Edgar Filing: UNITED INSURANCE HOLDINGS CORP.

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

_______________________

FORM 10-Q

_______________________

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2016

Commission File Number 001-35761

_____________________

United Insurance Holdings Corp.

(Exact name of Registrant as specified in its charter)

_______________________



	Delaware		75-3241967
	(State of Incorporation)		(IRS Employer Identification Number)

800 2nd Avenue S

St. Petersburg, Florida 33701

(Address, including zip code, of principal executive offices)

727-895-7737

(Registrant's telephone number, including area code)

_______________________

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

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

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



Large accelerated filer	£	Accelerated filer	þ
Non-accelerated filer	£	Smaller reporting company	£

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes £ No R

As of November 9, 2016; 21,643,714 shares of common stock, par value $0.0001 per share, were outstanding.

UNITED INSURANCE HOLDINGS CORP.



PART I. FINANCIAL INFORMATION
	Item 1. Financial Statements	4
	Consolidated Balance Sheets	4
	Unaudited Consolidated Statements of Comprehensive Income	5
	Unaudited Consolidated Statements of Cash Flows	6
	Notes to Unaudited Consolidated Financial Statements	7
	Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	28
	Item 3. Quantitative and Qualitative Disclosures About Market Risk	40
	Item 4. Controls and Procedures	41
PART II. OTHER INFORMATION
	Item 1. Legal Proceedings	42
	Item 1A. Risk Factors	42
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	42
	Item 3. Defaults Upon Senior Securities	44
	Item 4. Mine Safety Disclosures	44
	Item 5. Other Information	44
	Item 6. Exhibits	44
Signatures		46

Throughout this Form 10-Q, we present amounts in all tables in thousands, except for share amounts, per share amounts, policy counts or where more specific language or context indicates a different presentation. In the narrative sections of this Quarterly Report, we show full values rounded to the nearest thousand.

UNITED INSURANCE HOLDINGS CORP.

FORWARD-LOOKING STATEMENTS

Statements in this Quarterly Report on Form 10-Q as of September 30, 2016, and for the three and nine months ended September 30, 2016 and in documents incorporated by reference that do not reflect historical facts are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements about anticipated growth in revenues, earnings per share, estimated unpaid losses on insurance policies, investment returns and expectations about our liquidity, and our ability to meet our investment objectives and to manage and mitigate market risk with respect to our investments. These statements are based on current expectations, estimates and projections about the industry and market in which we operate, and management’s beliefs and assumptions. Without limiting the generality of the foregoing, words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “would,” “estimate,” or “continue,” the negative variations of those words, or comparable terminology are intended to identify forward-looking statements. Forward-looking statements are not guarantees of future performance and involve certain known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. The risks and uncertainties include, without limitation:


•	the regulatory, economic and weather conditions in the states in which we operate;


•	the impact of new federal or state regulations that affect the property and casualty insurance market;


•	the cost and availability of reinsurance;


•	assessments charged by various governmental agencies;


•	pricing competition and other initiatives by competitors;


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


•	the outcome of litigation pending against us, including the terms of any settlements;


•	dependence on investment income and the composition of our investment portfolio and related market risks;


•	our exposure to catastrophic events and severe weather conditions;


•	downgrades in our financial strength ratings;


•	risks and uncertainties relating to our acquisitions including our ability to successfully integrate the acquired companies; and


•	other risks and uncertainties described in the section entitled "Risk Factors" in Part I, Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2015.

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

Our forward-looking statements are subject to numerous risks, uncertainties and assumptions that are described in our filings with the SEC. The forward-looking events that we discuss in this Form 10-Q are valid only as of the date of this Form 10-Q and may not occur, or may have different consequences, in light of the risks, uncertainties and assumptions that we describe from time to time in our filings with the SEC. A detailed discussion of these and other risks and uncertainties that could cause actual results and events to differ materially from our forward-looking statements is included in the section entitled “RISK FACTORS” in Part I, Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2015. Except as required by applicable law, we undertake no obligation and disclaim any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

UNITED INSURANCE HOLDINGS CORP.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets



	September 30, 2016			December 31, 2015
ASSETS	(Unaudited)
Investments available for sale, at fair value:
Fixed maturities (amortized cost of $464,107 and $396,415, respectively)	$	472,668		$	396,698
Equity securities (adjusted cost of $44,094 and $48,679, respectively)	47,748			50,806
Other investments (amortized cost of $5,438 and $4,980, respectively)	5,690			5,210
Total investments	$	526,106		$	452,714
Cash and cash equivalents	139,556			84,786
Accrued investment income	3,408			2,915
Property and equipment, net	18,041			17,135
Premiums receivable, net	42,038			41,170
Reinsurance recoverable on paid and unpaid losses	17,389			2,961
Prepaid reinsurance premiums	135,289			79,399
Goodwill	13,519			3,413
Deferred policy acquisition costs	64,896			46,732
Other assets	14,173			8,796
Total Assets	$	974,415		$	740,021
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Unpaid losses and loss adjustment expenses	$	122,660		$	76,792
Unearned premiums	387,342			304,653
Reinsurance payable	122,536			64,542
Other liabilities	57,268			42,470
Notes payable	25,134			12,353
Total Liabilities	$	714,940		$	500,810
Commitments and contingencies (Note 9)
Stockholders' Equity:
Preferred stock, $0.0001 par value; 1,000,000 shares authorized; none issued or outstanding	—			—
Common stock, $0.0001 par value; 50,000,000 shares authorized; 21,855,797 and 21,736,431 issued; 21,643,714 and 21,524,348 outstanding for 2016 and 2015, respectively	2			2
Additional paid-in capital	98,836			97,163
Treasury shares, at cost; 212,083 shares	(431		)	(431		)
Accumulated other comprehensive income	7,671			1,620
Retained earnings	153,397			140,857
Total Stockholders' Equity	$	259,475		$	239,211
Total Liabilities and Stockholders' Equity	$	974,415		$	740,021

See accompanying Notes to Unaudited Consolidated Financial Statements.

UNITED INSURANCE HOLDINGS CORP.

Consolidated Statements of Comprehensive Income

(Unaudited)



	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2016			2015			2016			2015
REVENUE:
Gross premiums written	$	194,341		$	155,985		$	541,053		$	425,183
Increase in gross unearned premiums	(20,821		)	(27,252		)	(56,446		)	(60,286		)
Gross premiums earned	173,520			128,733			484,607			364,897
Ceded premiums earned	(53,299		)	(44,730		)	(148,837		)	(122,394		)
Net premiums earned	120,221			84,003			335,770			242,503
Investment income	2,663			2,413			7,786			6,725
Net realized gains	106			323			478			312
Other revenue	4,212			3,067			11,650			8,002
Total revenue	127,202			89,806			355,684			257,542
EXPENSES:
Losses and loss adjustment expenses	72,746			40,432			199,615			137,030
Policy acquisition costs	31,333			23,756			84,086			64,140
Operating expenses	5,558			4,329			15,326			12,679
General and administrative expenses	12,329			8,331			31,759			22,244
Interest expense	206			81			397			232
Total expenses	122,172			76,929			331,183			236,325
Income before other income	5,030			12,877			24,501			21,217
Other income	11			107			80			292
Income before income taxes	5,041			12,984			24,581			21,509
Provision for income taxes	1,618			4,901			8,366			7,953
Net income	$	3,423		$	8,083		$	16,215		$	13,556
OTHER COMPREHENSIVE INCOME:
Change in net unrealized gains (losses) on investments	(3,495		)	641			10,305			(1,722		)
Reclassification adjustment for net realized investment gains	(106		)	(323		)	(478		)	(312		)
Income tax benefit (expense) related to items of other comprehensive income	1,298			(123		)	(3,776		)	786
Total comprehensive income	$	1,120		$	8,278		$	22,266		$	12,308

Weighted average shares outstanding
Basic	21,448,892			21,290,759			21,406,599			21,193,825
Diluted	21,643,401			21,528,546			21,604,135			21,427,398

Earnings per share
Basic	$	0.16		$	0.38		$	0.76		$	0.64
Diluted	$	0.16		$	0.38		$	0.75		$	0.63

Dividends declared per share	$	0.06		$	0.05		$	0.17		$	0.15

See accompanying Notes to Unaudited Consolidated Financial Statements.

UNITED INSURANCE HOLDINGS CORP.

Consolidated Statements of Cash Flows

(Unaudited)



	Nine Months Ended September 30,
	2016			2015
OPERATING ACTIVITIES
Net income	$	16,215		$	13,556
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	8,640			2,093
Bond amortization and accretion	2,621			(286		)
Net realized gains	(478		)	(312		)
Provision for uncollectable premiums/over and short	57			314
Deferred income taxes, net	1,575			3,892
Stock based compensation	1,429			1,525
Changes in operating assets and liabilities:
Accrued investment income	155			(326		)
Premiums receivable	2,260			(13,838		)
Reinsurance recoverable on paid and unpaid losses	(11,097		)	(736		)
Prepaid reinsurance premiums	(55,890		)	(56,830		)
Deferred policy acquisition costs, net	(18,164		)	(15,003		)
Other assets	(2,301		)	(9,581		)
Unpaid losses and loss adjustment expenses	20,901			15,117
Unearned premiums	56,446			60,286
Reinsurance payable	59,036			72,188
Other liabilities	7,914			11,136
Net cash provided by operating activities	$	89,319		$	83,195
INVESTING ACTIVITIES
Proceeds from sales and maturities of investments available for sale	147,266			113,377
Purchases of investments available for sale	(146,535		)	(173,336		)
Cash from acquisition	—			14,467
Purchase of subsidiary, net of cash acquired	(32,840		)	—
Cost of property, equipment and capitalized software acquired	(2,726		)	(8,218		)
Net cash used in investing activities	$	(34,835	)	$	(53,710	)
FINANCING ACTIVITIES
Tax withholding payment related to net settlement of equity awards	(270		)	(181		)
Proceeds from borrowings	5,200			—
Repayments of borrowings	(969		)	(3,128		)
Dividends	(3,675		)	(3,226		)
Net cash provided by (used in) financing activities	$	286		$	(6,535	)
Increase in cash	54,770			22,950
Cash and cash equivalents at beginning of period	84,786			61,391
Cash and cash equivalents at end of period	$	139,556		$	84,341

Supplemental Cash Flows Information
Interest paid	$	201		$	230
Income taxes paid	$	7,199		$	6,920

See accompanying Notes to Unaudited Consolidated Financial Statements.

UNITED INSURANCE HOLDINGS CORP.

Notes to Unaudited Consolidated Financial Statements

September 30, 2016

1) ORGANIZATION, CONSOLIDATION AND PRESENTATION

(a)Business

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

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

We conduct our operations under one business segment.

(b)Consolidation and Presentation

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

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

We prepared the accompanying Unaudited Consolidated Balance Sheet as of September 30, 2016, with the Audited Consolidated Balance Sheet amounts as of December 31, 2015, presented for comparative purposes, and the related Unaudited Consolidated Statements of Comprehensive Income and Statements of Cash Flows in accordance with the instructions for Form 10-Q and Article 10-01 of Regulation S-X. In compliance with those instructions, we have omitted certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with GAAP, though management believes the disclosures made herein are sufficient to ensure that the information presented is not misleading.

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

UNITED INSURANCE HOLDINGS CORP.

Notes to Unaudited Consolidated Financial Statements

September 30, 2016

Management believes our unaudited consolidated interim financial statements include all the normal recurring adjustments necessary to fairly present our Unaudited Consolidated Balance Sheet as of September 30, 2016, our Unaudited Consolidated Statements of Comprehensive Income and our Unaudited Consolidated Statements of Cash Flows for all periods presented. Our unaudited consolidated interim financial statements and footnotes should be read in conjunction with our consolidated financial statements and footnotes in our Annual Report filed on Form 10-K for the year ended December 31, 2015.

2) SIGNIFICANT ACCOUNTING POLICIES

(a) Changes to significant accounting policies

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

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

(b) Fair value assumptions

The carrying amounts for the following financial instrument categories approximate their fair values at September 30, 2016 and December 31, 2015, because of their short-term nature: cash and cash equivalents, accrued investment income, premiums receivable, reinsurance recoverable, reinsurance payable, other assets, and other liabilities. The carrying amount of the notes payable to the Florida State Board of Administration and the Branch Banking & Trust Corporation (BB&T) approximate fair value as the interest rates are variable. The carrying amount of our note payable with Interboro, LLC approximates fair value due to the short term nature of the loan.

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

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

In June 2016, the FASB issued Accounting Standards Update No. 2016-13, Financial Instruments- Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13). This update is intended to replace the incurred loss impairment methodology in current GAAP with a method that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 will provide users with more useful information regarding the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. In addition, credit losses on available-for-sale debt securities will now have to be presented as an allowance rather than as a write-down. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years with early adoption permitted for certain requirements. We do not intend to early adopt and are assessing the impact of adopting this new accounting standard on our consolidated financial statements and related disclosures.

UNITED INSURANCE HOLDINGS CORP.

Notes to Unaudited Consolidated Financial Statements

September 30, 2016

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

UNITED INSURANCE HOLDINGS CORP.

Notes to Unaudited Consolidated Financial Statements

September 30, 2016

3) INVESTMENTS

The following table details the difference between cost or adjusted/amortized cost and estimated fair value, by major investment category, at September 30, 2016 and December 31, 2015:



	Cost or Adjusted/Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
September 30, 2016
U.S. government and agency securities	$	121,952	$	1,014	$	197	$	122,769
Foreign government	2,032		84		—		2,116
States, municipalities and political subdivisions	169,433		3,723		166		172,990
Public utilities	7,292		237		2		7,527
Corporate securities	161,957		3,911		24		165,844
Redeemable preferred stocks	1,441		55		74		1,422
Total fixed maturities	464,107		9,024		463		472,668
Mutual fund	20,036		—		—		20,036
Public utilities	1,342		182		—		1,524
Other common stocks	19,803		3,811		408		23,206
Non-redeemable preferred stocks	2,913		97		28		2,982
Total equity securities	44,094		4,090		436		47,748
Other long-term investments	5,438		273		21		5,690
Total investments	$	513,639	$	13,387	$	920	$	526,106

December 31, 2015
U.S. government and agency securities	$	81,973	$	148	$	474	$	81,647
Foreign government	2,038		37		—		2,075
States, municipalities and political subdivisions	154,004		2,391		490		155,905
Public utilities	8,398		128		33		8,493
Corporate securities	148,170		880		2,292		146,758
Redeemable preferred stocks	1,832		37		49		1,820
Total fixed maturities	396,415		3,621		3,338		396,698
Mutual fund	26,357		—		14		26,343
Public utilities	1,342		44		34		1,352
Other common stocks	18,624		2,615		545		20,694
Non-redeemable preferred stocks	2,356		67		6		2,417
Total equity securities	48,679		2,726		599		50,806
Other long-term investments	4,980		230		—		5,210
Total investments	$	450,074	$	6,577	$	3,937	$	452,714

UNITED INSURANCE HOLDINGS CORP.

Notes to Unaudited Consolidated Financial Statements

September 30, 2016

When we sell investments, we calculate the gain or loss realized on the sale by comparing the sales price (fair value) to the cost or adjusted/amortized cost of the security sold. We determine the cost or adjusted/amortized cost of the security sold using the specific-identification method. The following table details our realized gains (losses) by major investment category for the three and nine month periods ended September 30, 2016 and 2015:



	2016					2015
	Gains (Losses)			Fair Value at Sale		Gains (Losses)			Fair Value at Sale
Three Months Ended September 30,
Fixed maturities	$	508		$	11,009	$	315		$	24,168
Equity securities	—			—		778			2,469
Total realized gains	508			11,009		1,093			26,637
Fixed maturities	(396		)	7,635		(95		)	4,131
Equity securities	(6		)	17		(675		)	2,106
Total realized losses	(402		)	7,652		(770		)	6,237
Net realized investment gains (losses)	$	106		$	18,661	$	323		$	32,874

Nine Months Ended September 30,
Fixed maturities	$	1,806		$	47,391	$	542		$	45,392
Equity securities	24			10,769		817			3,441
Total realized gains	1,830			58,160		1,359			48,833
Fixed maturities	(1,170		)	20,663		(364		)	22,159
Equity securities	(182		)	17,025		(683		)	2,264
Total realized losses	(1,352		)	37,688		(1,047		)	24,423
Net realized investment gains (losses)	$	478		$	95,848	$	312		$	73,256

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



	September 30, 2016
	Cost or Amortized Cost		Percent of Total		Fair Value		Percent of Total
Due in one year or less	$	33,218	7.2	%	$	33,232	7.0	%
Due after one year through five years	250,847		54.0		253,958		53.7
Due after five years through ten years	131,831		28.4		135,305		28.6
Due after ten years	48,211		10.4		50,173		10.7
Total	$	464,107	100.0	%	$	472,668	100.0	%

UNITED INSURANCE HOLDINGS CORP.

Notes to Unaudited Consolidated Financial Statements

September 30, 2016

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



	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Fixed maturities	$	2,251		$	2,078		$	6,693		$	5,879
Equity securities	259			222			726			656
Cash, cash equivalents and short-term investments	38			4			87			9
Other investments	110			105			266			171
Other assets	5			4			14			10
Investment income	2,663			2,413			7,786			6,725
Investment expenses	(155		)	(92		)	(360		)	(181		)
Net investment income	$	2,508		$	2,321		$	7,426		$	6,544

Portfolio monitoring

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

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

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

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

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

UNITED INSURANCE HOLDINGS CORP.

Notes to Unaudited Consolidated Financial Statements

September 30, 2016

The following table presents an aging of our unrealized investment losses by investment class:



	Less Than Twelve Months					Twelve Months or More
	Number of Securities*	Gross Unrealized Losses		Fair Value		Number of Securities*	Gross Unrealized Losses		Fair Value
September 30, 2016
U.S. government and agency securities	75	$	197	$	51,848	—	$	—	$	—
States, municipalities and political subdivisions	53	166		42,276		—	—		—
Public utilities	4	2		651		—	—		—
Corporate securities	48	14		9,925		3	10		3,038
Redeemable preferred stocks	3	36		312		2	38		230
Total fixed maturities	183	415		105,012		5	48		3,268
Other common stocks	31	269		5,486		17	139		1,887
Non-redeemable preferred stocks	5	8		835		7	20		379
Total equity securities	36	277		6,321		24	159		2,266
Other long-term investments	1	21		987		—	—		—
Total	220	$	713	$	112,320	29	$	207	$	5,534

December 31, 2015
U.S. government and agency securities	73	$	265	$	44,786	21	$	209	$	11,250
States, municipalities and political subdivisions	61	463		56,971		5	27		7,620
Public utilities	8	4		1,961		1	29		1,015
Corporate securities	242	2,025		92,429		9	267		10,047
Redeemable preferred stocks	7	49		746		—	—		—
Total fixed maturities	391	2,806		196,893		36	532		29,932
Mutual Funds	1	14		26,343		—	—		—
Public utilities	4	34		697		—	—		—
Other common stocks	63	497		6,665		3	48		118
Non-redeemable preferred stocks	19	6		1,161		—	—		—
Total equity securities	87	551		34,866		3	48		118
Total	478	$	3,357	$	231,759	39	$	580	$	30,050

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

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

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

UNITED INSURANCE HOLDINGS CORP.

Notes to Unaudited Consolidated Financial Statements

September 30, 2016

Fair value measurement

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

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

Level 2: Assets and liabilities whose values are based on the following:

(a) Quoted prices for similar assets or liabilities in active markets;

(b) Quoted prices for identical or similar assets or liabilities in markets that are not active; or

(c) Valuation models whose inputs are observable, directly or indirectly, for substantially the full term of the asset or liability.

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

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

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

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

UNITED INSURANCE HOLDINGS CORP.

Notes to Unaudited Consolidated Financial Statements

September 30, 2016

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

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



	Total		Level 1		Level 2		Level 3
September 30, 2016
U.S. government and agency securities	$	122,769	$	—	$	122,769	$	—
Foreign government	2,116		—		2,116		—
States, municipalities and political subdivisions	172,990		—		172,990		—
Public utilities	7,527		—		7,527		—
Corporate securities	165,844		—		165,844		—
Redeemable preferred stocks	1,422		1,422		—		—
Total fixed maturities	472,668		1,422		471,246		—
Mutual fund	20,036		20,036		—		—
Public utilities	1,524		1,524		—		—
Other common stocks	23,206		23,206		—		—
Non-redeemable preferred stocks	2,982		2,982		—		—
Total equity securities	47,748		47,748		—		—
Other long-term investments	5,690		300		3,635		1,755
Total investments	$	526,106	$	49,470	$	474,881	$	1,755

December 31, 2015
U.S. government and agency securities	$	81,647	$	—	$	81,647	$	—
Foreign government	2,075		—		2,075		—
States, municipalities and political subdivisions	155,905		—		155,905		—
Public utilities	8,493		—		8,493		—
Corporate securities	146,758		—		146,758		—
Redeemable preferred stocks	1,820		1,820		—		—
Total fixed maturities	396,698		1,820		394,878		—
Mutual Funds	26,343		26,343		—		—
Public utilities	1,352		1,352		—		—
Other common stocks	20,694		20,694		—		—
Non-redeemable preferred stocks	2,417		2,417		—		—
Total equity securities	50,806		50,806		—		—
Other long-term investments	5,210		300		3,055		1,855
Total investments	$	452,714	$	52,926	$	397,933	$	1,855

UNITED INSURANCE HOLDINGS CORP.

Notes to Unaudited Consolidated Financial Statements

September 30, 2016

The table below presents the rollforward of our Level 3 investments held at fair value during the nine months ended September 30, 2016:



	Other Investments
December 31, 2015	$	1,855
Transfers in	—
Partnership income	115
Return of capital	(237		)
Unrealized gains in accumulated other comprehensive income	22
September 30, 2016	$	1,755

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

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

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

UNITED INSURANCE HOLDINGS CORP.

Notes to Unaudited Consolidated Financial Statements

September 30, 2016

Other investments

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



	Initial Investment		Book Value		Unrealized Gains (Losses)			Fair Value
DCR Mortgage Partners VI, L.P.	$	450	$	495	$	273		$	768
RCH Mortgage Fund VI Investors, LP	1,000		1,008		(21		)	987
Total Level 3 limited partnership investments	1,450		1,503		252			1,755
Kayne Senior Credit Fund II, L.P.	1,489		1,366		—			1,366
DCR Mortgage Partners VII, L.P.	2,000		2,049		—			2,049
Blackstone Alternative Solutions 2015 Trust	220		220		—			220
Total Level 2 limited partnership investments	3,709		3,635		—			3,635
Total limited partnership investments	$	5,159	$	5,138	$	252		$	5,390
Other short-term investments	300		300		—			300
Total other investments	$	5,459	$	5,438	$	252		$	5,690

The following table summarizes the quantitative impact that the significant unobservable inputs used to estimate the fair value of our Level 3 investments has on the estimated fair value on our investments shown in the tables above. Due to Kayne, DCR VII, and Blackstone being carried at cost, we have excluded them from the table below. The DCR VI and RCH investments were valued using a duration of 60 months for both periods presented below.



	Fair Value			Valuation		Rate
	Impact			Technique	Unobservable Input	Adjustment
September 30, 2016
DCR VI	$	(65	)	Discounted cash flow	Discount rate based on D&B paydex scale	2.35%
RCH	$	(341	)	Discounted cash flow	Discount rate based on D&B paydex scale	7.35%

December 31, 2015
DCR VI	$	(88	)	Discounted cash flow	Discount rate based on D&B paydex scale	2.35%
RCH	$	(341	)	Discounted cash flow	Discount rate based on D&B paydex scale	7.35%


4)	ACQUISITIONS

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

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

UNITED INSURANCE HOLDINGS CORP.

Notes to Unaudited Consolidated Financial Statements

September 30, 2016

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

The purchase price consisted of the following amounts:



Cash	$	48,450
Notes Payable	8,550
Accrued Liability	3,471
Total purchase price	$	60,471

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



Cash and cash equivalents	$	15,610
Investments	66,440
Premium and agents' receivable	3,185
Reinsurance receivable	1,042
Intangible assets	6,241
Insurance contract asset	8,366
Goodwill	10,106
Other assets	4,971
Unpaid losses and loss adjustment expenses	(24,967		)
Unearned premiums	(26,243		)
Deferred taxes	(352		)
Other liabilities	(3,928		)
Total purchase price	$	60,471

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



	For the nine months ended September 30, 2016
			Pro Forma
	As Reported		Adjustments		Pro Forma
Revenues	$	355,684	$	18,963	$	374,647

Net income	$	16,215	$	8,187	$	24,402

Diluted earnings per share	$	0.75	$	0.38	$	1.13

UNITED INSURANCE HOLDINGS CORP.

Notes to Unaudited Consolidated Financial Statements

September 30, 2016

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

5) EARNINGS PER SHARE

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



	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
Numerator:
Net income attributable to common stockholders	$	3,423	$	8,083	$	16,215	$	13,556

Denominator:
Weighted-average shares outstanding	21,448,892		21,290,759		21,406,599		21,193,825
Effect of dilutive securities	194,509		237,787		197,536		233,573
Weighted-average diluted shares	21,643,401		21,528,546		21,604,135		21,427,398

Basic earnings per share	$	0.16	$	0.38	$	0.76	$	0.64
Diluted earnings per share	$	0.16	$	0.38	$	0.75	$	0.63

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

6) PROPERTY AND EQUIPMENT, NET

Property and equipment, net consists of the following:



	September 30, 2016			December 31, 2015
Land	$	2,114		$	2,114
Building and building improvements	5,503			4,298
Computer hardware and software	14,468			13,574
Office furniture and equipment	2,458			1,831
Leasehold improvements	—			141
Total, at cost	24,543			21,958
Less: accumulated depreciation and amortization	(6,502		)	(4,823		)
Property and equipment, net	$	18,041		$	17,135

UNITED INSURANCE HOLDINGS CORP.

Notes to Unaudited Consolidated Financial Statements

September 30, 2016

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

7) REINSURANCE

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

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

During the second quarter of 2016, we placed our reinsurance program for the 2016 treaty year beginning June 1, 2016 and ending on May 31, 2017. The agreements incorporate the mandatory coverage required by and placed with the Florida Hurricane Catastrophe Fund (FHCF). The FHCF is a Florida state-sponsored trust fund that provides reimbursement in Florida against storms that the National Hurricane Center designates as hurricanes. The private agreements provide coverage against severe weather events such as hurricanes, tropical storms and tornadoes.

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

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

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

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

UNITED INSURANCE HOLDINGS CORP.

Notes to Unaudited Consolidated Financial Statements

September 30, 2016

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



	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Excess-of-loss	$	(476	)	$	1,898		$	(182,503	)	$	(163,221	)
Equipment & identity theft	(2,359		)	(1,723		)	(6,136		)	(4,521		)
Novation of Auto Policies ⁽¹⁾	—			—			(2,396		)	—
Flood	(5,006		)	(4,505		)	(12,969		)	(11,461		)
Ceded premiums written	$	(7,841	)	$	(4,330	)	$	(204,004	)	$	(179,203	)
Increase (decrease) in ceded unearned premiums	(45,458		)	(40,400		)	55,167			56,809
Ceded premiums earned	$	(53,299	)	$	(44,730	)	$	(148,837	)	$	(122,394	)

⁽¹⁾ Reflects ceding of auto policy premiums to Maidstone Insurance Company as part of the settlement of the novation agreement entered into at the closing of the Interboro Insurance Company transaction.

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



	2016					2015
	Number of Events	Incurred Loss and LAE ⁽¹⁾		Combined Ratio Impact		Number of Events	Incurred Loss and LAE ⁽¹⁾		Combined Ratio Impact
Three Months Ended September 30,
Current period catastrophe losses incurred
$ 1 million to $5 million ⁽²⁾	1	$	2,483	2.1	%	1	$	2,420	2.8	%
Less than $1 million ⁽³⁾⁽⁴⁾	17	2,626		2.1	%	12	1,388		1.7	%
Total	18	$	5,109	4.2	%	13	$	3,808	4.5	%

Nine Months Ended September 30,
Current period catastrophe losses incurred
$ 5 million to $10 million ⁽⁷⁾	—	$	—	—	%	2	$	11,342	4.7	%
$ 1 million to $5 million ⁽⁵⁾	9	16,500		4.9	%	6	12,275		5.1	%
Less than $1 million ^{(6) (4)}	9	7,385		2.2	%	5	1,968		0.8	%
Total	18	$	23,885	7.1	%	13	$	25,585	10.6	%


⁽¹⁾	Incurred loss and LAE is equal to losses and LAE paid plus the change in case and incurred but not reported reserves. Shown net of losses ceded to reinsurers. During the third quarter of 2016, we incurred losses and LAE from three new storms, while the remainder is from the development of fifteen storms occurring during the first six months of 2016.


⁽²⁾	Reflects losses from Hurricane Hermine during the third quarter of 2016 and losses from a wind storm in 2015.


⁽³⁾	Reflects losses from Tropical Storms Colin and Julia during 2016 which were fully retained, as well as development from Texas flooding, spring and hail storms, Winter Storm Olympia, and Florida tornadoes which occurred during the first three months of 2016, all net of losses ceded to reinsurers.

⁽⁴⁾ Reflects losses from winter storms, hail storms, Texas flooding, Hurricane Anna and Tropical Storm Bill in 2015.

⁽⁵⁾Reflects losses from Hurricane Hermine and Tropical Storm Colin during 2016 which were fully retained, as well as development from Texas flooding, spring and hail storms, Winter Storm Olympia, and Florida tornadoes, all net of losses ceded to reinsurers. Reflects losses from winter storms, hail storms and wind storms in 2015.

⁽⁶⁾Reflects losses from Tropical Storm Julia during 2016 which were fully retained, as well as development from Texas flooding and hail storms, Florida tornadoes and Louisiana flooding, all net of losses ceded to reinsurers.

UNITED INSURANCE HOLDINGS CORP.

Notes to Unaudited Consolidated Financial Statements

September 30, 2016

⁽⁷⁾ Reflects losses from winter storms in 2015.

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

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

We write flood insurance under an agreement with the National Flood Insurance Program. We cede 100% of the premiums written and the related risk of loss to the federal government. We earn commissions for the issuance of flood policies based upon a fixed percentage of net written premiums and the processing of flood claims based upon a fixed percentage of incurred losses, and we can earn additional commissions by meeting certain growth targets for the number of in-force policies. We recognized commission revenue from our flood program of $270,000 and $239,000 for the three month periods ended September 30, 2016 and 2015, respectively and $772,000 and $721,000 for the nine month periods ended September 30, 2016 and 2015, respectively.

8) LONG-TERM DEBT

Florida State Board of Administration Note Payable

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

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

Our SBA note requires that UPC maintain either a 2:1 ratio of net written premium to surplus, or net writing ratio, or a 6:1 ratio of gross written premium to surplus, or gross writing ratio, to avoid additional interest penalties. The SBA note agreement defines surplus for the purpose of calculating the required ratios as the $20,000,000 of capital contributed to UPC under the agreement plus the outstanding balance of the note. At September 30, 2016, UPC's net written premium to surplus ratio was 6.6:1, which is well above the 2:1 required ratio. UPC's gross written premium to surplus ratio was 10.6:1, which exceeds the required ratio of 6:1. 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 1.60% at the end of September 2016. Any other writing ratio deficiencies result in an interest rate penalty of 25 basis points above the stated rate of the note, which is 1.50% at the end of September 2016. Our SBA note further provides that the SBA may, among other things, declare its loan immediately due and payable for all defaults existing under the SBA note; however, any payment is subject to approval by the insurance regulatory authority. At September 30, 2016, we were in compliance with the covenants of the SBA note.

Interboro, LLC Promissory Note Payable

UNITED INSURANCE HOLDINGS CORP.

Notes to Unaudited Consolidated Financial Statements

September 30, 2016

On April 29, 2016, we issued an $8,550,000 promissory note to Interboro, LLC, the former parent company of Interboro Insurance Company, as part of the purchase price paid to acquire our newest insurance affiliate. The note will mature in 18 months after the closing of the transaction and bears interest at an annual rate of 6%. In accordance with the stock purchase agreement, we have the right to reduce the amount of the outstanding principal by the amount of all or part of any loss relating to a claim for indemnification to which we may be entitled under the stock purchase agreement.

In the event of default, Interboro, LLC, at its option, may declare the loan immediately due and payable.

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). The note bears interest at 1.65% in excess of the one month LIBOR. The interest rate resets monthly and was 2.19% at September 30, 2016. Principal and interest are payable monthly. During the three months ended September 30, 2016, we paid $58,000 and $19,000 of principal and interest, respectively, and during the nine months ended September 30, 2016, we paid $87,000 and $29,000 of principal and interest, respectively. At September 30, 2016, we owed $5,113,000 on the note.

The BB&T note requires that at all times while there has been no "Non-Recurring Losses", UPC Insurance will maintain a minimum Cash Flow Coverage ratio of 1.2:1. The Cash Flow Coverage ratio is defined as UPC Insurance's cash flow to borrower's debt services. Cash flow is defined as earnings before taxes, plus depreciation and amortization and interest. Debt service is defined as prior year's current maturities of long term debt plus interest expense. This ratio will be tested annually, based on UPC Insurance's audited financial statements. For the annual period only following a "Non-Recurring Loss", UPC Insurance will maintain a minimum Cash Flow Coverage ratio of 1.0:1.

For purposes of both of the foregoing, "Non-Recurring Losses" is defined as losses from our insurance subsidiaries' operations, as determined from time to time in the bank's sole discretion. This covenant will only be effective if the Pre Non-Recurring Losses test is failed, and is only available and effective for one (1) annual test period. Thereafter, the Non-Recurring Loss Cash Flow Coverage Ratio of 1.2:1 will immediately apply.

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 home office which has been pledged to the bank as security for the loan.

9) COMMITMENTS AND CONTINGENCIES

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

See Note 8 for information regarding commitments related to long-term debt, and Note 10 for commitments related to regulatory actions.

10) 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 affiliates. 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. At September 30, 2016, and during the three and nine months then ended, our insurance affiliates met all regulatory requirements of the states in which they operate, and they did not incur any material assessments.

UNITED INSURANCE HOLDINGS CORP.

Notes to Unaudited Consolidated Financial Statements

September 30, 2016

The National Association of Insurance Commissioners (NAIC) published 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 risk-based capital requirements may further restrict our insurance affiliates' ability to pay dividends or make distributions if the amount of the intended dividend or distribution would cause statutory surplus to fall below minimum risk-based capital requirements.

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

We have reported our insurance affiliates' assets, liabilities and results of operations in accordance with GAAP, which varies from statutory accounting principles prescribed or permitted by state laws and regulations, as well as by general industry practices. The following items are principal differences between statutory accounting and GAAP:


•	Statutory accounting requires that we exclude certain assets, called non-admitted assets, from the balance sheet.


•	Statutory accounting requires us to expense policy acquisition costs when incurred, while GAAP allows us to defer to the extent realizable, and amortize policy acquisition costs over the estimated life of the policies.


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


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


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


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

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Statutory accounting requires that a provision for reinsurance liability be established for reinsurance recoverable on paid losses aged over 90 days and for unsecured amounts recoverable from unauthorized reinsurers. Under GAAP there is no charge for uncollateralized amounts ceded to a company not licensed in the insurance affiliate's domiciliary state and a reserve for uncollectable reinsurance is charged through earnings rather than surplus or equity.


•	Statutory accounting requires an additional admissibility test and the change in deferred income tax is reported directly in capital and surplus, rather than being reported as a component of income tax expense under GAAP.

UNITED INSURANCE HOLDINGS CORP.

Notes to Unaudited Consolidated Financial Statements

September 30, 2016

Our insurance affiliates must 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 stockholder’s equity under GAAP. For the three and nine month periods ended September 30, 2016 and 2015, UPC, FSIC, UPC Re and IIC recorded the following amounts of statutory net income (loss).



	Three Months Ended					Nine Months Ended
	September 30, 2016			September 30, 2015		September 30, 2016			September 30, 2015
UPC	$	(3,916	)	$	2,537	$	(13,240	)	$	(174	)
UPC Re	$	2,239		$	169	$	2,988		$	249