UNITED INSURANCE HOLDINGS CORP. - FORM 10-Q

Attached files

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EX-32.2 - EXHIBIT 32.2 - UNITED INSURANCE HOLDINGS CORP.	exh32231mar20.htm
EX-32.1 - EXHIBIT 32.1 - UNITED INSURANCE HOLDINGS CORP.	exh32131mar20.htm
EX-31.2 - EXHIBIT 31.2 - UNITED INSURANCE HOLDINGS CORP.	exh31231mar20.htm
EX-31.1 - EXHIBIT 31.1 - UNITED INSURANCE HOLDINGS CORP.	exh31131mar20.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 March 31, 2020

Commission File Number 001-35761

_____________________

United Insurance Holdings Corp.

(Exact Name of Registrant as Specified in its Charter)



	Delaware		75-3241967
	(State or Other Jurisdiction of Incorporation or Organization)		(IRS Employer Identification Number)

	800 2nd Avenue S		33701
	St. Petersburg, Florida		(Zip Code)
	(Address of Principal Executive Offices)

727-895-7737

(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:



Title of Each Class	Trading Symbol(s)	Name of Each Exchange on Which Registered
Common Stock, $0.0001 par value per share	UIHC	Nasdaq Stock Market LLC

Indicate by check mark 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 (§232.405 of this chapter) 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 May 1, 2020, 42,983,371 shares of common stock, par value $0.0001 per share, were outstanding.

UNITED INSURANCE HOLDINGS CORP.



PART I. FINANCIAL INFORMATION
	Item 1. Financial Statements	4
	Condensed Consolidated Balance Sheets (Unaudited)	4
	Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)	5
	Condensed Consolidated Statements of Stockholders' Equity (Unaudited)	6
	Condensed Consolidated Statements of Cash Flows (Unaudited)	7
	Notes to Unaudited Condensed Consolidated Financial Statements	8
	Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	30
	Item 3. Quantitative and Qualitative Disclosures About Market Risk	40
	Item 4. Controls and Procedures	40
PART II. OTHER INFORMATION
	Item 1. Legal Proceedings	41
	Item 1A. Risk Factors	41
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	42
	Item 3. Defaults Upon Senior Securities	42
	Item 4. Mine Safety Disclosures	42
	Item 5. Other Information	42
	Item 6. Exhibits	43
Signatures		44

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.

UNITED INSURANCE HOLDINGS CORP.

FORWARD-LOOKING STATEMENTS

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


•	our exposure to catastrophic events and severe weather conditions;


•	the regulatory, economic and weather conditions present in Florida, the state in which we are most concentrated;


•	our ability to cultivate and maintain agent relationships, particularly our relationship with AmRisc, LLC (AmRisc);


•	the possibility that actual claims incurred may exceed our loss reserves for claims;


•	assessments charged by various governmental agencies;


•	our ability to implement and maintain adequate internal controls over financial reporting;


•	our ability to maintain information technology and data security systems, and to outsource relationships;


•	our reliance on key vendor relationships, and the ability of our vendors to protect the personally identifiable information of our customers, claimants or employees;


•	our ability to attract and retain the services of senior management;


•	risks and uncertainties relating to our acquisitions, mergers and other strategic transactions;


•	risks associated with joint ventures and investments in which we share ownership or management with third parties;


•	our ability to generate sufficient cash to service all of our indebtedness and comply with covenants and other requirements related to our indebtedness;


•	our ability to increase or maintain our market share;


•	changes in the regulatory environment present in the states in which we operate;


•	the impact of new federal or state regulations that affect the insurance industry;


•	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 legal actions pending against us, including the terms of any settlements;


•	downgrades in our financial strength or stability ratings;


•	the impact of future sales of substantial amounts of our common stock by us or our significant stockholders on our stock price;


•	our ability to pay dividends in the future, which may be constrained by our holding company structure;


•	the ability of our subsidiaries to pay dividends in the future, which may affect our liquidity and our ability to meet our obligations;


•	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 impact of transactions by R. Daniel Peed and his affiliates on the price of our common stock;


•	provisions in our charter documents that may make it harder for others to obtain control of us;


•	the impact of the novel strain of coronavirus (COVID-19) and related business disruption and economic uncertainty on our business, results of operations and financial condition; 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, 2019.

We caution you not to place undue 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.

UNITED INSURANCE HOLDINGS CORP.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Balance Sheets (Unaudited)



	March 31, 2020			December 31, 2019
ASSETS
Investments, at fair value:
Fixed maturities, available-for-sale (amortized cost of $862,565 and $869,598, respectively)	$	873,786		$	884,861
Equity securities	111,915			116,610
Other investments (amortized cost of $9,336 and $8,067, respectively)	9,565			10,252
Total investments	$	995,266		$	1,011,723
Cash and cash equivalents	218,355			215,469
Restricted cash	64,058			71,588
Total cash, cash equivalents and restricted cash	$	282,413		$	287,057
Accrued investment income	5,478			5,901
Property and equipment, net	34,955			32,728
Premiums receivable, net (credit allowance of $126 and $165, respectively)	90,547			86,568
Reinsurance recoverable on paid and unpaid losses, net (credit allowance of $241 and $256, respectively)	514,485			550,136
Ceded unearned premiums	179,513			270,034
Goodwill	73,045			73,045
Deferred policy acquisition costs, net	104,882			104,572
Intangible assets, net	24,941			26,079
Other assets, net (credit allowance of $112 and $141, respectively)	26,234			19,375
Total Assets	$	2,331,759		$	2,467,218
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Unpaid losses and loss adjustment expenses	$	711,042		$	760,357
Unearned premiums	664,619			674,055
Reinsurance payable on premiums	112,390			166,131
Payments outstanding	45,029			57,555
Accounts payable and accrued expenses	70,506			78,592
Operating lease liability	2,421			324
Other liabilities	60,959			47,407
Notes payable, net	158,636			158,932
Total Liabilities	$	1,825,602		$	1,943,353
Commitments and contingencies (Note 10)
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; 43,053,003 and 43,056,310 issued, respectively; 42,943,447 and 43,028,074 outstanding, respectively	4			4
Additional paid-in capital	392,552			391,852
Treasury shares, at cost: 212,083 shares	(431		)	(431		)
Accumulated other comprehensive income	8,493			11,319
Retained earnings	84,838			100,394
Total stockholders' equity attributable to United Insurance Holdings Corp. (UIHC) stockholders	$	485,456		$	503,138
Noncontrolling interests (NCI)	20,701			20,727
Total Stockholders' Equity	$	506,157		$	523,865
Total Liabilities and Stockholders' Equity	$	2,331,759		$	2,467,218

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

UNITED INSURANCE HOLDINGS CORP.

Condensed Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)



	Three months ended
	March 31,
	2020			2019
REVENUE:
Gross premiums written	$	335,183		$	318,559
Change in gross unearned premiums	9,436			(6,746		)
Gross premiums earned	344,619			311,813
Ceded premiums earned	(153,023		)	(131,091		)
Net premiums earned	191,596			180,722
Net investment income	6,917			7,295
Net realized investment gains (losses)	(68		)	181
Net unrealized gain (loss) on equity securities	(26,456		)	10,173
Other revenue	4,315			3,950
Total revenue	176,304			202,321
EXPENSES:
Losses and loss adjustment expenses	102,837			104,547
Policy acquisition costs	58,875			55,246
Operating expenses	9,704			10,211
General and administrative expenses	18,301			17,581
Interest expense	2,419			2,409
Total expenses	192,136			189,994
Income (loss) before other income	(15,832		)	12,327
Other income	28			6
Income (loss) before income taxes	(15,804		)	12,333
Provision (benefit) for income taxes	(3,288		)	2,755
Net income (loss)	$	(12,516	)	$	9,578
Less: Net income attributable to noncontrolling interests	207			109
Net income (loss) attributable to UIHC	$	(12,723	)	$	9,469
OTHER COMPREHENSIVE INCOME (LOSS):
Change in net unrealized gains (losses) on investments	(4,110		)	14,322
Reclassification adjustment for net realized investment losses (gains)	68			(181		)
Income tax benefit (expense) related to items of other comprehensive income (loss)	983			(3,459		)
Total comprehensive income (loss)	$	(15,575	)	$	20,260
Less: Comprehensive income (loss) attributable to NCI	(26		)	231
Comprehensive income (loss) attributable to UIHC	$	(15,549	)	$	20,029

Weighted average shares outstanding
Basic	42,805,527			42,696,681
Diluted	42,805,527			42,986,484

Earnings available to UIHC common stockholders per share
Basic	$	(0.30	)	$	0.22
Diluted	$	(0.30	)	$	0.22

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

Statements include related party transactions as detailed in Note 12.

UNITED INSURANCE HOLDINGS CORP.

Condensed Consolidated Statements of Stockholders’ Equity For the Three Months Ended

(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
	Number of Shares	Dollars
December 31, 2018	42,984,578	$	4	$	389,141	$	(431	)	$	(9,030	)	$	140,546		$	520,230		$	20,139	$	540,369
Net income	—	—		—		—			—			9,469			9,469			109		9,578
Other comprehensive income, net	—	—		—		—			10,560			—			10,560			122		10,682
Stock Compensation	24,151	—		901		—			—			—			901			—		901
Cash dividends on common stock ($0.06 per common share)	—	—		—		—			—			(2,569		)	(2,569		)	—		(2,569		)
March 31, 2019	43,008,729	$	4	$	390,042	$	(431	)	$	1,530		$	147,446		$	538,591		$	20,370	$	558,961



	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
	Number of Shares		Dollars
December 31, 2019	43,028,074		$	4	$	391,852	$	(431	)	$	11,319		$	100,394		$	503,138		$	20,727		$	523,865
Net income (loss)	—		—		—		—			—			(12,723		)	(12,723		)	207			(12,516		)
Other comprehensive loss, net	—		—		—		—			(2,826		)	—			(2,826		)	(233		)	(3,059		)
Reclassification due to adoption of ASU 2016-13	—		—		—		—			—			(262		)	(262		)	—			(262		)
Stock Compensation	(84,627	)	—		700		—			—			—			700			—			700
Cash dividends on common stock ($0.06 per common share)	—		—		—		—			—			(2,571		)	(2,571		)	—			(2,571		)
March 31, 2020	42,943,447		$	4	$	392,552	$	(431	)	$	8,493		$	84,838		$	485,456		$	20,701		$	506,157

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

UNITED INSURANCE HOLDINGS CORP.

Condensed Consolidated Statements of Cash Flows (Unaudited)



	Three Months Ended March 31,
	2020			2019
OPERATING ACTIVITIES
Net income (loss)	$	(12,516	)	$	9,578
Adjustments to reconcile net income (loss) to net cash used by operating activities:
Depreciation and amortization	2,510			2,320
Bond amortization and accretion	1,564			1,186
Net realized losses (gains) on investments	68			(181		)
Net unrealized losses (gains) on equity securities	26,456			(10,173		)
Provision for uncollectable premiums	10			(58		)
Deferred income taxes, net	(3,461		)	(958		)
Stock based compensation	700			901
Changes in operating assets and liabilities:
Accrued investment income	423			352
Premiums receivable	(3,854		)	2,946
Reinsurance recoverable on paid and unpaid losses	35,395			(28,462		)
Ceded unearned premiums	90,521			84,581
Deferred policy acquisition costs, net	(310		)	(3,907		)
Other assets	(6,999		)	(2,902		)
Unpaid losses and loss adjustment expenses	(49,315		)	(31,235		)
Unearned premiums	(9,436		)	6,746
Reinsurance payable on premiums	(53,741		)	(59,153		)
Payments outstanding	(12,526		)	9,107
Accounts payable and accrued expenses	(8,086		)	(6,899		)
Operating lease liability	2,097			438
Other liabilities	17,998			23,309
Net cash provided by (used in) operating activities	$	17,498		$	(2,464	)
INVESTING ACTIVITIES
Proceeds from sales, maturities and repayments of:
Fixed maturities	63,743			45,586
Equity securities	1,233			511
Other investments	212			2,256
Purchases of:
Fixed maturities	(58,266		)	(23,359		)
Equity securities	(21,116		)	(862		)
Other investments	(1,481		)	(5,361		)
Cost of property, equipment and capitalized software acquired	(3,515		)	(3,297		)
Net cash provided by (used in) investing activities	$	(19,190	)	$	15,474
FINANCING ACTIVITIES
Repayments of borrowings	(381		)	(382		)
Dividends	(2,571		)	(2,569		)
Net cash used in financing activities	$	(2,952	)	$	(2,951	)
Increase (decrease) in cash, cash equivalents and restricted cash	(4,644		)	10,059
Cash, cash equivalents and restricted cash at beginning of period	287,057			184,120
Cash, cash equivalents and restricted cash at end of period	$	282,413		$	194,179
Supplemental Cash Flows Information
Interest paid	$	70		$	105
Income taxes paid	$	—		$	—

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

UNITED INSURANCE HOLDINGS CORP.

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2020

1) ORGANIZATION, CONSOLIDATION AND PRESENTATION

(a)Business

United Insurance Holdings Corp. (referred to in this document as we, our, us, the Company or UPC Insurance) is a property and casualty insurance holding company that sources, writes and services residential personal and commercial property and casualty insurance policies using a network of agents, four wholly-owned insurance subsidiaries, and one majority-owned insurance subsidiary. Our largest insurance subsidiary is United Property & Casualty Insurance Company (UPC), which was formed in Florida in 1999 and has operated continuously since that time. Our four other insurance subsidiaries are Family Security Insurance Company, Inc. (FSIC), acquired via merger on February 3, 2015; Interboro Insurance Company (IIC), acquired via merger on April 29, 2016; American Coastal Insurance Company (ACIC), acquired via merger on April 3, 2017; and Journey Insurance Company (JIC). JIC was formed in strategic partnership with a subsidiary of Tokio Marine Kiln Group Limited (Kiln) on August 30, 2018. The Kiln subsidiary holds a noncontrolling interest in JIC.

Our other subsidiaries include United Insurance Management, L.C. (UIM), a managing general agent that manages

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

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

We conduct our operations under one reportable segment, property and casualty insurance policies. Our chief operating decision maker is our Chief Executive Officer, who makes decisions to allocate resources and assesses performance at the corporate level.

(b)Consolidation and Presentation

We prepare our 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 the 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. We include all of our subsidiaries in our consolidated financial statements, eliminating intercompany balances and transactions during consolidation. 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, 2019.

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 (Loss), we generally use the term loss(es) to collectively refer to both loss and loss adjustment expenses.

We reclassified certain amounts in the 2019 financial statements to conform to the 2020 presentation, including reclassifying the presentation of "outstanding checks in excess of funds on deposit" in the financing section of the Unaudited Condensed Consolidated Statements of Cash Flows to "changes in payments outstanding" in the operating section, to provide the users of the financial statement with more transparency. These reclassifications had no impact on our results of operations or stockholders' equity, as previously reported.

UNITED INSURANCE HOLDINGS CORP.

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2020

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.

(c)Impact of COVID-19, Financial Status and Outlook

In recent months, there has been an outbreak of a novel strain of COVID-19 in many countries in the world, which was declared a pandemic by the World Health Organization in March 2020. This has resulted in governments worldwide enacting emergency measures to combat the spread of the virus. These measures, which include the implementation of travel bans and restrictions, self-imposed quarantine periods, state and local shelter-in-place orders, business and government shutdowns and social distancing, have caused material disruption to businesses and economies globally. In addition, global equity markets have experienced significant volatility and weakness.

We are committed to our employees, agents, customers and shareholders in our resolve to maintain a stable and secure business. We have continued to operate at nearly full capacity while taking the necessary steps to ensure the health and safety of our employees through adherence to CDC and local government work guidelines. In addition, we have converted to virtual sales processes to enable our agents to continue their activities.

We have not seen a material impact from COVID-19 on our business operations, financial position, liquidity or our ability to service our policyholders to date, with the exception of fluctuations in our investment portfolios due to volatility in the equity securities markets, as further described in Part I, Item 2. "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Form 10-Q. The COVID-19 pandemic and resulting global disruptions did not have a material impact on our access to credit and capital markets needed to maintain sufficient liquidity for our continued operating needs.

The scope, severity and longevity of any business shutdowns and economic disruption as a result of the COVID-19 outbreak is highly uncertain and cannot be predicted at this time, as new information may continue to emerge concerning the actions governments may take to contain or mitigate the spread of the virus or address its impact on individuals, businesses and the economy. We did not incur material claims or significant disruptions to our business for the three months ended March 31, 2020. At this time, it is not possible to reasonably estimate the extent of the impact of the economic uncertainties on our business, results of operations and financial conditions in future periods, but we will continue to respond to the COVID-19 pandemic and take reasonable measures to make sure customers continue to be served without interruption.

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, 2019, except for the standards adopted in 2020 as noted below.

(b) Allowance for Expected Credit Losses

We are exposed to credit losses primarily through three different pools of assets based on similar risk characteristics: premiums receivable for direct written business; reinsurance recoverables from ceded losses to our reinsurers; and our note receivable. We estimate the expected credit losses based on historical trends, credit ratings assigned to reinsurers by rating agencies, average default rates, current economic conditions, and reasonable and supportable forecasts of future economic conditions that affect the collectability of the reported amounts over its expected life. Changes in the relevant information may significantly affect the estimates of expected credit losses.

The allowance for credit losses is deducted from the amortized cost basis of the assets to present their net carrying value at the amount expected to be collected. Each period, the allowance for credit losses is adjusted through earnings to reflect expected credit losses over the remaining lives of the assets.

UNITED INSURANCE HOLDINGS CORP.

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2020

The following table summarizes our allowance for expected credit losses by pooled asset for the three months ended March 31, 2020:



	December 31, 2019		Provision for expected credit losses			Write-offs		March 31, 2020
Premiums Receivable	$	165	$	(39	)	$	—	$	126
Reinsurance Recoverables	256		(15		)	—		241
Note Receivable	141		(29		)	—		112
Total	$	562	$	(83	)	$	—	$	479

On March 27, 2020, the U.S. enacted the Coronavirus Aid, Relief, and Economic Security (CARES) Act to mitigate the economic impacts of the COVID-19 crisis. We are assessing the impact of applying the tax provisions of the CARES Act, and believe it will have a favorable but immaterial impact on our U.S. Federal Tax obligations.

(d) Recently Adopted Accounting Pronouncements

In August 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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. 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 early adopted the guidance on removed and modified disclosures and adopted the remainder of the guidance on January 1, 2020, which has not impacted the accompanying unaudited condensed consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (ASU 2017-04). This update simplifies the manner in which an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. ASU 2017-04 is effective for annual periods beginning after December 15, 2019, including interim periods within those annual periods, with early adoption permitted for certain requirements. We intend to adopt this new guidance when we perform our annual assessment of goodwill as of September 30, 2020. In the event that a triggering event occurs and requires an earlier interim assessment, we intend to adopt the updated guidance at that time. Any impact of the standard on our consolidated financial statements and related disclosures will be dependent on market conditions of the reporting units at the time of our assessment and subsequent adoption.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments- Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13). This update is intended to replace the incurred loss impairment methodology in current GAAP with a method that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 will provide users with more useful information regarding the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. In addition, credit losses on available-for-sale debt securities will now have to be presented as an allowance rather than as a write-down. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. We adopted this guidance as of January 1, 2020 using a modified retrospective approach, which allowed us to initially apply the new credit loss guidance at the adoption date and recognize a cumulative effect adjustment to the opening balance of retained earnings for 2020, with no adjustment to prior periods presented.The cumulative effect to the opening balance of retained earnings was a decrease of $262,000, net of reversals from allowances recorded under prior guidance.

(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 December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes (ASU 2019-12). This update enhances and simplifies various aspects of the income tax guidance, including intra-period

UNITED INSURANCE HOLDINGS CORP.

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2020

tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. ASU 2019-12 is effective for annual reporting periods beginning after December 15, 2020, including interim periods within those fiscal years, with early adoption permitted. We do not intend to early adopt and are assessing the impact of adopting this new accounting standard on our unaudited condensed consolidated financial statements and related disclosures.

3) INVESTMENTS

The following table details fixed-maturity available-for-sale securities, by major investment category, at March 31, 2020 and December 31, 2019:



	Cost or Adjusted/Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
March 31, 2020
U.S. government and agency securities	$	104,530	$	5,034	$	44	$	109,520
Foreign government	3,721		70		1		3,790
States, municipalities and political subdivisions	126,962		2,885		38		129,809
Public utilities	27,125		479		313		27,291
Corporate securities	285,633		4,087		7,025		282,695
Mortgage-backed securities	255,523		8,872		1,541		262,854
Asset-backed securities	52,181		282		849		51,614
Redeemable preferred stocks	6,890		—		677		6,213
Total fixed maturities	$	862,565	$	21,709	$	10,488	$	873,786

December 31, 2019
U.S. government and agency securities	$	120,260	$	749	$	193	$	120,816
Foreign government	3,975		97		1		4,071
States, municipalities and political subdivisions	131,203		2,611		63		133,751
Public utilities	24,660		700		26		25,334
Corporate securities	281,892		7,123		143		288,872
Mortgage-backed securities	248,206		4,174		477		251,903
Asset-backed securities	56,487		683		41		57,129
Redeemable preferred stocks	2,915		72		2		2,985
Total fixed maturities	$	869,598	$	16,209	$	946	$	884,861

Equity securities are summarized as follows:



	March 31, 2020				December 31, 2019
	Estimated Fair Value		Percent of Total		Estimated Fair Value		Percent of Total

Mutual funds	$	52,492	46.9	%	$	65,453	56.1	%
Public utilities	6,255		5.6		3,663		3.1
Other common stocks	45,801		40.9		44,492		38.2
Nonredeemable preferred stocks	7,367		6.6		3,002		2.6
Total equity securities	$	111,915	100.0	%	$	116,610	100.0	%

UNITED INSURANCE HOLDINGS CORP.

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2020

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 months ended March 31, 2020 and 2019:



	2020					2019
	Gains (Losses)			Fair Value at Sale		Gains (Losses)			Fair Value at Sale
Three Months Ended March 31,
Fixed maturities	$	345		$	59,225	$	248		$	6,004
Equity securities	12			280		6			59
Short-term investments	—			35		—			—
Total realized gains	357			59,540		254			6,063
Fixed maturities	(337		)	4,518		(36		)	9,589
Equity securities	(88		)	953		(37		)	383
Short-term investments	—			128		—			—
Total realized losses	(425		)	5,599		(73		)	9,972
Net realized investment gains (losses)	$	(68	)	$	65,139	$	181		$	16,035

The table below summarizes our fixed maturities at March 31, 2020 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.



	March 31, 2020
	Cost or Amortized Cost		Percent of Total		Fair Value		Percent of Total
Due in one year or less	$	81,916	9.5	%	$	81,888	9.4	%
Due after one year through five years	266,843		30.9		269,289		30.8
Due after five years through ten years	194,258		22.5		196,540		22.5
Due after ten years	11,844		1.4		11,601		1.3
Asset and mortgage backed securities	307,704		35.7		314,468		36.0
Total	$	862,565	100.0	%	$	873,786	100.0	%

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



	Three Months Ended March 31,
	2020			2019
Fixed maturities	$	5,470		$	6,062
Equity securities	771			492
Cash and cash equivalents	671			135
Other investments	266			768
Other assets	9			88
Investment income	7,187			7,545
Investment expenses	(270		)	(250		)
Net investment income	$	6,917		$	7,295

UNITED INSURANCE HOLDINGS CORP.

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2020

Portfolio monitoring

We have a quarterly portfolio monitoring process to identify and evaluate each fixed-income security whose carrying value may be impaired as the result of a credit loss. For each fixed-income security in an unrealized loss position, if we determine that we intend to sell the security or 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. The security's entire decline in fair value is recorded in earnings.

If our management decides not to sell the fixed-income security and it is more likely than not that we will not be required to sell the fixed-income security before recovery of its amortized cost basis, we evaluate whether the decline in fair value has resulted from credit losses or other factors. This is typically indicated by a change in the rating of the security assigned by a rating agency, and any adverse conditions specifically related to the security or industry, among other factors. If the assessment indicates that a credit loss may exist, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses will be recorded in earnings. Credit loss is limited to the difference between a security's amortized cost basis and its fair value. Any additional impairment not recorded through an allowance for credit losses is recognized in other comprehensive income (loss).

During the three months ended March 31, 2020, we determined that none of our fixed-income securities shown in the table below that are in an unrealized loss position, have declines in fair value that are reflected as a result of credit losses. Therefore, no credit loss allowance was recorded at March 31, 2020. The issuers of our debt security investments 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. Equity securities are reported at fair value with changes in fair value recognized in the valuation of equity investments.

UNITED INSURANCE HOLDINGS CORP.

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2020

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
March 31, 2020
U.S. government and agency securities	3	$	2	$	2,467	22	$	42	$	13,125
Foreign governments	—	—		—		1	1		350
States, municipalities and political subdivisions	19	38		13,084		—	—		—
Public utilities	31	313		14,960		—	—		—
Corporate securities	300	6,948		134,296		10	77		2,792
Mortgage-backed securities	93	1,304		53,126		10	237		3,904
Asset-backed securities	57	843		23,749		1	6		994
Redeemable preferred stocks	66	677		6,116		—	—		—
Total fixed maturities	569	$	10,125	$	247,798	44	$	363	$	21,165

December 31, 2019
U.S. government and agency securities	37	$	89	$	26,372	39	$	104	$	31,364
Foreign governments	—	—		—		2	1		600
States, municipalities and political subdivisions	31	61		14,508		2	2		1,262
Public utilities	9	25		4,626		2	1		250
Corporate securities	42	124		22,435		27	19		9,605
Mortgage-backed securities	89	322		59,101		50	155		12,738
Asset-backed securities	15	34		8,447		5	7		1,259
Redeemable preferred stocks	—	—		—		1	2		97
Total fixed maturities	223	$	655	$	135,489	128	$	291	$	57,175

⁽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.

UNITED INSURANCE HOLDINGS CORP.

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2020

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 March 31, 2020 and December 31, 2019. Changes in interest rates subsequent to March 31, 2020 may affect the fair value of our investments.

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

Any change in the estimated fair value of our fixed-income securities would impact the amount of unrealized gain or loss we have recorded, which could change the amount we have recorded for our investments and other comprehensive income (loss) on our Unaudited Condensed Consolidated Balance Sheet as of March 31, 2020.

UNITED INSURANCE HOLDINGS CORP.

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2020

The following table presents the fair value of our financial instruments measured on a recurring basis by level at March 31, 2020 and December 31, 2019:



	Total		Level 1		Level 2		Level 3
March 31, 2020
U.S. government and agency securities	$	109,520	$	—	$	109,520	$	—
Foreign government	3,790		—		3,790		—
States, municipalities and political subdivisions	129,809		—		129,809		—
Public utilities	27,291		—		27,291		—
Corporate securities	282,695		—		282,695		—
Mortgage-backed securities	262,854		—		262,854		—
Asset-backed securities	51,614		—		51,614		—
Redeemable preferred stocks	6,213		1,815		4,398		—
Total fixed maturities	873,786		1,815		871,971		—
Mutual funds	52,492		52,492		—		—
Public utilities	6,255		6,255		—		—
Other common stocks	45,801		45,801		—		—
Non-redeemable preferred stocks	7,367		7,367		—		—
Total equity securities	111,915		111,915		—		—
Other investments ⁽¹⁾	1,590		300		1,290		—
Total investments	$	987,291	$	114,030	$	873,261	$	—

December 31, 2019
U.S. government and agency securities	$	120,816	$	—	$	120,816	$	—
Foreign government	4,071		—		4,071		—
States, municipalities and political subdivisions	133,751		—		133,751		—
Public utilities	25,334		—		25,334		—
Corporate securities	288,872		—		288,872		—
Mortgage-backed securities	251,903		—		251,903		—
Asset-backed securities	57,129		—		57,129		—
Redeemable preferred stocks	2,985		747		2,238		—
Total fixed maturities	884,861		747		884,114		—
Mutual Funds	65,453		65,453		—		—
Public utilities	3,663		3,663		—		—
Other common stocks	44,492		44,492		—		—
Non-redeemable preferred stocks	3,002		3,002		—		—
Total equity securities	116,610		116,610		—		—
Other investments ⁽¹⁾	499		300		199		—
Total investments	$	1,001,970	$	117,657	$	884,313	$	—

⁽¹⁾ Other investments included in the fair value hierarchy exclude these limited partnership interests that are measured at estimated fair value using the net asset value per share (or its equivalent) practical expedient.

The carrying amounts for the following financial instrument categories approximate their fair values at March 31, 2020 and December 31, 2019, 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.

UNITED INSURANCE HOLDINGS CORP.

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2020

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 March 31, 2020, we transferred no investments between levels.

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

Other investments

We acquired investments in limited partnerships, recorded in the other investments line of our Unaudited Condensed Consolidated Balance Sheets, and we currently account for these investments at fair value utilizing a net asset value per share equivalent methodology.

The information presented in the table below is as of March 31, 2020:



	Book Value		Unrealized Gain		Unrealized Loss		Fair Value
Limited partnership investments ⁽¹⁾	$	7,746	$	321	$	92	$	7,975
Certificates of deposit	300		—		—		300
Short-term investments	1,290		—		—		1,290
Total other investments	$	9,336	$	321	$	92	$	9,565

⁽¹⁾ Distributions will be generated from investment gains, from operating income, from underlying investments of funds, and from liquidation of the underlying assets of the funds. We estimate that the underlying assets of the funds will be liquidated over the next two to ten years.

Restricted Cash

We are required to maintain assets on deposit with various regulatory authorities to support our insurance operations. The cash on deposit with state regulators is available to settle insurance liabilities. We also use trust funds in certain reinsurance transactions.

The following table presents the components of restricted assets:



	March 31, 2020		December 31, 2019
Trust funds	$	63,134	$	70,668
Cash on deposit (regulatory deposits)	924		920
Total restricted cash	$	64,058	$	71,588

UNITED INSURANCE HOLDINGS CORP.

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2020

4) EARNINGS PER SHARE (EPS)

Basic EPS is based on the weighted average number of common shares outstanding for the period, excluding any dilutive common share equivalents. Diluted EPS reflects the potential dilution resulting from the vesting of outstanding restricted stock awards, restricted stock units, performance stock units and stock options. The following table shows the computation of basic and diluted EPS for the three-month periods ended March 31, 2020 and 2019, respectively:



	Three Months Ended March 31,
	2020			2019
Numerator:
Net income (loss) attributable to UIHC common stockholders	$	(12,723	)	$	9,469

Denominator:
Weighted-average shares outstanding	42,805,527			42,696,681
Effect of dilutive securities	—			289,803
Weighted-average diluted shares	42,805,527			42,986,484

Earnings available to UIHC common stockholders per share
Basic	$	(0.30	)	$	0.22
Diluted	$	(0.30	)	$	0.22

See Note 15 of these Notes to Unaudited Condensed Consolidated Financial Statements for additional information on the stock grants related to dilutive securities.

5) PROPERTY AND EQUIPMENT, NET

Property and equipment, net consisted of the following:



	March 31, 2020				December 31, 2019
Land	$	2,114			$	2,114
Building and building improvements (construction in progress of $2,904 and $2,180, respectively)	12,040				11,315
Computer hardware and software(software in progress of $8,805 and $6,317, respectively)	35,722				33,219
Office furniture and equipment	3,234				3,260
Leasehold improvements	94				20
Leased vehicles⁽¹⁾	1,898			—	1,693
Total, at cost	55,102				51,621
Less: accumulated depreciation and amortization	(20,147		)		(18,893		)
Property and equipment, net	$	34,955			$	32,728

⁽¹⁾Includes vehicles under capital leases. See Note 10 of these Notes to Unaudited Condensed Consolidated Financial Statements for further information on leases.

Depreciation and amortization expense under property and equipment was $1,287,000 and $870,000 for the three months ended March 31, 2020 and 2019, respectively.

UNITED INSURANCE HOLDINGS CORP.

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2020

6) GOODWILL AND INTANGIBLE ASSETS

Goodwill

The carrying amount of goodwill, both at March 31, 2020 and December 31, 2019, was $73,045,000. There was no goodwill acquired or disposed of during the three-month periods ended March 31, 2020 and 2019.

We completed our most recent goodwill impairment testing during the fourth quarter of 2019 and determined that there was no impairment in the value of the asset as of December 31, 2019. The future potential impacts of COVID-19 on the operating results of our reporting units are uncertain, as we continue to monitor the global economic volatility. However, we remain committed to our strategic plan to realize our long-term forecasts. As a result of our analysis, and in consideration of the totality of events and circumstances, we did not identify any triggering events of impairment during the first quarter of 2020.

No impairment loss in the value of goodwill was recognized during the three-month periods ended March 31, 2020 and 2019. Additionally, there was no accumulated impairment related to goodwill at March 31, 2020 or December 31, 2019.

Intangible Assets

The following is a summary of intangible assets excluding goodwill recorded as intangible assets on our Unaudited Condensed Consolidated Balance Sheets:



	March 31, 2020		December 31, 2019
Intangible assets subject to amortization	$	21,303	$	22,440
Indefinite-lived intangible assets⁽¹⁾	3,638		3,639
Total	$	24,941	$	26,079

⁽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
March 31, 2020
Value of business acquired	—	$	42,788	$	(42,788	)	$	—
Agency agreements acquired	6.7	34,661		(16,593		)	18,068
Trade names acquired	4.0	6,381		(3,146		)	3,235
Total		$	83,830	$	(62,527	)	$	21,303

December 31, 2019
Value of business acquired	—	$	42,788	$	(42,788	)	$	—
Agency agreements acquired	6.8	34,661		(15,658		)	19,003
Trade names acquired	4.3	6,381		(2,944		)	3,437
Total		$	83,830	$	(61,390	)	$	22,440

No impairment in the value of amortizing or non-amortizing intangible assets was recognized during the three months ended March 31, 2020 and 2019.

Amortization expense of our intangible assets was $1,137,000 and $1,365,000 for the three months ended March 31, 2020 and 2019, respectively.

UNITED INSURANCE HOLDINGS CORP.

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2020

Estimated amortization expense of our intangible assets to be recognized by the Company during the remainder of 2020 and over the next five years is as follows:



Year ending December 31,	Estimated Amortization Expense
Remaining in 2020	$	3,130
2021	3,555
2022	3,246
2023	3,246
2024	2,640
2025	2,438

7) REINSURANCE

Our reinsurance program is designed, utilizing our risk management methodology, to address our exposure to catastrophes. Our program provides reinsurance protection for catastrophes, including hurricanes, tropical storms and tornadoes. These reinsurance agreements are part of our catastrophe management strategy, which is intended to provide our stockholders an acceptable return on the risks assumed in our property business, and to reduce variability of earnings, while providing protection to our policyholders. Although reinsurance agreements contractually obligate our reinsurers to reimburse us for the agreed-upon portion of our gross paid losses, they do not discharge our primary liability.

Our program includes excess of loss, aggregate excess of loss and quota share treaties. Our excess of loss treaty, in effect from June 1, 2019 through May 31, 2020, provides coverage for catastrophe losses from named or numbered windstorms and earthquakes up to an exhaustion point of approximately $3,200,000,000. In addition to this treaty, we have an aggregate excess of loss treaty effective January 1, 2020, which provides coverage for all catastrophe perils other than hurricanes, tropical storms, tropical depressions and earthquakes. We did not cede any catastrophe losses under this treaty for the three months ended March 31, 2020. The quota share agreement, effective June 1, 2019 to May 31, 2020, provides coverage for all catastrophe perils and attritional losses incurred by two of our insurance subsidiaries, UPC and FSIC. For all catastrophe perils, the quota share agreement provides ground-up protection effectively reducing our retention for catastrophe losses.

Reinsurance recoverable at the balance sheet dates consists of the following:



	March 31,		December 31,
	2020		2019
Reinsurance recoverable on unpaid losses and loss adjustment expenses	$	423,609	$	482,315
Reinsurance recoverable on paid losses and loss adjustment expenses	90,876		67,821
Reinsurance recoverable	$	514,485	$	550,136

We write flood insurance under an agreement with the National Flood Insurance Program. We cede 100% of the premiums written and the related risk of loss to the federal government. We earn commissions for the issuance of flood policies based upon a fixed percentage of net written premiums and the processing of flood claims based upon a fixed percentage of incurred losses, and we can earn additional commissions by meeting certain growth targets for the number of in-force policies. We recognized commission revenue from our flood program of $333,000 and $342,000 for the three-month periods ended March 31, 2020 and 2019, respectively.

UNITED INSURANCE HOLDINGS CORP.

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2020

8) LIABILITY FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSE (LAE)

We determine the reserve for unpaid losses on an individual case basis for all incidents reported. The liability also includes amounts for incurred but not reported (IBNR) claims as of the balance sheet date.

The table below shows the analysis of our reserve for unpaid losses for the three months ended March 31, 2020 and 2019 on a GAAP basis:



	March 31,
	2020			2019
Balance at January 1	$	760,357		$	661,203
Less: reinsurance recoverable on unpaid losses	482,315			477,870
Net balance at January 1	$	278,042		$	183,333

Incurred related to:
Current year	103,966			98,913
Prior years	(1,129		)	5,634
Total incurred	$	102,837		$	104,547
Paid related to:
Current year	30,935			31,215
Prior years	62,511			60,893
Total paid	$	93,446		$	92,108

Net balance at March 31	$	287,433		$	195,772
Plus: reinsurance recoverable on unpaid losses	423,609			434,196
Balance at March 31	$	711,042		$	629,968

Composition of reserve for unpaid losses and LAE:
Case reserves	$	294,679		$	258,550
IBNR reserves	416,363			371,418
Balance at March 31	$	711,042		$	629,968

Based upon our internal analysis and our review of the annual statement of actuarial opinion provided by our actuarial consultants at year end, we believe that the reserve for unpaid losses reasonably represents the amount necessary to pay all claims and related expenses which may arise from incidents that have occurred as of the balance sheet date.

As reflected in the table above, we had favorable developments in 2020 related to prior year losses. These favorable developments come as a result of strengthening of our case reserves at the end of 2019 based on a review of historical loss trends. The incurred losses and LAE and payments made during the quarter ended March 31, 2020 were in line with our incurred losses and LAE and payments made during the quarter ended March 31, 2019.

UNITED INSURANCE HOLDINGS CORP.

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2020

9) LONG-TERM DEBT

Long-Term Debt

The table below presents all long-term debt outstanding as of March 31, 2020 and December 31, 2019:



		Effective Interest Rate	Carrying Value at
	Maturity	Effective Interest Rate	March 31, 2020		December 31, 2019
Senior Notes Payable	December 15, 2027	6.25%	$	150,000	$	150,000
Florida State Board of Administration Note Payable	July 1, 2026	1.90%	7,353		7,647
BB&T Term Note Payable	May 26, 2031	3.31%	3,871		3,958
Total long-term debt			$	161,224	$	161,605

Senior Notes Payable

On December 13, 2017, we issued $150,000,000 of 10-year senior notes (the Senior Notes) that will mature on December 15, 2027 and bear interest at a rate equal to 6.25% per annum payable semi-annually on each June 15 and December 15, commencing June 15, 2018. The Senior Notes are senior unsecured obligations of the Company. We may redeem the Senior Notes at our option, at any time and from time to time in whole or in part, at a redemption price equal to the greater of (i) 100% of the principal amount of the notes to be redeemed and (ii) the sum of the present values of the remaining scheduled payments of principal and interest thereon from the date of redemption to the date that is three months prior to maturity. On or after that date, we may redeem the Senior Notes at par.

Florida State Board of Administration Note Payable

On September 22, 2006, we issued a $20,000,000, 20-year note payable to the Florida State Board of Administration (the SBA Note). For the first three years of the SBA Note we were required to pay interest only. On October 1, 2009, we began to repay the principal in addition to interest. The SBA Note bears an annual interest rate equivalent to the 10-year Constant Maturity Treasury rate (as defined in the SBA Note agreement), which resets quarterly.

BB&T Term Note Payable

On May 26, 2016, we issued a $5,200,000, 15-year term note payable to BB&T (the BB&T Note), with the intent to use the funds to purchase, renovate, furnish and equip our principal executive office. The BB&T Note bears interest at 1.65% in excess of the one-month LIBOR, which resets monthly. LIBOR is expected to be phased out by the end of 2021. In the event of default, BB&T may, among other things, declare its loan immediately due and payable, require us to pledge additional collateral to the bank, and take possession of and foreclose upon our principal executive office, which has been pledged to the bank as security for the loan.

Financial Covenants

Senior Notes - Our Senior Notes provide that the Company and its subsidiaries shall not incur any indebtedness unless no default exists and the Company’s leverage ratio as of the last day of any annual or quarterly period (the balance sheet date) immediately preceding the date on which such additional indebtedness is incurred would have been no greater than 0.3:1, determined on a pro forma basis as if the additional indebtedness and all other indebtedness incurred since the immediately preceding balance sheet date had been incurred and the proceeds therefrom applied as of such day. The Company and its subsidiaries also may not create, assume, incur or permit to exist any indebtedness for borrowed money that is secured by a lien on the voting stock of any significant subsidiary without securing the Senior Notes equally. The Company may not issue, sell, assign, transfer or otherwise dispose of, directly or indirectly, any of the capital stock of the Company’s significant subsidiaries as of the issue date of the Senior Notes (except to the Company or to one or more of the Company’s other subsidiaries, or for the purpose of qualifying directors or as may be required by law or regulation), subject to certain exceptions. At March 31, 2020, we were in compliance with the covenants in the Senior Notes.

UNITED INSURANCE HOLDINGS CORP.

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2020

SBA Note - Our SBA Note requires that UPC maintain either a 2:1 ratio of net written premium to surplus, or net writing ratio, or a 6:1 ratio of gross written premium to surplus, or gross writing ratio, to avoid additional interest penalties. The SBA Note agreement defines surplus for the purpose of calculating the required ratios as the $20,000,000 of capital contributed to UPC under the agreement plus the outstanding balance of the note. Should UPC fail to exceed either a net writing ratio of 1.5:1 or a gross writing ratio of 4.5:1, UPC's interest rate will increase by 450 basis points above the 10-year Constant Maturity Treasury rate, which was 1.90% at the end of March 2020. Any other writing ratio deficiencies result in an interest rate penalty of 25 basis points above the stated rate of the note. Our SBA Note further provides that the Florida State Board of Administration may, among other things, declare its loan immediately due and payable upon any default existing under the SBA Note; however, any payment is subject to approval by the insurance regulatory authority. At March 31, 2020, we were in compliance with the covenants in the SBA Note.

BB&T Note - Our BB&T Note requires that, at all times while there has been no losses from our insurance subsidiaries' operations (non-recurring losses), we will maintain a minimum cash flow coverage ratio of 1.2:1. The cash flow coverage ratio is defined as the ratio of our cash flow to debt service charges. This ratio will be tested annually, based on our audited financial statements. For the one-year period following a non-recurring loss, we are required to maintain a minimum cash flow coverage ratio of 1.0:1. This covenant will only be effective if the pre non-recurring losses test is failed, and is only available and effective for one annual test period. Thereafter, the non-recurring loss cash flow coverage ratio of 1.2:1 will immediately apply. At the time of the most recent annual test period, December 31, 2019, we were not in compliance with the minimum cash flow coverage ratio covenant in the BB&T Note. However, we obtained a waiver from BB&T for such non-compliance for the year ended December 31, 2019.

In addition, the BB&T Note requires that we establish and maintain with BB&T at all times during the term of the loan a non-interest bearing demand deposit account with a minimum balance of $500,000, and an interest-bearing account with a minimum balance of $1,500,000. In the event of default, BB&T may, among other things, declare its loan immediately due and payable, require us to pledge additional collateral to the bank, and take possession of and foreclose upon our corporate headquarters, which has been pledged to the bank as security for the loan. At March 31, 2020, we were in compliance with the covenants in the BB&T Note other than the minimum cash flow coverage ratio covenant.

Debt Issuance Costs

The table below presents the rollforward of our debt issuance costs paid, in conjunction with the debt instruments described above, during the three months ended March 31, 2020 and 2019:



	2020			2019
Balance at January 1,	$	2,672		$	3,010
Additions	—			—
Amortization	(84		)	(84		)
Balance at March 31,	$	2,588		$	2,926

10) COMMITMENTS AND CONTINGENCIES

Litigation

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

At March 31, 2020, we were not involved in any material non-claims-related legal actions.

UNITED INSURANCE HOLDINGS CORP.

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2020

Commitments to fund partnership investments

We have fully funded two limited partnership investments and have committed to fund our remaining four limited partnership investments. The amount of unfunded commitments was $2,161,000 and $2,201,000 at March 31, 2020 and December 31, 2019, respectively.

Leases

We, as lessee, have entered into leases of commercial office space of various term lengths. In addition to office space, we lease office equipment and a parking lot under operating leases and vehicles under finance leases.

The classification of operating and finance lease asset and liability balances within the Unaudited Condensed Consolidated Balance Sheets was as follows:



	Financial Statement Line	March 31, 2020		December 31, 2019
Assets
Operating lease assets	Other assets	$	2,359	$	335
Financing lease assets	Property and equipment, net	1,316		1,263
Total lease assets		$	3,675	1,598

Liabilities
Operating lease liabilities	Operating lease liability	$	2,421	$	324
Financing lease liabilities	Other liabilities	37		34
Total lease liabilities		$	2,458	$	358

The components of lease expenses were as follows:



	Three Months Ended
	March 31, 2020		March 31, 2019
Operating lease expense	$	127	$	43
Financing lease expense:
Amortization of leased assets	151		56
Short-term lease expense	—		77
Net lease expense	$	278	$	176

At March 31, 2020, future minimum gross lease payments relating to these non-cancellable operating and finance lease agreements were as follows:



	Operating Leases			Finance Leases			Total
Remaining in 2020	$	472		$	14		$	486
2021	601			18			619
2022	527			8			535
2023	516			—			516
2024	528			—			528
Thereafter	1,373			—			1,373
Total undiscounted future minimum lease payments	4,017			40			4,057
Less: Imputed interest	(1,596		)	(3		)	(1,599		)
Present value of lease liabilities	$	2,421		$	37		$	2,458

UNITED INSURANCE HOLDINGS CORP.

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2020

Weighted average remaining lease term and discount rate related to operating and finance leases were as follows:



	March 31, 2020		December 31, 2019
Weighted average remaining lease term (months)
Operating leases	75		176
Financing leases	27		28

Weighted average discount rate
Operating leases	3.56	%	4.00	%
Financing leases	3.27	%	3.27	%

Other cash and non-cash related activities were as follows:



	Three Months Ended
	March 31, 2020		March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities
Investing cash flows from financing leases	$	197	361

Right-of-use assets obtained in exchange for new operating lease liabilities	2,136		—
Right-of-use assets obtained in exchange for new financing lease liabilities	203		371

See Note 9 of these Notes to Unaudited Condensed Consolidated Financial Statements for information regarding commitments related to long-term debt, and Note 11 of these Notes to Unaudited Condensed Consolidated Financial Statements for information regarding commitments related to regulatory actions.

11) STATUTORY ACCOUNTING AND REGULATION

The insurance industry is heavily regulated. State laws and regulations, as well as national regulatory agency requirements, govern the operations of all insurers such as our insurance subsidiaries. The various laws and regulations require that insurers maintain minimum amounts of statutory surplus and risk-based capital, restrict insurers' ability to pay dividends, specify allowable investment types and investment mixes, and subject insurers to assessments. Our insurance subsidiaries UPC, ACIC and JIC are domiciled in Florida, while FSIC and IIC are domiciled in Hawaii and New York, respectively. At March 31, 2020, and during the three months then ended, our insurance subsidiaries met all regulatory requirements of the states in which they operate. We did not receive any significant assessments from regulatory authorities in the states in which our insurance subsidiaries operate.

The National Association of Insurance Commissioners (NAIC) has Risk-Based Capital (RBC) guidelines for insurance companies that are designed to assess capital adequacy and to raise the level of protection that statutory surplus provides for policyholders. Most states, including Florida, Hawaii and New York, have enacted statutory requirements adopting the NAIC RBC guidelines, and insurers having less statutory surplus than required will be subject to varying degrees of regulatory action, depending on the level of capital inadequacy. State insurance regulatory authorities could require an insurer to cease operations in the event the insurer fails to maintain the required statutory capital.

The state laws of Florida, Hawaii and New York permit an insurer to pay dividends or make distributions out of that part of statutory surplus derived from net operating profit and net realized capital gains. The state laws further provide calculations to determine the amount of dividends or distributions that can be made without the prior approval of the insurance regulatory authorities in those states and the amount of dividends or distributions that would require prior approval of the insurance regulatory authorities in those states. Statutory RBC requirements may further restrict our insurance subsidiaries' ability to pay dividends or make distributions if the amount of the intended dividend or distribution would cause statutory surplus to fall below minimum RBC requirements.

UNITED INSURANCE HOLDINGS CORP.

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2020

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

Our insurance subsidiaries must each file with the various insurance regulatory authorities an “Annual Statement” which reports, among other items, statutory net income (loss) and surplus as regards policyholders, which is called stockholders' equity under GAAP. For the three months ended March 31, 2020, our combined recorded statutory net income was $7,208,000. Our combined recorded statutory net loss for the three months ended March 31, 2019 was $7,735,000.

Our insurance subsidiaries must maintain capital and surplus ratios or balances as determined by the regulatory authority of the states in which they are domiciled. At March 31, 2020, we met these requirements. The amount of surplus as regards policyholders for our regulated entities at March 31, 2020 and December 31, 2019 was $403,913,000 and $415,948,000, respectively.

12) RELATED PARTY TRANSACTIONS

AmRisc, LLC

AmRisc, a managing general agent, handles the underwriting, claims processing, premium collection and reinsurance review for AmCo. Effective January 1, 2019, R. Daniel Peed, Vice Chairman of our Board of Directors, became Non-Executive Vice Chairman of AmRisc. Effective December 31, 2019, Mr. Peed resigned from this position, terminating the related party relationship.

In accordance with the managing general agency contract with AmRisc, we recorded $107,619,000 of gross written premiums for the three-month period ended March 31, 2019, resulting in gross fees and commission (including a profit commission) of $28,979,000 for the three-month period ended March 31, 2019, due to AmRisc. Receivables are stated net of the fees and commission due under the contract.

In addition to the direct premiums written, we recorded $1,545,000 in ceded premiums to AmRisc as a reinsurance intermediary for the three-month period ended March 31, 2019.

13) ACCUMULATED OTHER COMPREHENSIVE INCOME

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

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



	Pre-Tax Amount			Tax (Expense) Benefit			Net-of-Tax Amount
December 31, 2019	$	14,962		$	(3,643	)	$	11,319
Changes in net unrealized gains on investments	(3,802		)	890			(2,912		)
Reclassification adjustment for realized gains	69			17			86
March 31, 2020	$	11,229		$	(2,736	)	$	8,493

UNITED INSURANCE HOLDINGS CORP.

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2020

14) STOCKHOLDERS' EQUITY

Our Board of Directors declared dividends on our outstanding shares of common stock to stockholders of record as follows for the periods presented (in thousands, except per share amounts):



	Three Months Ended March 31,
	2020				2019
	Per Share Amount		Aggregate Amount		Per Share Amount		Aggregate Amount
First Quarter	$	0.06	$	2,571	$	0.06	$	2,569

In July 2019, our Board of Directors authorized a stock repurchase plan of up to $25,000,000 of our common stock. As of March 31, 2020, we had not yet repurchased any shares under this stock repurchase plan. The timing and volume of repurchases are at the discretion of management, based on the capital needs of the business, the market price of UIHC common stock, and general market conditions. The plan has no expiration date, and the plan may be suspended or discontinued at any time.

See Note 15 in these Notes to Unaudited Condensed Consolidated Financial Statements for information regarding stock-based compensation activity.

15) STOCK-BASED COMPENSATION

We account for stock-based compensation under the fair value recognition provisions of ASC Topic 718 - Compensation - Stock Compensation. We recognize stock-based compensation cost over the award’s requisite service period on a straight-line basis for time-based restricted stock grants and performance-based restricted stock grants. We record forfeitures as they occur for all stock-based compensation.

The following table presents our total stock-based compensation expense:



	Three Months Ended March 31,
	2020		2019
Employee stock-based compensation expense
Pre-tax	$	526	$	530
Post-tax ⁽¹⁾	416		419
Director stock-based compensation expense
Pre-tax	174		371
Post-tax ⁽¹⁾	137		293

⁽¹⁾ The after tax amounts are determined using the 21% corporate federal tax rate.

We had approximately $3,037,000 of unrecognized stock compensation expense at March 31, 2020 related to non-vested stock-based compensation granted, which we expect to recognize over a weighted-average period of approximately 1.7 years. We had approximately $72,000 of unrecognized director stock-based compensation expense at March 31, 2020 related to non-vested director stock-based compensation granted, which we expect to recognize over a weighted-average period of approximately 0.1 years.

Restricted stock, restricted stock units and performance stock units

Stock-based compensation cost for restricted stock awards, restricted stock units and performance stock units is measured based on the closing fair market value of our common stock on the date of grant, which vest in equal installments over the requisite service period of typically three years. Restricted stock awards granted to non-employee directors vest over a one-year period. Each restricted stock unit and performance stock unit represents our obligation to deliver to the holder one share of common stock upon vesting.

Performance stock units vest based on the Company's return on average equity compared to a defined group of peer companies. On the grant date, we issue the target number of performance stock units. They are subject to forfeitures if

UNITED INSURANCE HOLDINGS CORP.

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2020

performance goals are not met. The actual number of performance stock units earned can vary from zero to 150 percent of the target for the 2018 and 2019 awards.

We granted 1,175 shares of restricted common stock during the three-month period ended March 31, 2020, which had a weighted-average grant date fair value of $8.75 per share. We granted 22,052 shares of restricted common stock during the three-month period ended March 31, 2019, which had a weighted-average grant date fair value of $16.54 per share.

The following table presents certain information related to the activity of our non-vested common stock grants:



	Number of Restricted Shares	Weighted Average Grant Date Fair Value
Outstanding as of December 31, 2019	214,495	$	17.49
Granted	1,175	8.75
Less: Forfeited	400	16.54
Less: Vested	25,753	16.67
Outstanding as of March 31, 2020	189,517	$	17.55

Stock options

Stock option fair value was estimated on the grant date using the Black-Scholes-Merton formula. Stock options vest in equal installments over the requisite service period of typically three years. The following weighted-average assumptions were used to value the stock options granted:



	2020
Expected annual dividend yield	1.28	%
Expected volatility	41.07	%
Risk-free interest rate	3.11	%
Expected term	6	years

Expected annual dividend yield is based on the current quarterly dividend of $0.06 per share and the stock price on the grant date. The expected volatility is a historical volatility calculated based on the daily closing prices over a period equal to the expected term. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the grant date. Expected term takes into account the three-year graded vesting term and the 10-year contractual term of the option.

The following table presents certain information related to the activity of our non-vested stock option grants:



	Number of Stock Options	Weighted Average Exercise Prices		Weighted Average Remaining Contractual Term (years)	Aggregate Intrinsic Value
Outstanding as of December 31, 2019	207,069	$	18.69	9.00	$	—
Granted	—	—		—	—
Less: Forfeited	—	—		—	—
Less: Exercised	—	—		—	—
Outstanding as of March 31, 2020	207,069	$	18.69	8.75	$	—

Vested as of March 31, 2020	35,965	$	20.94	8.51	$	—
Exercisable as of March 31, 2020	35,965	$	20.94	8.51	$	—

UNITED INSURANCE HOLDINGS CORP.

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2020

16) SUBSEQUENT EVENTS

On May 5, 2020, our Board of Directors declared a $0.06 per share quarterly cash dividend payable on May 26, 2020, to stockholders of record on May 19, 2020.

On May 5, 2020, our shareholders approved the 2020 Omnibus Incentive Plan which adds an additional 2,000,000 shares to our current equity plan.

We will continue to monitor the scope, severity and longevity of business shutdowns and economic disruption as a result of the COVID-19 outbreak and the actions government may take to contain or mitigate the spread of the virus or address its impact on individuals, businesses and the economy, which may cause further business disruption, economic uncertainty and market volatility that will impact our business, results of operations and financial condition.

UNITED INSURANCE HOLDINGS CORP.

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Unaudited Condensed Consolidated Financial Statements and related notes appearing elsewhere in this Form 10-Q, as well as with the Consolidated Financial Statements and related footnotes under Part II. Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2019. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Actual results may differ materially from those expressed or implied in these forward-looking statements as a result of certain known and unknown risks and uncertainties. See "Forward-Looking Statements."

EXECUTIVE SUMMARY

Overview

United Insurance Holdings Corp. (referred to in this document as we, our, us, the Company or UPC Insurance) is a holding company primarily engaged in residential personal and commercial property and casualty insurance in the United States. We conduct our business principally through four wholly-owned insurance subsidiaries and one majority-owned insurance subsidiary: United Property & Casualty Insurance Company (UPC); American Coastal Insurance Company (ACIC); Family Security Insurance Company, Inc. (FSIC); Interboro Insurance Company (IIC); and Journey Insurance Company (JIC). Collectively, we refer to the holding company and all our subsidiaries, including non-insurance subsidiaries, as “UPC Insurance,” which is the preferred brand identification for our Company.

Our Company’s primary source of revenue is generated from writing insurance in Connecticut, Florida, Georgia, Hawaii,

Louisiana, Massachusetts, New Jersey, New York, North Carolina, Rhode Island, South Carolina and Texas. We are also licensed to write property and casualty insurance in an additional six states; however, we have not commenced writing in these states. Our target market in such areas consists of states where the perceived threat of natural catastrophe has caused large national insurance carriers to reduce their concentration of policies. We believe an opportunity exists for UPC Insurance to write profitable business in such areas.

We have historically grown our business through strong organic growth complemented by strategic acquisitions and partnerships, including our acquisitions of AmCo Holding Company, LLC (AmCo) and its subsidiaries, including ACIC, in April 2017, IIC in April 2016, and Family Security Holdings, LLC (FSH), including its subsidiary FSIC, in February 2015, and our strategic partnership with a subsidiary of Tokio Marine Kiln Group Limited, which formed JIC in August 2018. As a result of these transactions, along with the organic growth of premium in states in which we currently write premium, we have grown our policies in-force by 5.0% from 598,294 policies in-force at March 31, 2019 to 628,355 policies in-force at March 31, 2020.

The following discussion highlights significant factors influencing the consolidated financial position and results of

operations of UPC Insurance. In evaluating our results of operations, we use premiums written and earned, policies in-force and

new and renewal policies by geographic concentration. We also consider the impact of catastrophe losses and prior year

development on our loss ratios, expense ratios and combined ratios. In monitoring our investments, we use credit quality,

investment income, cash flows, realized gains and losses, unrealized gains and losses, asset diversification and portfolio

duration. To evaluate our financial condition, we consider our liquidity, financial strength, ratings, book value per share and

return on equity.

Impact of COVID-19

In recent months, there has been an outbreak of a novel strain of coronavirus (COVID-19) in many countries in the world, which was declared a pandemic by the World Health Organization in March 2020. This has resulted in governments worldwide enacting emergency measures to combat the spread of the virus. These measures, which include the implementation of travel bans and restrictions; self-imposed quarantine periods; state and local shelter-in-place orders; business and government shutdowns and social distancing, have caused material disruption to businesses and economies globally.

We are closely monitoring the impact of COVID-19 on our business, employees and policyholders. In response to the measures taken to limit the impact of COVID-19 described above, and for the protection of our employees and communities, we have shifted operations for all employees to remote work environments. We may take further actions that alter our operations as may be required by federal, state or local authorities, or which we determine are in the best interest of our employees.

UNITED INSURANCE HOLDINGS CORP.

We have not seen a material impact from COVID-19 on our business operations, financial position, liquidity or our ability to service our policyholders to date, with the exception of fluctuations in our investment portfolios due to volatility in the equity securities markets, as further described in this Part I, Item 2. "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Form 10-Q. The COVID-19 pandemic and resulting global disruptions did not have a material impact on our access to credit and capital markets needed to maintain sufficient liquidity for our continued operating needs. A severe or prolonged economic downturn related to impacts from COVID-19 could result in a variety of future risks to our business as described in Part II, Item 1A. "Risk Factors" of this Form 10-Q.

The scope, severity and longevity of any business shutdowns and economic disruptions as a result of the COVID-19 outbreak are highly uncertain and cannot be predicted at this time, as new information may continue to emerge concerning the actions governments may take to contain or mitigate the spread of the virus or address its impact on individuals, businesses and the economy.

2020 Highlights



	Three Months Ended March 31,
	2020			2019

Gross premiums written	$	335,183		$	318,559
Gross premiums earned	344,619			311,813
Net premiums earned	191,596			180,722
Total revenues	176,304			202,321
Earnings before income tax	(15,804		)	12,333
Consolidated net income (loss) attributable to UIHC	(12,723		)	9,469
Net income (loss) available to UIHC stockholders per diluted share	$	(0.30	)	$	0.22

Reconciliation of net income (loss) to core income:
Plus: Non-cash amortization of intangible assets	$	1,137		$	1,998
Less: Realized gains (losses) on investment portfolio	(68		)	181
Less: Unrealized gains (losses) on equity securities	(26,456		)	10,173
Less: Net tax impact ⁽¹⁾	5,809			(2,089		)
Core income⁽²⁾	9,129			3,202
Core income per diluted share⁽²⁾	$	0.21		$	0.07

Book value per share	$	11.30		$	12.52

⁽¹⁾ In order to reconcile the net income (loss) to the core income measure, we included the tax impact of all adjustments using the 21% corporate federal tax rate.

⁽²⁾ Core income , a measure that is not based on U.S. generally accepted accounting principles (GAAP), is reconciled above to net income (loss), the most directly comparable GAAP measure. Additional information regarding non-GAAP financial measures presented in this Form 10-Q is in "Definitions of Non-GAAP Measures" below.

UNITED INSURANCE HOLDINGS CORP.

Consolidated Net Income



	Three Months Ended March 31,
	2020			2019
REVENUE:
Gross premiums written	$	335,183		$	318,559
Change in gross unearned premiums	9,436			(6,746		)
Gross premiums earned	344,619			311,813
Ceded premiums earned	(153,023		)	(131,091		)
Net premiums earned	191,596			180,722
Net investment income	6,917			7,295
Net realized investment gains (losses)	(68		)	181
Net unrealized gains (losses) on equity securities	(26,456		)	10,173
Other revenue	4,315			3,950
Total revenue	176,304			202,321
EXPENSES:
Losses and loss adjustment expenses	102,837			104,547
Policy acquisition costs	58,875			55,246
Operating expenses	9,704			10,211
General and administrative expenses	18,301			17,581
Interest expense	2,419			2,409
Total expenses	192,136			189,994
Income (loss) before other income	(15,832		)	12,327
Other income	28			6
Income (loss) before income taxes	(15,804		)	12,333
Provision (benefit) for income taxes	(3,288		)	2,755
Net income (loss)	$	(12,516	)	$	9,578
Less: Net income attributable to noncontrolling interests	207			109
Net income (loss) attributable to UIHC	$	(12,723	)	$	9,469
Earnings available to UIHC common stockholders per diluted share	$	(0.30	)	$	0.22
Book value per share	$	11.30		$	12.52
Return on equity based on GAAP net income (loss)	(9.7		)%	0.3		%
Loss ratio, net ⁽¹⁾	53.7		%	57.8		%
Expense ratio ⁽²⁾	45.3		%	45.9		%
Combined ratio⁽³⁾	99.0		%	103.7		%
Effect of current year catastrophe losses on combined ratio	8.9		%	6.5		%
Effect of prior year development on combined ratio	(0.6		)%	3.1		%
Underlying combined ratio ⁽⁴⁾	90.7		%	94.1		%

⁽¹⁾ Loss ratio, net is calculated as losses and LAE net of losses ceded to reinsurers, relative to net premiums earned. Management uses this operating metric to analyze our loss trends and believes it is useful for investors to evaluate this component separately from our other operating expenses.

⁽²⁾ Expense ratio is calculated as the sum of all operating expenses less interest expense relative to net premiums earned. Management uses this operating metric to analyze our expense trends and believes it is useful for investors to evaluate this component separately from our loss expenses.

⁽³⁾ Combined ratio is the sum of the loss ratio, net and the expense ratio, net. Management uses this operating metric to analyze our total expense trends and believes it is a key indicator for investors when evaluating the overall profitability of our business.

⁽⁴⁾ Underlying combined ratio, a measure that is not based on GAAP, is reconciled above to the combined ratio, the most directly comparable GAAP measure. Additional information regarding non-GAAP financial measures presented in this Form 10-Q is in "Definitions of Non-GAAP Measures" below.

UNITED INSURANCE HOLDINGS CORP.

Definitions of Non-GAAP Measures

We believe that investors' understanding of our performance is enhanced by our disclosure of the following non-GAAP measures. Our methods for calculating these measures may differ from those used by other companies and therefore comparability may be limited.

Combined ratio excluding the effects of current year catastrophe losses and prior year reserve development (underlying combined ratio) is a non-GAAP measure, which is computed by subtracting the effect of current year catastrophe losses and prior year development. We believe that this ratio is useful to investors and it is used by management to highlight the trends in our business that may be obscured by current year catastrophe losses and prior year development. Current year catastrophe losses cause our loss trends to vary significantly between periods as a result of their incidence of occurrence and magnitude, and can have a significant impact on the combined ratio. Prior year development is caused by unexpected loss development on historical reserves. We believe it is useful for investors to evaluate these components separately and in the aggregate when reviewing our performance. The most directly comparable GAAP measure is the combined ratio. The underlying combined ratio should not be considered as a substitute for the combined ratio and does not reflect the overall profitability of our business.

Net loss and LAE excluding the effects of current year catastrophe losses and prior year reserve development (underlying loss and LAE) is a non-GAAP measure, which is computed by subtracting the effect of current year catastrophe losses and prior year reserve development from net loss and LAE. We use underlying loss and LAE figures to analyze our loss trends that may be impacted by current year catastrophe losses and prior year development on our reserves. As discussed previously, these two items can have a significant impact on our loss trends in a given period. We believe it is useful for investors to evaluate these components separately and in the aggregate when reviewing our performance. The most directly comparable GAAP measure is net loss and LAE. The underlying loss and LAE measure should not be considered a substitute for net loss and LAE and does not reflect the overall profitability of our business.

Net income excluding the effects of amortization of intangible assets, realized gains (losses) and unrealized gains (losses) on equity securities, net of tax (core income) is a non-GAAP measure, which is computed by adding amortization, net of tax, to net income and subtracting realized gains (losses) on our investment portfolio, net of tax, and unrealized gains (losses) on our equity securities, net of tax, from net income. Amortization expense is related to the amortization of intangible assets acquired through mergers and therefore the expense does not arise through normal operations. Investment portfolio gains (losses) and unrealized equity security gains (losses) vary independent of our operations. We believe it is useful for investors to evaluate these components separately and in the aggregate when reviewing our performance. The most directly comparable GAAP measure is net income. The core income measure should not be considered a substitute for net income and does not reflect the overall profitability of our business.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

When we prepare our consolidated financial statements and accompanying notes in conformity with GAAP, we must make estimates and assumptions about future events that affect the amounts we report. Certain of these estimates result from judgments that can be subjective and complex. As a result of that subjectivity and complexity, and because we continuously evaluate these estimates and assumptions based on a variety of factors, actual results could materially differ from our estimates and assumptions if changes in one or more factors require us to make accounting adjustments. During the three months ended March 31, 2020, we reassessed our critical accounting policies and estimates as disclosed in Note 2 to the Notes to Unaudited Condensed Consolidated Financial Statements and our Annual Report on Form 10-K for the year ended December 31, 2019; however, we have made no material changes or additions with regard to those policies and estimates, except for those standards adopted in 2020 as described in Note 2 in the Notes to Unaudited Condensed Consolidated Financial Statements.

RECENT ACCOUNTING STANDARDS

Please refer to Note 2 in the Notes to Unaudited Condensed Consolidated Financial Statements for a discussion of recent accounting standards that may affect us.

ANALYSIS OF FINANCIAL CONDITION - MARCH 31, 2020 COMPARED TO DECEMBER 31, 2019

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our accompanying unaudited condensed consolidated interim financial statements and related notes, and in conjunction with the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2019.

UNITED INSURANCE HOLDINGS CORP.

Investments

The primary goals of our investment strategy are to preserve capital, maximize after-tax investment income, maintain liquidity and minimize risk. To accomplish our goals, we purchase debt securities in sectors that represent the most attractive relative value, and we maintain a moderate equity exposure. Limiting equity exposure manages risks and helps to preserve capital for two reasons: first, bond market returns are less volatile than stock market returns, and second, should the bond issuer enter bankruptcy liquidation, bondholders generally have a higher priority than equityholders in a bankruptcy proceeding.

We must comply with applicable state insurance regulations that prescribe the type, quality and concentrations of investments our insurance subsidiaries can make; therefore, our current investment policy limits investment in non-investment-grade fixed maturities and limits total investment amounts in preferred stock, common stock and mortgage notes receivable. We do not invest in derivative securities.

Two outside asset management companies, which have authority and discretion to buy and sell securities for us, manage our investments subject to (i) the guidelines established by our Board of Directors and (ii) the direction of management. The Investment Committee of our Board of Directors reviews and approves our investment policy on a regular basis.

Our cash, cash equivalents, restricted cash and investment portfolio totaled $1,277,679,000 at March 31, 2020, compared to $1,298,780,000 at December 31, 2019.

The following table summarizes our investments, by type:



	March 31, 2020				December 31, 2019
	Estimated Fair Value		Percent of Total		Estimated Fair Value		Percent of Total
U.S. government and agency securities	$	109,520	8.6	%	$	120,816	9.3	%
Foreign government	3,790		0.3	%	4,071		0.3	%
States, municipalities and political subdivisions	129,809		10.2	%	133,751		10.3	%
Public utilities	27,291		2.1	%	25,334		2.0	%
Corporate securities	282,695		22.1	%	288,872		22.3	%
Mortgage-backed securities	262,854		20.6	%	251,903		19.4	%
Asset-backed securities	51,614		4.0	%	57,129		4.4	%
Redeemable preferred stocks	6,213		0.5	%	2,985		0.2	%
Total fixed maturities	873,786		68.4	%	884,861		68.2	%
Mutual funds	52,492		4.1	%	65,453		5.0	%
Public utilities	6,255		0.5	%	3,663		0.3	%
Other common stocks	45,801		3.6	%	44,492		3.4	%
Non-redeemable preferred stocks	7,367		0.6	%	3,002		0.2	%
Total equity securities	111,915		8.8	%	116,610		8.9	%
Other investments	9,565		0.7	%	10,252		0.8	%
Total investments	995,266		77.9	%	1,011,723		77.9	%
Cash and cash equivalents	218,355		17.1	%	215,469		16.6	%
Restricted cash	64,058		5.0	%	71,588		5.5	%
Total cash, cash equivalents, restricted cash and investments	$	1,277,679	100.0	%	$	1,298,780	100.0	%

We classify all of our fixed-maturity investments as available-for-sale. Our investments at March 31, 2020 and December 31, 2019 consisted mainly of U.S. government and agency securities, states, municipalities and political subdivisions and securities of investment-grade corporate issuers. Our equity holdings consisted mainly of securities issued by companies in the energy, consumer products, financial, technology and industrial sectors. Most of the corporate bonds we hold reflected a similar diversification. At March 31, 2020, approximately 84.4% of our fixed maturities were U.S. Treasuries or corporate bonds rated “A” or better, and 15.6% were corporate bonds rated “BBB” or "BB".

UNITED INSURANCE HOLDINGS CORP.

The most significant impact of COVID-19 on our business during the three months ended March 31, 2020 was the fluctuations in our investment portfolios due to volatility in the equity securities markets. Our unrealized loss on equity securities during the three months ended March 31, 2020 was $26,456,000. Management is working closely with our investment asset managers to monitor the fluctuations in the market and the corresponding impact to our portfolios. Future declines in the market may have a negative impact on our investment returns, however, we have taken a conservative approach and have limited our exposure to the volatility in the equity markets to less than 10% of our invested assets.

Reinsurance

We follow the industry practice of reinsuring a portion of our risks. Reinsurance involves transferring, or "ceding", all or a

portion of the risk exposure on policies we write to another insurer, known as a reinsurer. To the extent that our reinsurers are

unable to meet the obligations they assume under our reinsurance agreements, we remain primarily liable for the entire insured loss under the policies we write.

Our reinsurance program is designed, utilizing our risk management methodology, to address our exposure to catastrophe losses. 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 which we define as incidents that result in $1,000,000 or more in losses for multiple policyholders.

During the second quarter of 2019, we placed our reinsurance program for the 2019 hurricane season. We purchased catastrophe excess of loss reinsurance protection of approximately $3,200,000,000. The treaties reinsure for personal and commercial lines property excess catastrophe losses caused by multiple perils including hurricanes, tropical storms and tornadoes. The agreements became effective as of June 1, 2019, for a one-year term, and incorporate the mandatory coverage required by and placed with the Florida Hurricane Catastrophe Fund (FHCF). The FHCF covers Florida risks only and we participate at 90%.

Effective June 1, 2019, we extended our quota share agreement that was set to expire on May 31, 2019, for a one-year term. This quota share reinsurance agreement has a cession rate of 22.5% for all subject business and provides coverage for all catastrophe perils and attritional losses. We also included coverage for our subsidiary, FSIC, under this renewal. Effective January 1, 2020, we renewed the aggregate excess of loss agreement to provide coverage against accumulated losses from specified catastrophe events, for a term of 12 months.

As of May 7, 2020, the placement of our June 1, 2020 catastrophe excess of loss reinsurance treaty is 91% complete.

Reinsurance costs as a percent of gross earned premium during the three-month periods ended March 31, 2020 and 2019 were as follows:



	2020		2019
Non-at-Risk	(2.6	)%	(2.4	)%
Quota Share	(12.4	)%	(7.5	)%
All Other	(29.4	)%	(32.2	)%
Total Ceding Ratio	(44.4	)%	(42.1	)%

UNITED INSURANCE HOLDINGS CORP.

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



	Three Months Ended March 31,
	2020			2019
Quota Share	$	(39,561	)	$	(21,625	)
Excess-of-loss	(15,722		)	(18,723		)
Equipment, identity theft, and cyber security ⁽¹⁾	(2,818		)	(2,233		)
Flood and inland flood ⁽¹⁾	(4,400		)	(3,929		)
Ceded premiums written	$	(62,501	)	$	(46,510	)
Change in ceded unearned premiums	(90,522		)	(84,581		)
Ceded premiums earned	$	(153,023	)	$	(131,091	)

⁽¹⁾We began writing cyber security and inland flood policies in 2020.

Current year catastrophe losses disaggregated between name and numbered storms and all other catastrophe loss events are shown in the following table.



	2020					2019
	Number of Events	Incurred Loss and LAE ⁽¹⁾		Combined Ratio Impact		Number of Events	Incurred Loss and LAE ⁽¹⁾		Combined Ratio Impact
Three Months Ended March 31,
Current period catastrophe losses incurred
Named and numbered storms	—	$	—	—	%	—	$	—	—	%
All other catastrophe loss events	5	17,118		8.9	%	8	11,657		6.5	%
Total	5	$	17,118	8.9	%	8	$	11,657	6.5	%

⁽¹⁾ Incurred loss and LAE is equal to losses and LAE paid plus the change in case and incurred but not reported reserves. Shown net of losses ceded to reinsurers. Incurred loss and LAE and number of events includes the development on storms during the year in which it occurred.

See Note 7 in our Notes to Unaudited Condensed Consolidated Financial Statements for additional information regarding our reinsurance program.

Unpaid Losses and Loss Adjustments

We generally use the term “loss(es)” to collectively refer to both loss and LAE. We establish reserves for both reported and unreported unpaid losses that have occurred at or before the balance sheet date for amounts we estimate we will be required to pay in the future, including provisions for claims that have been reported but are unpaid at the balance sheet date and for obligations on claims that have been incurred but not reported at the balance sheet date. Our policy is to establish these loss reserves after considering all information known to us at each reporting period. At any given point in time, our loss reserve represents our best estimate of the ultimate settlement and administration costs of our insured claims incurred and unpaid.

Unpaid losses and LAE totaled $711,042,000 and $760,357,000 as of March 31, 2020 and December 31, 2019, respectively. The balance decreased from year end as a result of a decrease in our reinsurance recoverables on unpaid losses balance at March 31, 2020 compared to December 31, 2019.

Since the process of estimating loss reserves requires significant judgment due to a number of variables, such as fluctuations in inflation, judicial decisions, legislative changes and changes in claims handling procedures, our ultimate liability will likely differ from these estimates. We revise our reserve for unpaid losses as additional information becomes available, and reflect adjustments, if any, in our earnings in the periods in which we determine the adjustments as necessary.

UNITED INSURANCE HOLDINGS CORP.

See Note 8 in our Notes to Unaudited Condensed Consolidated Financial Statements for additional information regarding our losses and loss adjustments.

RESULTS OF OPERATIONS - COMPARISON OF THE THREE-MONTH PERIODS ENDED MARCH 31, 2020 AND 2019

Net loss attributable to UIHC for the three months ended March 31, 2020 decreased $22,192,000, or 234.4%, to $12,723,000 for the first quarter of 2020 from $9,469,000 for the same period in 2019. The decrease in net income was primarily due to unrealized losses on equity securities during the first quarter of 2020 compared to unrealized gains in the first quarter of 2019. The unrealized losses on equity securities were driven by market reactions to the COVID-19 pandemic. These losses were partially offset by improvements in our underwriting results.

Revenue

Our gross written premiums increased $16,624,000, or 5.2%, to $335,183,000 for the first quarter ended March 31, 2020 from $318,559,000 for the same period in 2019, primarily reflecting organic growth in new and renewal business generated in the Gulf and Southeast regions, as well as the impact of rate increases in Florida and the Northeast regions. The breakdown of the quarter-over-quarter changes in both direct written and assumed premiums by region and gross written premium by line of business is shown in the table below.



($ in thousands)	Three Months Ended March 31,
	2020		2019		Change
Direct Written and Assumed Premium by Region ⁽¹⁾
Florida	$	193,696	$	175,626	$	18,070
Gulf	52,716		47,376		5,340
Northeast	42,797		41,756		1,041
Southeast	26,872		25,007		1,865
Total direct written premium by region	316,081		289,765		26,316
Assumed premium ⁽²⁾	19,102		28,794		(9,692		)
Total gross written premium by region	$	335,183	$	318,559	$	16,624

Gross Written Premium by Line of Business
Personal property	$	224,616	$	210,681	$	13,935
Commercial property	110,567		107,878		2,689
Total gross written premium by line of business	$	335,183	$	318,559	$	16,624

⁽¹⁾ "Gulf" is comprised of Hawaii, Louisiana and Texas; "Northeast" is comprised of Connecticut, Massachusetts, New Jersey, New York and Rhode Island; and "Southeast" is comprised of Georgia, North Carolina and South Carolina.

⁽²⁾ Assumed premium written for 2020 and 2019 is primarily commercial property business assumed from unaffiliated insurers.



	Three Months Ended March 31,
New and Renewal Policies by Region ⁽¹⁾	2020	2019	Change
Florida	59,167	61,818	(2,651	)
Northeast	32,993	33,015	(22	)
Gulf	32,698	30,053	2,645
Southeast	21,669	20,519	1,150
Total	146,527	145,405	1,122

⁽¹⁾Only includes new and renewal homeowner, commercial and dwelling fire policies written during the quarter.

We expect our gross written premium growth to continue as we increase our policies in-force in the states in which we currently write policies and as we expand into other states in which we are currently licensed to write property and casualty insurance.

UNITED INSURANCE HOLDINGS CORP.

Expenses

Expenses for the three months ended March 31, 2020 increased $2,142,000, or 1.1%, to $192,136,000 from $189,994,000 for the same period in 2019. The increase in expenses was primarily due to a $3,629,000 increase in policy acquisition costs which was partially offset by a decrease in loss and LAE expenses of $1,710,000 in the first quarter of 2020 compared to the first quarter of 2019.

The calculations of our loss ratios and underlying loss ratios are shown below.



	Three Months Ended March 31,
	2020			2019			Change
Net loss and LAE	$	102,837		$	104,547		$	(1,710	)
% of Gross earned premiums	29.8		%	33.5		%	(3.7) pts
% of Net earned premiums	53.7		%	57.8		%	(4.1) pts
Less:
Current year catastrophe losses	$	17,118		$	11,657		$	5,461
Prior year reserve (favorable) development	(1,129		)	5,634			(6,763		)
Underlying loss and LAE ⁽¹⁾	$	86,848		$	87,256		$	(408	)
% of Gross earned premiums	25.2		%	28.0		%	(2.8) pts
% of Net earned premiums	45.4		%	48.3		%	(2.9) pts

⁽¹⁾Underlying loss and LAE is a non-GAAP measure and is reconciled above to Net loss and LAE, the most directly comparable GAAP measure. Additional information regarding non-GAAP financial measures presented in this document is in the "Definitions of Non-GAAP Measures" section of this Form 10-Q.

The calculations of our expense ratios are shown below.



	Three Months Ended March 31,
	2020			2019			Change
Policy acquisition costs	$	58,875		$	55,246		$	3,629
Operating and underwriting	9,704			10,211			(507		)
General and administrative	18,301			17,581			720
Total Operating Expenses	$	86,880		$	83,038		$	3,842
% of Gross earned premiums	25.2		%	26.6		%	(1.4) pts
% of Net earned premiums	45.3		%	45.9		%	(0.6) pts

Loss and LAE decreased by $1,710,000, or 1.6%, to $102,837,000 for the first quarter of 2020 from $104,547,000 for the first quarter of 2019. Loss and LAE expense as a percentage of net earned premiums decreased 4.1 points to 53.7% for the first quarter of 2020, compared to 57.8% for the same period last year. Excluding catastrophe losses and reserve development, our gross underlying loss and LAE ratio for the first quarter of 2020 would have been 25.2%, a decrease of 2.8 points from 28.0% during the first quarter of 2019.

Policy acquisition costs increased by $3,629,000, or 6.6%, to $58,875,000 for the first quarter of 2020 from $55,246,000 for the first quarter of 2019. The primary driver of the increase was an increase of $6,647,000 in agent commission expenses and $920,000 in premium taxes, each as a result of policy growth. This increase was partially offset by a $5,658,000 increase in ceding commission earned.

Operating and underwriting expenses decreased by $507,000, or 5.0%, to $9,704,000 for the first quarter of 2020 from $10,211,000 for the first quarter of 2019, primarily due to a decrease of $1,031,000 in printing and postage expenses which was partially offset by increased expenditures on technology software and services of $564,000.

General and administrative expenses increased by $720,000, or 4.0%, to $18,301,000 for the first quarter of 2020 from $17,581,000 for the first quarter of 2019, primarily due to an increase of $822,000 in professional services and consulting fees.

UNITED INSURANCE HOLDINGS CORP.

LIQUIDITY AND CAPITAL RESOURCES

We generate cash through premium collections, reinsurance recoveries, investment income, the sale or maturity of invested assets, the issuance of debt and the issuance of additional shares of our stock. We use our cash to pay reinsurance premiums, claims and related costs, policy acquisition costs, salaries and employee benefits, other expenses and stockholder dividends, acquire subsidiaries and pay associated costs, as well as to repay debts and purchase investments.

As a holding company, we do not conduct any business operations of our own and, as a result, we rely on cash dividends or intercompany loans from our management subsidiaries to pay our general and administrative expenses. Insurance regulatory authorities heavily regulate our insurance subsidiaries, including restricting any dividends paid by our insurance subsidiaries and requiring approval of any management fees our insurance subsidiaries pay to our management subsidiaries for services rendered; however, nothing restricts our non-insurance company subsidiaries from paying us dividends other than state corporate laws regarding solvency. Our management subsidiaries pay us dividends primarily using cash from the collection of management fees from our insurance subsidiaries, pursuant to the management agreements in effect between those entities. In accordance with state laws, our insurance subsidiaries may pay dividends or make distributions out of that part of their statutory surplus derived from their net operating profit and their net realized capital gains. The Risk-Based Capital (RBC) guidelines published by the National Association of Insurance Commissioners may further restrict our insurance subsidiaries’ ability to pay dividends or make distributions if the amount of the intended dividend or distribution would cause their respective surplus as it regards policyholders to fall below minimum RBC guidelines. See Note 11 in our Notes to Unaudited Condensed Consolidated Financial Statements for additional information.

During the three-month period ended March 31, 2020, IIC paid a dividend of $12,000,000 to the Company. In addition, the Company made a $12,000,000 capital contribution to our insurance subsidiary, UPC. During the three-month period ended March 31, 2019, we made capital contributions of $4,000,000 and $1,000,000 to our insurance subsidiaries UPC and FSIC, respectively. We may make future contributions of capital to our insurance subsidiaries as circumstances require.

The COVID-19 pandemic and resulting global disruptions have caused significant volatility in financial markets. However, during the three-month period ended March 31, 2020, the disruptions did not have an impact on our access to credit and capital markets needed to maintain sufficient liquidity for our continued operating needs. We expect to continue to maintain financing flexibility in the current market conditions. However, due to the rapidly evolving national and global situation, it is not possible to predict whether unanticipated consequences of the pandemic are reasonably likely to materially affect our liquidity and capital resources in the future.

Cash Flows for the three months ended March 31, 2020 and 2019 (in millions)

UNITED INSURANCE HOLDINGS CORP.

Operating Activities

The principal cash inflows from our operating activities come from premium collections, reinsurance recoveries and investment income. The principal cash outflows from our operating activities are the result of claims and related costs, reinsurance premiums, policy acquisition costs and salaries and employee benefits. A primary liquidity concern with respect to these cash flows is the risk of large magnitude catastrophe events.

During the three months ended March 31, 2020, we had cash inflows of $17,498,000 compared to cash outflows of $2,464,000 during the three months ended March 31, 2019. During 2020, we had fewer cash payments related to prior accident year incurred losses than in 2019. The higher payments in 2019 could be attributable to Hurricanes Michael and Florence and continued development on Hurricane Irma.

Investing Activities

The principal cash inflows from our investing activities come from repayments of principal, proceeds from maturities and sales of investments. We closely monitor and manage these risks through our comprehensive investment risk management process. The principal cash outflows relate to purchases of investments and cost of property, equipment and capitalized software acquired. The primary liquidity concerns with respect to these cash flows are the risk of default by debtors and market disruption. During the three months ended March 31, 2020, we had net purchases of investments totaling $15,675,000 compared to net sales of investments totaling $18,771,000 during the three months ended March 31, 2019. Our cash outflows associated with the purchase of property, equipment and capitalized software remained consistent for both periods.

Financing Activities

The principal cash outflows from our financing activities come from repayments of debt and payments of dividends. The primary liquidity concern with respect to these cash flows is market disruption in the cost and availability of credit. We believe our current capital resources, together with cash provided from our operations, are sufficient to meet currently anticipated working capital requirements. During the three months ended March 31, 2020, cash used in financing activities remained consistent totaling $2,952,000 compared to $2,951,000 for the three months ended March 31, 2019. This outflow was primarily due to our dividend payments in the first quarters of both 2020 and 2019.

OFF-BALANCE SHEET ARRANGEMENTS

At March 31, 2020, we did not have any off-balance-sheet arrangements or material changes to our contractual obligations during the quarter.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risks, including interest rate risk related to changes in interest rates in our fixed-maturity securities, credit risk related to changes in the financial condition of the issuers of our fixed-maturities and equity price risk related to changes in equity security prices. These risks are disclosed in Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2019. We had no material changes in our market risk during the three months ended March 31, 2020.

Item 4. Controls and Procedures

We maintain a set of disclosure controls and procedures designed to ensure that the information required to be disclosed in reports we file or submit under the Securities Exchange Act of 1934, as amended (Exchange Act), is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. We designed our disclosure controls with the objective of ensuring we accumulate and communicate this information to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operations of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this report. Based on our evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of the end of the period covered by this report.

UNITED INSURANCE HOLDINGS CORP.

Changes in Internal Control over Financial Reporting

Although we have shifted operations for all employees to remote work environments for the protection of our employees and communities in response to COVID-19, this shift to remote work environments has not impacted our ability to ensure that our controls operate effectively. We did not make any changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting during the quarter ended March 31, 2020.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

At March 31, 2020, we were not involved in any material non-claims-related legal actions.

Item 1A. Risk Factors

Other than as described in the additional risk factor below, there have been no material changes to the risk factors previously disclosed in Part I. Item 1A "Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2019.

The outbreak of the novel coronavirus (COVID-19) pandemic and related business disruption and economic uncertainty could adversely impact our business, results of operations and financial condition.

In recent months, a novel strain of coronavirus (COVID-19) has spared to many countries in the world, including the United States, and the outbreak was declared a pandemic by the World Health Organization in March 2020.

Considerable uncertainty still surrounds the COVID-19 virus and its potential impact, and the extent of and effectiveness of responses taken on international, national and local levels. The extent of the impact of COVID-19 on our business, results of operations and financial condition will depend, in large part, on future developments, which are highly uncertain and cannot be predicted with confidence such as:


•	the duration and severity of the spread;


•	the extent and duration of business closures, travel restrictions, social distancing and other actions taken to contain and treat COVID-19; and


•	the effectiveness of actions taken by governmental authorities to contain and treat the virus.

However, measures taken to limit the impact of COVID-19, including shelter-in-place orders, social distancing measures, travel bans and restrictions, and business and government shutdowns, have already resulted in significant negative economic impacts on the United States and globally. The pandemic has resulted in extreme volatility and disruptions in the economy. While we have not incurred any significant disruptions to our business operations, financial position, liquidity or our ability to service our policyholders as of the date of this Form 10-Q, with the exception of fluctuations in our investment portfolios due to the volatility in the equity securities markets, the continued impacts of COVID-19 (including a severe or prolonged economic downturn due to impacts from COVID-19) could result in a variety of risks to our business, including:


•	an increase in the default of insurance premiums coinciding with an increase in unemployment rates and customers' inability to pay premiums;


•	our ability to meet regulatory and debt service requirements;


•	a decline in premiums as a result of limited new business production, weaker renewal retention rates, higher mid-term cancellations, more stringent regulatory requirements or a rating agency downgrade that would impact both agency and consumer confidence;

UNITED INSURANCE HOLDINGS CORP.


•	travel restrictions and quarantines leading to a lack of in-person meetings, which could hinder the efficiency of our internal operations and our ability to establish relationships with agents to generate new business;


•	contraction of the global reinsurance markets resulting from uncertainties related to current and future COVID-19 claims on underlying risks;


•	higher frequency and/or severity of claims from certain perils such as theft, fire and liability, as well as fraudulent insurance loss schemes and litigation attempting to force coverage;


•	changes in the equity markets, changes in interest rates, and reduced liquidity leading to a decline in the value of our investment portfolio;


•	a recession or market correction could materially affect the value of our common stock; and


•	our third-party vendors experiencing shutdowns or other business disruptions which impact our ability to conduct our business in the manner and on the timelines presently planned.

In response to the measures taken to limit the impact of COVID-19 described above, and for the protection of our employees and communities, we have shifted operations for all employees to remote work environments. This shift in operations to remote work environments could prevent us from executing initiatives effectively, which could have an adverse effect on our business, results of operations and financial condition. An extended period of remote work arrangements could introduce operational risk (including but not limited to cybersecurity risks) and may impair our ability to manage our business. We also outsource certain business activities to third parties. If one or more of the third parties to whom we outsource certain business activities experience operational failures or business disruptions as a result of the impacts from the spread of COVID-19, or claim that they cannot perform, it may have negative effects on our business and financial condition.

We are currently following the recommendations of local and federal health authorities to minimize exposure risk for our various stakeholders, including employees, and management is actively monitoring the global situation and its effects on our financial condition, liquidity, operations, industry and workforce. The full extent of the impact of COVID-19 on our business and operating results will depend on future developments that are highly uncertain and cannot be accurately predicted, as described in greater detail above.

To the extent that COVID-19 adversely affects our business, results of operations or financial condition, it may also have the effect of amplifying many of the other risks described in Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2019.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

During the three months ended March 31, 2020, we did not sell any unregistered equity securities or repurchase any of our equity securities.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

UNITED INSURANCE HOLDINGS CORP.

Item 6. Exhibits

The following exhibits are filed or furnished herewith or are incorporated herein by reference:



Exhibit		Description

3.1		Amended and Restated By-Laws (included as Exhibit 3.1 to the Form 8-K filed on April 23, 2020, and incorporated herein by reference).

31.1		Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act.

31.2		Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act.

32.1		Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act.

32.2		Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act.

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema

101.CAL		XBRL Taxonomy Extension Calculation Linkbase

101.DEF		XBRL Taxonomy Extension Definition Linkbase

101.LAB		XBRL Taxonomy Extension Label Linkbase

101.PRE		XBRL Taxonomy Extension Presentation Linkbase

UNITED INSURANCE HOLDINGS CORP.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



		UNITED INSURANCE HOLDINGS CORP.

May 8, 2020	By:	/s/ John Forney
		John Forney, Chief Executive Officer (principal executive officer and duly authorized officer)



May 8, 2020	By:	/s/ B. Bradford Martz
		B. Bradford Martz, Chief Financial Officer (principal financial officer and principal accounting officer)

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