Reported amounts that require us to make extensive use of estimates include our reserves for unpaid losses and loss adjustment expenses, investments and goodwill. Except for the captions on our Unaudited Condensed Consolidated Balance Sheets and Unaudited Condensed Consolidated Statements of Comprehensive Income, we generally use the term loss(es) to collectively refer to both loss and loss adjustment expenses.

We reclassified certain amounts in the 2017 financial statements to conform to the 2018 presentation. These reclassifications had no impact on our results of operations or stockholders' equity, as previously reported.

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.




8

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2018

2)    SIGNIFICANT ACCOUNTING POLICIES

(a) Changes to Significant Accounting Policies

We have made no changes to our significant accounting policies as reported in our Annual Report on Form 10-K for the year ended December 31, 2017, except as noted below.

(b) Income Taxes

As of September 30, 2018, we have not fully completed our accounting for the tax effects of the enactment of the legislation commonly known as the Tax Cuts and Jobs Act of 2017 (Tax Act) with regards to the deductibility of compensation expense for certain covered executives due to uncertainty surrounding the appropriate tax treatment of outstanding performance-based awards and the grandfather rule for existing executive compensation agreements and the uncertainty surrounding the discount factors to be applied for loss reserve discounting. The U.S. Treasury Department and the Internal Revenue Service has recently issued further clarification and guidance on the deductibility of compensation expense that we are currently reviewing for potential impact on our accounting and disclosures. Interpretive guidance of the Tax Act will be received throughout 2018, and we expect to update our estimates and our disclosure on a quarterly basis as interpretive guidance is received within each quarter that it is received.

(c) Reinsurance

We record provisional ceding commissions that we receive in connection with our reinsurance contracts for the 2018 underwriting year as an offset to deferred acquisition costs to the extent that they relate to compensation for acquisition costs that are incurred that are deferrable. The remaining provisional ceding commissions are recorded as unearned reinsurance commission and are recognized as an offset to other acquisition costs based in proportion to the premiums earned or coverage provided by the reinsurance contracts.

(d) Recently Adopted Accounting Pronouncements

In May 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting (ASU 2017-09). This standard provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. ASU 2017-09 is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods, with early adoption permitted for certain requirements. We did not early adopt and the new guidance did not impact the way in which we account for share-based payment transactions. Therefore, the adoption as of January 1, 2018 had no impact on our results of operations.

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (ASU 2016-18). This standard provides guidance on the presentation of restricted cash in the statement of cash flows. We are required to explain the changes during a reporting period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents in the statement of cash flows. We retrospectively adopted this standard on April 1, 2018. The adoption of this new accounting standard impacted the presentation of our Unaudited Condensed Consolidated Statement of Cash Flows but had no effect on our results of operations. The restricted cash on our Condensed Consolidated Balance Sheets at September 30, 2018 and December 31, 2017 represents cash that is held in trust for assumed business and cash held in deposit accounts to satisfy state statutory deposit requirements.

In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01). This update substantially revises standards for the recognition, measurement and presentation of financial instruments. This standard revised our accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. It also amended certain disclosure requirements associated with the fair value of financial instruments. ASU 2016-01 is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods, with early adoption permitted for certain requirements. We adopted this standard as of January 1, 2018, which resulted in a reclassification of a $9,338,000 gain, net of tax, on equity securities from accumulated other comprehensive income to retained earnings on our condensed consolidated financial statements. Refer to Note 14 in these Notes to Unaudited Condensed Consolidated Financial Statements for a reconciliation.


9

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2018

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09). Insurance contracts are excluded from the scope of this standard. 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. We adopted this standard as of January 1, 2018. The adoption of this new accounting standard did not have an impact on our condensed consolidated financial statements and related disclosures.

(e) 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 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (ASU 2018-13). This update modifies the existing disclosure requirements on fair value measurements in Topic 820 by changing requirements regarding Level 1, Level 2 and Level 3 investments. ASU 2018-13 is effective for annual reporting periods beginning after December 15, 2019, including interim periods within those annual periods, with early adoption permitted. Entities are permitted to early adopt any removed or modified disclosures of ASU 2018-13 immediately and delay the adoption of the additional disclosures until their effective date. We have early adopted the guidance on removed and modified disclosures. We do not intend to early adopt the additional disclosures and are assessing the impact of retrospectively adopting the additions from this new accounting standard on our fair value disclosures.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (ASU 2017-04). This update simplifies the manner in which an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. ASU 2017-07 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 prospectively adopting this new accounting standard on our condensed consolidated financial statements and related disclosures. Any impact of the standard on our condensed consolidated financial statements and related disclosures will be dependent on market conditions of the reporting units at the time of adoption.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (ASU 2016-02). This update is intended to replace existing lease guidance by requiring a lessee to recognize substantially all leases (whether operating or finance leases) on the balance sheet as a right-of-use asset and an associated lease liability. Short-term leases of 12 months or less are excluded from this amendment. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. We do not intend to early adopt and are assessing the impact of adopting this new accounting standard on our condensed consolidated financial statements and related disclosures using a modified retrospective approach upon adoption. We are currently quantifying the expected recognition on our balance sheet for a right to use asset and a lease liability as required by this standard.

10

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2018

3)    INVESTMENTS

The following table details fixed maturity available-for-sale and equity securities, by major investment category, at September 30, 2018 and December 31, 2017:
 
Cost or Adjusted/Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
September 30, 2018
 
 
 
 
 
 
 
U.S. government and agency securities
$
104,822

 
$

 
$
2,093

 
$
102,729

Foreign government
2,998

 

 
32

 
2,966

States, municipalities and political subdivisions
154,195

 
389

 
2,718

 
151,866

Public utilities
24,898

 
19

 
775

 
24,142

Corporate securities
296,009

 
197

 
6,610

 
289,596

Mortgage-backed securities
211,288

 

 
6,298

 
204,990

Asset backed securities
59,145

 
5

 
252

 
58,898

Redeemable preferred stocks
1,285

 
3

 
85

 
1,203

Total fixed maturities
$
854,640

 
$
613

 
$
18,863

 
$
836,390

 
 
 
 
 
 
 
 
Mutual funds
$
44,589

 
$
6,506

 
$

 
$
51,095

Public utilities
2,045

 
331

 
19

 
2,357

Other common stocks
27,016

 
10,893

 
341

 
37,568

Non-redeemable preferred stocks
2,098

 
8

 
34

 
2,072

Total equity securities
$
75,748

 
$
17,738

 
$
394

 
$
93,092

 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
U.S. government and agency securities
$
93,827

 
$
40

 
$
1,241

 
$
92,626

Foreign government
2,022

 
14

 

 
2,036

States, municipalities and political subdivisions
200,706

 
1,929

 
1,123

 
201,512

Public utilities
20,215

 
127

 
85

 
20,257

Corporate securities
287,025

 
1,746

 
1,209

 
287,562

Mortgage-backed securities
143,982

 
235

 
952

 
143,265

Asset-backed securities
14,902

 
23

 
20

 
14,905

Redeemable preferred stocks
755

 
11

 
74

 
692

Total fixed maturities
$
763,434

 
$
4,125

 
$
4,704

 
$
762,855

 
 
 
 
 
 
 
 
Mutual fund
$
29,079

 
$
2,845

 
$

 
$
31,924

Public utilities
1,343

 
359

 

 
1,702

Other common stocks
18,856

 
9,093

 
47

 
27,902

Non-redeemable preferred stocks
1,718

 
53

 
4

 
1,767

Total equity securities
$
50,996

 
$
12,350

 
$
51

 
$
63,295


11

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2018

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 months ended September 30, 2018 and 2017:

 
2018
 
2017
 
Gains
(Losses)
 
Fair Value at Sale
 
Gains
(Losses)
 
Fair Value at Sale
Three Months Ended September 30,
 
 
 
 
 
 
 
Fixed maturities
$
12

 
$
4,864

 
$
123

 
$
11,368

Equity securities
8

 
411

 
1

 
156

Total realized gains
20

 
5,275

 
124

 
11,524

Fixed maturities
(441
)
 
46,268

 
(195
)
 
10,517

Equity securities
(26
)
 
387

 

 

Total realized losses
(467
)
 
46,655

 
(195
)
 
10,517

Net realized investment gains (losses)
$
(447
)
 
$
51,930

 
$
(71
)
 
$
22,041

 
 
 
 
 
 
 
 
Nine Months Ended September 30,
 
 
 
 
 
 
 
Fixed maturities
$
68

 
$
11,745

 
$
263

 
$
30,264

Equity securities
517

 
1,593

 
8

 
175

Total realized gains
585

 
13,338

 
271

 
30,439

Fixed maturities
(1,233
)
 
116,587

 
(815
)
 
47,913

Equity securities
(26
)
 
387

 
(10
)
 
100

Total realized losses
(1,259
)
 
116,974

 
(825
)
 
48,013

Net realized investment gains (losses)
$
(674
)
 
$
130,312

 
$
(554
)
 
$
78,452


The table below summarizes our fixed maturities at September 30, 2018 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, 2018
 
Cost or Amortized Cost
 
Percent of Total
 
Fair Value
 
Percent of Total
Due in one year or less
$
70,131

 
8.2
%
 
$
69,785

 
8.3
%
Due after one year through five years
337,014

 
39.4
%
 
331,204

 
39.6
%
Due after five years through ten years
164,523

 
19.3
%
 
159,481

 
19.1
%
Due after ten years
12,539

 
1.5
%
 
12,032

 
1.4
%
Asset and mortgage backed securities
270,433

 
31.6
%
 
263,888

 
31.6
%
Total
$
854,640

 
100.0
%
 
$
836,390

 
100.0
%


12

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2018

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

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Fixed maturities
$
5,725

 
$
4,111

 
$
15,929

 
$
10,696

Equity securities
525

 
375

 
1,455

 
940

Cash and cash equivalents
588

 
285

 
1,427

 
445

Other investments
41

 
124

 
830

 
385

Other assets
9

 
6

 
24

 
23

Investment income
6,888

 
4,901

 
19,665

 
12,489

Investment expenses
(267
)
 
(213
)
 
(756
)
 
(482
)
Net investment income
$
6,621

 
$
4,688

 
$
18,909

 
$
12,007


Portfolio monitoring

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

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

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

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

13

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2018

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, 2018
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency securities
83

 
$
580

 
$
48,600

 
56

 
$
1,513

 
$
54,114

Foreign governments
5

 
32

 
2,966

 

 

 

States, municipalities and political subdivisions
132

 
1,742

 
103,690

 
43

 
976

 
30,133

Public utilities
41

 
672

 
19,812

 
6

 
103

 
1,976

Corporate securities
481

 
4,752

 
217,405

 
90

 
1,858

 
49,688

Mortgage-backed securities
180

 
4,683

 
173,692

 
89

 
1,615

 
29,984

Asset backed securities
83

 
250

 
51,428

 
7

 
2

 
1,362

Redeemable preferred stocks
8

 
25

 
749

 
2

 
60

 
200

Total fixed maturities
1,013

 
12,736

 
618,342

 
293

 
6,127

 
167,457

Mutual Fund
1

 

 
56

 

 

 

Public utilities
8

 
19

 
672

 

 

 

Other common stocks
70

 
305

 
4,103

 
1

 
36

 
91

Non-redeemable preferred stocks
18

 
32

 
1,506

 
3

 
2

 
19

Total equity securities
97

 
356

 
6,337

 
4

 
38

 
110

Total
1,110

 
$
13,092

 
$
624,679

 
297

 
$
6,165

 
$
167,567

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency securities
40

 
$
166

 
$
26,979

 
73

 
$
1,075

 
$
58,980

States, municipalities and political subdivisions
106

 
734

 
91,245

 
31

 
389

 
19,718

Public utilities
16

 
44

 
7,052

 
5

 
41

 
1,016

Corporate securities
263

 
871

 
134,755

 
52

 
338

 
16,476

Mortgage-backed securities
89

 
475

 
76,349

 
50

 
477

 
15,210

Asset-backed securities
18

 
20

 
11,682

 

 

 

Redeemable preferred stocks

 

 

 
3

 
74

 
303

Total fixed maturities
532

 
2,310

 
348,062

 
214

 
2,394

 
111,703

Mutual Funds
1

 

 
131

 

 

 

Other common stocks
5

 
47

 
748

 

 

 

Non-redeemable preferred stocks
4

 
4

 
87

 

 

 

Total equity securities
10

 
51

 
966

 

 

 

Total
542

 
$
2,361

 
$
349,028

 
214

 
$
2,394

 
$
111,703

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

During our quarterly evaluations of our securities for impairment, we determined that none of our investments in fixed-income securities that reflected an unrealized loss position were other-than-temporarily impaired. The issuers of our debt securities continue to make interest payments on a timely basis. We do not intend to sell nor is it likely that we would be required to sell the debt securities before we recover our amortized cost basis. Due to the adoption of ASU 2016-01 as of January 1, 2018, equity securities are reported at fair value with changes in fair value recognized in valuation of equity investments and are no longer included in impairment write-downs, change in intent write-downs and sales. During the three and nine months ended September 30, 2018 and 2017, we recorded no other-than-temporary impairment charges.

14

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2018

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 our Unaudited Condensed Consolidated Balance Sheets at fair value are categorized in the fair value hierarchy based on the observability of inputs to the valuation techniques as follows:

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

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

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

We estimate the fair value of our investments using the closing prices on the last business day of the reporting period, obtained from active markets such as the NYSE, Nasdaq and NYSE American. For securities for which quoted prices in active markets are unavailable, we use a third-party pricing service that utilizes quoted prices in active markets for similar instruments, benchmark interest rates, broker quotes and other relevant inputs to estimate the fair value of those securities for which quoted prices are unavailable. Our estimates of fair value reflect the interest rate environment that existed as of the close of business on September 30, 2018 and December 31, 2017. Changes in interest rates subsequent to September 30, 2018 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 method is primarily based on models using our share of the net asset value of the limited partnership interests as provided on the financial statements of the investee. In certain circumstances, management may adjust the net asset value when it has sufficient evidence to support applying such adjustments.

Any change in the estimated fair value of our fixed-income securities would impact the amount of unrealized gain or loss we have recorded, which could change the amount we have recorded for our investments and other comprehensive income on our Unaudited Condensed Consolidated Balance Sheet as of September 30, 2018.








15

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2018

The following table presents the fair value of our financial instruments measured on a recurring basis by level at September 30, 2018 and December 31, 2017:

 
Total
 
Level 1
 
Level 2
 
Level 3
September 30, 2018
 
 
 
 
 
 
 
U.S. government and agency securities
$
102,729

 
$

 
$
102,729

 
$

Foreign government
2,966

 

 
2,966

 

States, municipalities and political subdivisions
151,866

 

 
151,866

 

Public utilities
24,142

 

 
24,142

 

Corporate securities
289,596

 

 
289,596

 

Mortgage-backed securities
204,990

 

 
204,990

 

Asset-backed securities
58,898

 

 
58,898

 

Redeemable preferred stocks
1,203

 
821

 
382

 

Total fixed maturities
836,390

 
821

 
835,569

 

Mutual funds
51,095

 
51,095

 

 

Public utilities
2,357

 
2,357

 

 

Other common stocks
37,568

 
37,568

 

 

Non-redeemable preferred stocks
2,072

 
2,072

 

 

Total equity securities
93,092

 
93,092

 

 

Other long-term investments
8,330

 
300

 
2,173

 
5,857

Total investments
$
937,812

 
$
94,213

 
$
837,742

 
$
5,857

 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
U.S. government and agency securities
$
92,626

 
$

 
$
92,626

 
$

Foreign government
2,036

 

 
2,036

 

States, municipalities and political subdivisions
201,512

 

 
201,512

 

Public utilities
20,257

 

 
20,257

 

Corporate securities
287,562

 

 
287,562

 

Mortgage-backed securities
143,265

 

 
143,265

 

Asset-backed securities
14,905

 

 
14,905

 

Redeemable preferred stocks
692

 
692

 

 

Total fixed maturities
762,855

 
692

 
762,163

 

Mutual Funds
31,924

 
31,924

 

 

Public utilities
1,702

 
1,702

 

 

Other common stocks
27,902

 
27,902

 

 

Non-redeemable preferred stocks
1,767

 
1,767

 

 

Total equity securities
63,295

 
63,295

 

 

Other long-term investments
8,381

 
300

 
7,447

 
634

Total investments
$
834,531

 
$
64,287

 
$
769,610

 
$
634



The carrying amounts for the following financial instrument categories approximate their fair values at September 30, 2018 and December 31, 2017, because of their short-term nature: cash and cash equivalents, accrued investment income, premiums receivable, reinsurance recoverable, reinsurance payable, other assets, and other liabilities. The carrying amount of the notes payable to the Florida State Board of Administration, the Branch Banking & Trust Corporation (BB&T) and our senior notes approximate fair value as the interest rates and terms are variable.





16

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2018

The table below presents the rollforward of our Level 3 investments held at fair value during the nine months ended September 30, 2018:
 
 
Other Investments
December 31, 2017
 
$
634

Transfers in
 
5,507

Partnership income
 
261

Return of capital
 
(482
)
Unrealized gains in accumulated other comprehensive income
 
(63
)
September 30, 2018
 
$
5,857



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 quarter ended September 30, 2018, we transferred two investments from Level 2 to Level 3 investments, 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, and adds final spreads to the U.S. Treasury curve at 3 p.m. (ET) as of quarter end. Since the inputs the valuation service uses in its calculations are not quoted prices in active markets, but are observable inputs, they represent Level 2 inputs.


17

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2018

Other investments

We acquired investments in limited partnerships, recorded in the other investments line of our Unaudited Condensed Consolidated Balance Sheets and these investments are currently being accounted for at fair value utilizing a net asset value per share equivalent methodology. The estimated fair value of our investments in the limited partnership interests at September 30, 2018 was $8,029,000. We have fully funded two investments and are still obligated to fund an additional $2,708,000 for the remaining four investments.

The information presented in the table below is as of September 30, 2018:

 
 
Book Value
 
Unrealized Gain
 
Unrealized Loss
 
Fair Value
Limited partnership investments
 
$
7,769

 
$
260

 
$

 
$
8,029

Certificates of deposit
 
300

 

 

 
300

Total other investments
 
$
8,069

 
$
260

 
$

 
$
8,329



Portfolio loans

At December 31, 2017, we held commercial portfolio loans of $20,000,000. We believe that making sound loans is a necessary and desirable means of employing funds available for investment. Recognizing our obligation to our stockholders, management is expected to seek to develop and make sound, profitable loans that resources permit and that opportunity affords. These were short-term collateralized loans (less than one year), which were repaid in full in April 2018, primarily from cash flows of the borrowers.

4)
ACQUISITIONS

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

On April 3, 2017, we completed our acquisition of AmCo and its subsidiaries. The transaction was completed through a series of mergers that ultimately resulted in the Company issuing 20,956,355 shares of its common stock as consideration to the equity holders of RDX Holding, LLC, the former parent company of AmCo. As a result of the mergers, AmCo merged with and into a wholly-owned subsidiary of the Company. The acquisition of AmCo supported our growth strategy and further strengthened our overall position in the commercial property and casualty insurance market. Goodwill recorded in the transaction, which reflected the synergies expected from the acquisition and enhanced reinsurance opportunities, is not tax deductible.

The operations of AmCo are included in our Unaudited Condensed Consolidated Statements of Comprehensive Income effective April 3, 2017. The final purchase price allocation is as follows:


18

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2018

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
59,475

Other assets
4,591

Unpaid losses and loss adjustment expenses
(60,529
)
Unearned premiums
(128,824
)
Reinsurance payable
(22,406
)
Deferred taxes
(17,093
)
Other liabilities
(6,261
)
Total purchase price
$
285,468


The unaudited pro forma financial information below has been prepared as if the acquisition of AmCo had taken place on January 1, 2017. The unaudited pro forma financial information is not necessarily indicative of the results that we would have achieved had the transaction taken place on January 1, 2017, and the unaudited pro forma information does not purport to be indicative of future financial operating results.

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

 
$
38,096

 
$
509,930

Net income (loss)
(16,856
)
 
6,712

 
(10,144
)
Diluted earnings per share
(0.47
)
 

 
(0.24
)

The following table summarizes the results of the acquired AmCo operations since the acquisition date that have been included within our unaudited condensed consolidated statements of comprehensive income:

 
January 1, 2018 to September 30, 2018
 
April 3, 2017 to September 30, 2017
Revenues
$
146,301

 
$
93,269

Net income
25,605

 
1,122


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 the 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, 2018 and 2017, respectively:


19

UNITED INSURANCE HOLDINGS CORP.
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2018

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
Numerator:
 
 
 
 
 
 
 
 
Net income attributable to UIHC common stockholders
 
$
(11,708
)
 
$
(28,012
)
 
$
11,361

 
$
(16,856
)