AMERICAN COASTAL INSURANCE CORPORATION The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing in Part II, Item 8 of this Form 10-K. The following discussion provides an analysis of our results of operations and financial condition for 2020 as compared to 2019. Discussion regarding our results of operations and financial condition for 2019 as compared to 2018 is included in Part II, Item 7 of our Annual Report on Form 10-K for the year endedDecember 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 ." OVERVIEWUnited Insurance Holding Corp. is a holding company primarily engaged in residential personal and commercial property and casualty insurance inthe 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); andJourney 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 inConnecticut ,Florida ,Georgia ,Hawaii ,Louisiana ,Massachusetts ,New Jersey , NewYork, North Carolina ,Rhode Island ,South Carolina andTexas . 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 forUPC 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 ofAmCo Holding Company (AmCo ) and its subsidiaries, including ACIC, inApril 2017 , IIC inApril 2016 , andFamily Security Holdings, LLC (FSH), including its subsidiary FSIC inFebruary 2015 , and our strategic partnership with a subsidiary ofTokio Marine Kiln Group Limited (Kiln), which formed JIC inAugust 2018 . During 2020, our policies in-force has remained constant, increasing by only 0.6% from 627,230 policies in-force atDecember 31, 2019 to 630,991 policies in-force atDecember 31, 2020 . Our business is subject to the impact of weather-related catastrophes on our loss and loss adjustment expenses (LAE). Over the last three years, the frequency of these catastrophes has increased. As a result, we have experienced higher catastrophe losses during the prior three years. During the years endedDecember 31, 2020 , 2019, and 2018, thirteen, five, and six named storms, respectively, made landfall in our geographic footprint, resulting in retained pre-tax catastrophe losses of$208,157,000 ,$32,170,000 , and$53,227,000 , respectively. In addition, during each of the three years we increased our loss and LAE reserves as a result of development trends from 2017's Hurricane Irma, that indicated our ultimate gross loss estimate should be increased. The following discussion highlights significant factors influencing the consolidated financial position and results of operations ofUPC 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. 31
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UNITED INSURANCE HOLDINGS CORP.Consolidated Net Income (Loss)
Year Ended December 31,
2020 2019 2018
REVENUE:
Gross premiums written $ 1,456,863 $ 1,380,268 $ 1,252,401
Change in gross unearned premiums (49,883) (46,742) (71,440)
Gross premiums earned 1,406,980 1,333,526 1,180,961
Ceded premiums earned (641,317) (581,126) (491,685)
Net premiums earned 765,663 752,400 689,276
Net investment income 24,125 30,145 27,201
Net realized gains 66,691 1,228 1,655
Net unrealized gains (losses) on equity securities (27,562) 24,761 (9,300)
Other revenue 17,739 16,582 15,110
Total revenues 846,656 825,116 723,942
EXPENSES:
Losses and loss adjustment expenses 608,316 499,493 408,589
Policy acquisition costs 236,002 238,268 203,140
Operating expenses 52,876 44,310 40,590
General and administrative expenses 72,057 65,989 66,112
Interest expense 9,582 9,781 9,866
Total expenses 978,833 857,841 728,297
Loss before other income (132,177) (32,725) (4,355)
Other income 74 119 116
Loss before income taxes (132,103) (32,606) (4,239)
Benefit for income taxes (36,605) (3,121) (4,633)
Net income (loss) $ (95,498) $ (29,485) $ 394
Less: Net income attributable to noncontrolling
interests 956 387 104
Net income (loss) attributable to UIHC $ (96,454) $ (29,872) $ 290
Net income (loss) per diluted share $ (2.25) $ (0.70) $ 0.01
Book value per share $ 9.19 $ 11.69 $ 12.10
Return on equity based on GAAP net income (loss) (20.2) % (5.6) % 0.1 %
Loss ratio, net (1) 79.4 % 66.4 % 59.3 %
Expense ratio (2)(5) 47.1 % 46.3 % 45.0 %
Combined ratio (3)(5) 126.5 % 112.7 % 104.3 %Effect of current year catastrophe losses on combined ratio
38.5 % 12.9 % 14.5 %
Effect of prior year development on combined ratio (0.9) % 4.4 % 0.6 %
Underlying combined ratio(4)(5) 88.9 % 95.4 % 89.2 %
(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 these components separately from our loss expenses.
(3) Combined ratio is the sum of the loss ratio, net and expense ratio.
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-K can be found in "Definitions of Non-GAAP Measures", below.
(5) Included in both the expense ratio and the combined ratio is amortization
expense predominately associated with the AmCo , IIC, and FSH acquisitions, which
cause comparative differences among periods.
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UNITED INSURANCE HOLDINGS CORP.DEFINITIONS OF NON-GAAP MEASURES
We believe that investors' understanding ofUPC Insurance's 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, that is computed by subtracting the effect of current year catastrophe losses and prior year development from the combined ratio. 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 frequency 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 that 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 both 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. 33
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UNITED INSURANCE HOLDINGS CORP.
RESULTS OF OPERATIONS
Net loss attributable to UIHC for the year ended December 31, 2020 increased by
$66,582,000 to $96,454,000 , compared to $29,872,000 for the year ended December
31, 2019 . The increase in net losses was primarily due to an increase in losses
and LAE during 2020, offset by an increase in net realized investment gain and
net unrealized loss on equity securities.
Revenues
Our gross written premiums increased by$76,595,000 , or 5.5%, to$1,456,863,000 for the year endedDecember 31, 2020 , from$1,380,268,000 for the year endedDecember 31, 2019 , primarily reflecting the impact of rate increases in multiple states across all regions, as well as organic growth in new and renewal business generated in the Gulf and Southeast regions. These increases were partially offset by a decrease in assumed premiums of$56,322,000 or 55.4%, due to the termination of a contract which included commercial property business assumed from unaffiliated insurers. The breakdown of the year-over-year changes in both direct and assumed written premiums by region and gross written premium by line of business are shown in the table below. Direct Written and Assumed Premium By Region (1) 2020 2019 Change Florida$ 829,777 $ 737,615 $ 92,162 Gulf 258,064 225,636 32,428 Northeast 197,556 199,504 (1,948) Southeast 126,161 115,886 10,275 Total direct written premium by region$ 1,411,558 $ 1,278,641 $ 132,917 Assumed premium (2) 45,305 101,627 (56,322) Total gross written premium by region$ 1,456,863 $
1,380,268
Gross Written Premium by Line of Business Personal property (3)$ 1,063,599 $ 973,354 $ 90,245 Commercial property 393,264
406,914 (13,650)
Total gross written premium by line of business
(1) "Gulf" is comprised of
New and Renewal Policies(1) By Region(2) 2020 2019
Change
Florida 264,001 266,841 (2,840)
Gulf 150,748 138,468 12,280
Northeast 147,079 152,673 (5,594)
Southeast 98,086 95,000 3,086
Total 659,914 652,982 6,932
(1) Only includes new and renewal homeowner, commercial and dwelling fire
policies written during the year.
(2) "Northeast" is comprised of Connecticut , Massachusetts , New Jersey , New York
and Rhode Island ; "Gulf" is comprised of Hawaii , Louisiana and Texas ; and
"Southeast" is comprised of Georgia , North Carolina and South Carolina .
Ceded premiums earned increased by $60,191,000 , or 10.4%, to $641,317,000 for
the year ended December 31, 2020 from $581,126,000 for 2019. The increase is
primarily driven by a $53,301,000 increase in ceded premiums earned from our
quota share agreement. During the first five months of 2019, the agreement
covered only UPC at a cession rate of 20%. Effective June 1, 2019 and through
the entirety of the year ended December 31, 2020 , the agreement was renewed to
also include FSIC and to increase the cession rate to 22.5% for both companies.
This resulted in more ceded premiums earned year-over-year. In addition, upon
renewal of the quota share agreement effective June 1, 2020 , we no longer
include an offset for unearned reinsurance commission from the provisional
ceding commission related to our quota share agreement increasing ceded earned
premiums by $7,227,000 year-over-year.
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UNITED INSURANCE HOLDINGS CORP.
Net investment income decreased by $6,020,000 , or 20.0%, to $24,125,000 for the
year ended December 31, 2020 from $30,145,000 for 2019. The decrease is driven
by a $2,789,000 decrease in income from our cash and cash equivalents as a
result of lower yields in 2020 from volatility in the interest market as a
result of the COVID-19 pandemic. Our alternative investments have produced lower
returns during the year ended December 31, 2020 causing a $1,215,000 decrease in
net investment income. In addition, the net investment yield of our fixed
maturities portfolio decreased from 2.1% at December 31, 2019 to 1.0% at
December 31, 2020 , resulting in a decrease of $1,478,000 in investment income
generated from our fixed maturity portfolio.
Net realized investment gains and net unrealized gains (losses) on equity
securities increased by
Expenses
Expenses for the year endedDecember 31, 2020 increased$120,992,000 , or 14.1%, to$978,833,000 for the year endedDecember 31, 2020 , from$857,841,000 for 2019. The increase in expenses was primarily due to an increase in loss and LAE as a result of the higher frequency of catastrophe activity during 2020. The calculations of our combined loss ratios and underlying loss ratios are shown below. Year ended ($ in thousands) December 31, 2020 2019 Change Net loss and LAE$ 608,316 $ 499,493 $ 108,823 % of Gross earned premiums 43.2 % 37.5 % 5.7 pts % of Net earned premiums 79.4 % 66.4 % 13.0 pts Less: Current year catastrophe losses$ 294,537 $ 96,875
Prior year reserve unfavorable development (6,786) 33,134
(39,920)
Underlying loss and LAE (1)$ 320,565 $ 369,484
% of Gross earned premiums 22.8 % 27.7
% (4.9) pts
% of Net earned premiums 41.8 % 49.1
% (7.3) pts
(1) Underlying loss and LAE is a non-GAAP financial 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 Form 10-K can be found in the "Definitions of Non-GAAP Measures" section, above.
The calculations of the Company's expense ratios are shown below.
Year ended
($ in thousands) December 31,
2020 2019 Change
Policy acquisition costs $ 236,002 $ 238,268 $ (2,266)
Operating and underwriting 52,876 44,310 8,566
General and administrative 72,057 65,989 6,068
Total Operating Expenses $ 360,935 $ 348,567 $ 12,368
% of Gross earned premiums 25.7 % 26.1 % (0.4) pts
% of Net earned premiums 47.1 % 46.3 % 0.8 pts
Loss and LAE increased by $108,823,000 , or 21.8%, to $608,316,000 for the year
ended December 31, 2020 , from $499,493,000 for the year ended December 31, 2019 .
Loss and LAE expense as a percentage of net earned premiums increased 13.0
points to 79.4% for the year ended December 31, 2020 , compared to 66.4% for the
year ended December 31, 2019 .
During the year ended December 31, 2020 there was a higher frequency of
catastrophe events when compared to prior years. Excluding catastrophe losses
and reserve development, our gross underlying loss and LAE ratio for the year
ended
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UNITED INSURANCE HOLDINGS CORP.
December 31, 2020 would have been 22.8%, an decrease of 4.9 points from 27.7%
during the year ended December 31, 2019 , representing an improvement in current
year non-catastrophe loss and LAE expense.
Policy acquisition costs decreased by $2,266,000 , or 1.0%, to $236,002,000 for
the year ended December 31, 2020 , from $238,268,000 for the year ended December
31, 2019 . The primary driver of the decrease in costs was a decrease in assumed
ceding commission expense of $12,465,000 , as a result of the decline in our
assumed line of business during 2020, which was offset in part by an increase in
managing general agent commissions related to commercial premiums of
$10,786,000 .
Operating and underwriting expenses increased by
General and administrative expenses increased by$6,068,000 , or 9.2%, to$72,057,000 for the year endedDecember 31, 2020 , from$65,989,000 for the year endedDecember 31, 2019 , primarily due to increased salary and benefit related costs of$3,210,000 from an increase in employee headcount and an increase in professional services expenses of$2,763,000 , from costs incurred to plan construction of a new headquarters building, which was subsequently discontinued.
We experienced favorable reserve development in the current year and its historical impact on our net loss and net underlying loss ratios is outlined in the following table.
Historical Reserve Development
($ in thousands, except ratios) 2016 2017 2018 2019 2020
Prior year reserve favorable (unfavorable)
development $ (16,988) $ 2,613 $ (4,318) $ (33,134) $ 6,786
Development as a % of earnings before
interest and taxes 219.9 % 62.9 % (76.7) % 145.2 % (5.5) %
Consolidated net loss and LAE ratio (LR) 65.3 % 62.4 %
59.3 % 66.4 % 79.4 %
Prior year reserve unfavorable (favorable)
development on LR 3.7 % (0.4) % 0.6 % 4.4 % (0.9) %
Current year catastrophe losses on LR 12.2 % 19.8 % 14.6 % 12.9 % 38.5 %
Underlying net loss and LAE ratio(1) 49.4 % 43.0 % 44.1 % 49.1 % 41.8 %
(1) Underlying net loss and LAE Ratio is a non-GAAP measure and is reconciled
above to the Consolidated net loss and LAE Ratio, the most directly comparable
GAAP measure. Additional information regarding non-GAAP financial measures
presented in this Form 10-K can be found in the "Definitions of Non-GAAP
Measures" section, above.
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UNITED INSURANCE HOLDINGS CORP.ANALYSIS OF FINANCIAL CONDITION
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our accompanying consolidated financial statements and related notes in Part II, Item 8 in this Form 10-K.
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 equity holders 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 and investment portfolios totaled
The following table summarizes our investments, by type:
December 31, 2020
Estimated Fair Percent of Estimated Fair Percent of
Value Total Value Total
securities$ 130,425 10.1 %$ 120,816 9.3 % Foreign governments 1,516 0.1 % 4,071 0.3 %
States, municipalities and
political subdivisions 134,382 10.4 % 133,751 10.3 % Public utilities 29,980 2.3 % 25,334 2.0 % Corporate securities 292,329 22.4 % 288,872 22.2 % Mortgage-backed securities 288,212 22.2 % 251,903 19.4 % Asset-backed securities 56,657 4.4 % 57,129 4.4 % Redeemable preferred stocks 6,510 0.5 % 2,985 0.2 % Total fixed maturities 940,011 72.4 % 884,861 68.1 % Mutual fund 152 - % 65,453 5.0 % Public utilities - - % 3,663 0.3 % Other common stocks - - % 44,492 3.4 %
Non-redeemable preferred
stocks 7,293 0.6 % 3,002 0.2 % Total equity securities 7,445 0.6 % 116,610 8.9 % Other investments 47,595 3.7 % 10,252 0.8 % Total investments 995,051 76.7 % 1,011,723 77.9 % Cash and cash equivalents 239,420 18.5 % 215,469 16.6 % Restricted cash 62,078 4.8 % 71,588 5.5 %
Total cash, cash equivalents,
restricted cash and investments$ 1,296,549 100.0 %$ 1,298,780 100.0 % We classify all of our investments as available-for-sale. Our investments atDecember 31, 2020 and 2019 consisted mainly ofU.S. government and agency securities, states, municipalities and political subdivisions, mortgage-backed securities and securities of investment-grade corporate issuers. Our equity holdings in 2020 and 2019 consisted mainly of securities issued by companies in the energy, consumer products, financial, technology and industrial sectors. Most of the corporate bonds we hold 37 -------------------------------------------------------------------------------- UNITED INSURANCE HOLDINGS CORP. reflected a similar diversification. AtDecember 31, 2020 , approximately 87.6% of our fixed maturities wereU.S. Treasuries, or corporate bonds rated "A" or better, and 12.4% were corporate bonds rated "BBB" or "BB". The most significant impact of COVID-19 on our business during the year endedDecember 31, 2020 was the fluctuations in our investment portfolios due to volatility in the equity securities markets that we were unable to predict. During the second half of the year endedDecember 31, 2020 , we decreased our equity portfolio from 9.1% of our total invested assets (including cash, restricted cash and cash equivalents) atJune 30, 2020 to 0.6% of our total invested assets (including cash, restricted cash and cash equivalents) atDecember 31, 2020 . As a result of this decrease, we experienced a decreased impact from fluctuations in the equity securities markets on our financial statements for the second half of the year endedDecember 31, 2020 . We may continue seeing volatile swings in the markets through 2021 if economic stresses persist. Management is working closely with our investment asset managers to monitor the fluctuations in the markets and the corresponding impact to our portfolios. Future declines in the markets due to COVID-19 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 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 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 inU.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. EffectiveJanuary 1, 2020 , we renewed our all other perils catastrophe excess of loss agreement (AOP) agreement. The agreement provides protection from catastrophe loss events other than named windstorms and earthquakes up to$110,000,000 , an increase of$10,000,000 from 2019. Additionally, we increased our aggregate protection provided under this agreement by adding a prepaid reinstatement to the$30,000,000 of limit provided by second layer of the program. During the second quarter of 2020, we placed our reinsurance program for the 2020 hurricane season. We purchased catastrophe excess of loss reinsurance protection of$3,300,000,000 . The treaties reinsure personal and commercial lines property excess catastrophe losses caused by multiple perils including hurricanes, tropical storms, and tornadoes. The treaties were effective as ofJune 1, 2020 , for a one-year term and incorporate the mandatory coverage required by and placed with theFlorida Hurricane Catastrophe Fund (FHCF). The FHCF coversFlorida risks only and we participate at 90%. In addition, effectiveJune 1, 2020 , we renewed our quota share agreement for a one-year term expiringMay 31, 2021 . EffectiveDecember 31, 2020 , we extended our quota share reinsurance agreement that was set to expire onMay 31, 2021 . This quota share reinsurance agreement has a cession rate of 30.5% for all subject business and provides coverage for all catastrophe perils and attritional losses. This cession rate is comprised of a quota share cession of 23.0% throughMay 31, 2022 , which covers UPC, FSIC and ACIC with the remaining 7.5% pending renewal atJune 1, 2021 covering UPC and FSIC only. EffectiveJanuary 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. EffectiveDecember 31, 2020 , we entered into a property quota share reinsurance agreement with HPC, effective as ofDecember 31, 2020 . According to the terms of this reinsurance contract,UPC Insurance will cede and HPC will assume a 69.5% quota share of our personal lines homeowners business inConnecticut ,Massachusetts ,New Jersey andRhode Island on an in-force, new and renewal basis for the period fromDecember 31, 2020 throughMay 31, 2021 . 38
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UNITED INSURANCE HOLDINGS CORP.
Reinsurance costs as a percent of gross earned premium during the years ended
2020 2019
Non-at-Risk (2.4) % (2.5) %
Quota Share (13.1) % (10.4) %
All Other (30.1) % (30.7) %
Total Ceding Ratio (45.6) % (43.6) %
We amortize our ceded unearned premiums over the annual agreement period, and we
record that amortization in ceded premiums earned on our 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:
Year Ended December 31,
2020 2019 2018
Quota Share $ (306,331) $ (174,147) $ (94,267)
Excess-of-loss (412,220) (424,622) (389,633)Equipment, identity theft, and cyber security
(1) (13,801)
(13,379) (9,163)
Flood and inland flood (1) (23,517)
(21,127) (19,207)
Ceded premiums written$ (755,869)
Change in ceded unearned premiums 114,552
52,149 20,585
Ceded premiums earned$ (641,317)
(1) We began writing cyber security and inland flood policies in 2020.
Current year catastrophe losses disaggregated between named and numbered storms and all other catastrophe loss events are shown in the following table.
Incurred Loss and
Loss adjustment
Number of Events expense (LAE) (1) Combined Ratio Impact
December 31, 2020
Current period catastrophe losses
incurred
Named and numbered storms 13 $ 208,157 27.2 %
All other catastrophe loss events 35 86,380 11.3 %
Total 48 $ 294,537 38.5 %
December 31, 2019
Current period catastrophe losses
incurred
Named and numbered storms 5 $ 32,170 4.3 %
All other catastrophe loss events 32 64,705 8.6 %
Total 37 $ 96,875 12.9 %
December 31, 2018
Current period catastrophe losses
incurred
Named and numbered storms 5 $ 53,227 7.7 %
All other catastrophe loss events 27 46,761 6.8 %
Total 32 $ 99,988 14.5 %
(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 8 in our Notes to Consolidated Financial Statements for additional information regarding our reinsurance program.
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UNITED INSURANCE HOLDINGS CORP.
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$1,089,966,000 and$760,357,000 as ofDecember 31, 2020 and 2019, respectively. The balance has increased year over year as a result of increased current year incurred losses primarily related to a higher frequency of catastrophe activity during the third and fourth quarter of 2020. This increase also resulted in an increase in our reinsurance recoverables on unpaid losses balance atDecember 31, 2020 compared toDecember 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.
See Note 9 in our Notes to Unaudited Consolidated Financial Statements for additional information regarding our losses and LAE.
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 RBC guidelines published by the NAIC 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 13 in our Notes to Consolidated Financial Statements and Part II, Item 5 for additional information. During the year endedDecember 31, 2020 , we contributed$12,000,000 and$3,000,000 to our insurance subsidiary, UPC, and reinsurance subsidiary, UPC Re, respectively. During the year endedDecember 31, 2019 , we contributed$4,000,000 and$13,000,000 to our insurance subsidiaries UPC and FSIC, respectively. We may make future contributions of capital to our insurance subsidiaries as circumstances require. DuringFebruary 2020 , we received a dividend of$12,000,000 from IIC. DuringAugust 2019 , we received a dividend of$13,579,000 from our insurance subsidiary ACIC. DuringNovember 2018 , ACIC and IIC paid dividends to the Company of$50,000,000 and$1,764,000 , respectively. In 2019, the$1,764,000 dividend paid by IIC in 2018 was returned by UIHC. DuringAugust 2018 , we contributed$40,000,000 to fund a new subsidiary, JIC, and Kiln contributed$20,000,000 , for total funding of$60,000,000 . JIC is owned 66.7% by the Company and 33.3% by Kiln. 40 -------------------------------------------------------------------------------- UNITED INSURANCE HOLDINGS CORP. OnDecember 13, 2017 , we issued$150,000,000 of senior notes (Senior Notes) that will mature onDecember 15, 2027 and bear interest at a rate equal to 6.25% per annum payable semi-annually on eachJune 15 andDecember 15 , commencingJune 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 Senior 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 and after that date, we may redeem the Senior Notes at par. As a result of claim activity from the current and prior years, we have an obligation related to the unpaid policyholder losses and unpaid loss adjustment expenses associated with the settling of these claims. As ofDecember 31, 2020 , our total obligation related to these claim payments was$1,089,996,000 , of which we estimate$589,181,000 to be short-term in nature (due in less than twelve months), based upon our cumulative claims paid over the last 21 years. While we believe that historical performance of loss payment patterns is a reasonable source for projecting future claim payments, there is inherent uncertainty in this estimated projected settlement, and as a result these estimates will differ, perhaps significantly, from actual future payments. In addition to our unpaid loss and loss adjustment expenses, as ofDecember 31, 2020 we have outstanding debt obligations related to our notes payable totaling$160,376,000 . This is exclusive of interest costs, which we estimate will total$65,629,000 over the life of the debt, based on the current fixed and variable interest rates of these notes. Our short-term obligation related to these notes payable total$1,523,000 in principal payments and$9,479,000 in estimated interest payments. For more information regarding these outstanding notes, please see Note 10 . In connection with entering into contracts with our outside vendors, we have minimum obligations due to our vendors over the life of the contracts. Our main vendor obligations are related to underwriting tools, claims and policy administration systems, and software used by our information technology department in their daily operations. Our total obligation related to these three categories of obligations are$2,610,000 ,$12,103,000 , and$6,443,000 , respectively. Of these obligations,$1,222,000 ,$5,668,000 , and$1,443,000 , respectively are short-term in nature.
Cash Flows for the Year Ended
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 year endedDecember 31, 2020 , several changes in operating assets and liabilities were impacted by current year catastrophe losses. Unpaid losses and LAE increased during the period and, as a result, we expect an increase in cash outflows related to the payment of catastrophe claims in the near future. In addition, reinsurance recoverable on paid and unpaid losses increased during the period. In 2020, we saw losses above our reinsurance retention thresholds and subsequent reinsurance 41 -------------------------------------------------------------------------------- UNITED INSURANCE HOLDINGS CORP. recoverables as a result of 13 named storms making landfall within our geographic footprint. In 2019, while we did have losses related to catastrophes, these catastrophes were less severe. As a result, fewer losses were incurred that were eligible for ceding under our reinsurance treaty.
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. Additional cash outflows relate to the purchase of fixed assets. The primary liquidity concerns with respect to these cash flows are the risk of default by debtors and market disruption. During the year endedDecember 31, 2020 , cash provided by (used in) investing activities increased$70,545,000 as the result of net sales of investments totaling$47,414,000 in 2020, compared to net purchases of investments of$12,083,000 in 2019.
Financing Activities
The principal cash inflows from our financing activities come from issuances of debt and other securities. The principal cash outflows 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 year endedDecember 31, 2020 , cash provided by (used in) financing activities decreased by$445,000 due to a$294,000 decrease year over year in cash outflows related to our repayment of our outstanding debt, as well as a$184,000 decrease year over year in our tax withholding payments related to the net settlement of equity awards. RECENT ACCOUNTING STANDARDS
Please refer to Note 2(u) in our Notes to Consolidated Financial Statements for a discussion of recent accounting standards that may affect us.
APPLICATION OF CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with GAAP requires management to adopt accounting policies and make estimates and assumptions that affect amounts reported in the consolidated financial statements. The most critical estimates include those used in determining:
•reserves for unpaid losses,
•fair value of investments,
•investment portfolio credit allowances, and
•goodwill.
In making these determinations, management makes subjective and complex
judgments that frequently require estimates about matters that are inherently
uncertain. Many of these policies, estimates and related judgments are common in
the insurance industry. It is reasonably likely that changes in these estimates
could occur from time to time and result in a material impact on our
consolidated financial statements.
In addition, the preparation of our financial statements in accordance with GAAP
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.
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UNITED INSURANCE HOLDINGS CORP.Reserves for Unpaid Losses and LAE
Reserves for unpaid losses and LAE represent the most significant accounting estimate inherent in the preparation of our financial statements. These reserves represent management's best estimate of the amount we will ultimately pay for losses and we base the amount upon the application of various actuarial reserve estimation techniques as well as considering other material facts and circumstances known at the balance sheet date. As discussed in Note 9 in our Notes to Consolidated Financial Statements, we determine our ultimate losses by using multiple actuarial methods to determine an actuarial estimate within a relevant range of indications that we calculate using generally accepted actuarial techniques. Our selection of the actuarial estimate is influenced by the analysis of our historical loss and claims experience since inception. For each accident year, we estimate the ultimate incurred losses for both reported and unreported claims. In establishing this estimate, we reviewed the results of various actuarial methods discussed in
Note 9 in our Notes to Consolidated Financial Statements.
Fair Value of Investments
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. We are responsible for the determination of fair value of financial assets and the supporting assumptions and methodologies. We use quoted prices from active markets and we use an independent third-party valuation service to assist us in determining fair value. We obtain only one single quote or price for each financial instrument. As discussed in Note 3 in our Notes to Consolidated Financial Statements, we value our investments at fair value using quoted prices from active markets, to the extent available. For securities for which quoted prices in active markets are unavailable, we use observable inputs such as quoted prices in inactive markets, quoted prices in active markets for similar instruments, benchmark interest rates, broker quotes and other relevant inputs. We also have investments in limited partnerships that require us to use the net asset value per share method of valuation to determine fair value.
Investment Portfolio Credit Allowances
For investments classified as available for sale, the difference between fair
value and cost or amortized cost for fixed income securities is reported as a
component of accumulated other comprehensive income (loss) on our Consolidated
Balance Sheet and is not reflected in our net income (loss) of any period until
reclassified to net income (loss) upon the consummation of a transaction with an
unrelated third party. We have a 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.
If the estimated recovery value is less than the amortized cost of the security,
a credit loss exists and an allowance for the difference between the estimated
recovery value and amortized cost is recorded in earnings. The portion of the
unrealized loss related to factors other than credit remains classified in
accumulated other comprehensive income (loss). If we determine that the fixed
income security does not have sufficient cash flow or other information to
estimate a recovery value for the security, we may conclude that the entire
decline in fair value is deemed to be credit related and the loss is recorded in
earnings.
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UNITED INSURANCE HOLDINGS CORP.
Due to the adoption of Accounting Standards Update (ASU) 2016-01 (ASU 2016-01)
as of January 1, 2018 , equity securities are reported at fair value with changes
in fair value, including impairment write-downs, being recognized in the revenue
section of our Consolidated Statements of Comprehensive Income.
See Note 2(b) in our Notes to Consolidated Financial Statements for further information regarding our credit loss testing.
Measurement of
Goodwill is the excess of cost over the estimated fair value of net assets acquired.Goodwill is not amortized but is tested for impairment at least annually or more frequently if events or circumstances, such as adverse changes in the business climate, indicate that there may be justification for conducting an interim test. We test goodwill for impairment by performing a quantitative assessment and goodwill is impaired when it is determined that the carrying value of a reporting unit is in excess of the fair value of that reporting unit. The valuation methodologies utilized are subject to key judgments and assumptions that are sensitive to change. Estimates of fair value are inherently uncertain and represent only management's reasonable expectation regarding future developments. Please refer to Note 2 ( j ) in our Notes to Consolidated Financial Statements for further information regarding our measurement ofGoodwill and Related Impairment. RELATED PARTY TRANSACTIONS
Please refer to Note 14 in our Notes to Consolidated Financial Statements for a discussion of our related party transactions.
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