United Insurance(ACIC) - 2020 Q2 - Quarterly Report

FORM 10-Q General Information This section provides general information about the Form 10-Q filing, including company details, filer status, and forward-looking statements with associated risks Filing Details This section details the company's Form 10-Q filing, identifying United Insurance Holdings Corp. as an accelerated filer on Nasdaq - Quarterly Report on Form 10-Q for the period ended June 30, 2020[1] - United Insurance Holdings Corp. is a Delaware corporation[1][2] - Listed on Nasdaq Stock Market LLC under trading symbol UIHC[2] - Classified as an accelerated filer, having submitted all required reports and Interactive Data Files[2][3] Forward-Looking Statements This section outlines forward-looking statements regarding growth and financial performance, along with significant risks and uncertainties that could alter actual results - Forward-looking statements encompass anticipated growth in revenues, gross written premium, EPS, estimated unpaid losses, investment returns, diversification, liquidity, investment objectives, and market risk management[6] - Key risks include exposure to catastrophic events, regulatory/economic conditions in Florida, agent relationships, potential claims exceeding loss reserves, governmental assessments, internal control adequacy, IT/data security, vendor reliance, management retention, acquisition risks, indebtedness, market share, regulatory changes, reinsurance costs/collectability, investment income dependence, industry cyclicality, legal actions, ratings downgrades, stock price impact, dividend constraints, and the impact of COVID-19[6] - The company cautions against undue reliance on these statements, which are valid only as of their making date, and undertakes no obligation to update them except as required by law[7] PART I. FINANCIAL INFORMATION This part presents the unaudited condensed consolidated financial statements, management's discussion and analysis, market risk disclosures, and controls and procedures Item 1. Financial Statements This section presents unaudited condensed consolidated financial statements, including balance sheets, income, equity, and cash flows, with detailed explanatory notes Condensed Consolidated Balance Sheets (Unaudited) The balance sheets detail the company's financial position, showing a $363.2 million increase in total assets and a $337.6 million increase in total liabilities by June 30, 2020 | ASSETS (in thousands) | June 30, 2020 | December 31, 2019 | | :------------------------------------------------------- | :------------ | :---------------- | | Total investments | $1,158,304 | $1,011,723 | | Total cash, cash equivalents and restricted cash | $281,570 | $287,057 | | Premiums receivable, net | $113,288 | $86,568 | | Reinsurance recoverable on paid and unpaid losses, net | $486,805 | $550,136 | | Ceded unearned premiums | $498,838 | $270,034 | | Total Assets | $2,830,432 | $2,467,218 | | LIABILITIES AND STOCKHOLDERS' EQUITY (in thousands) | | | | Unpaid losses and loss adjustment expenses | $683,471 | $760,357 | | Unearned premiums | $760,131 | $674,055 | | Reinsurance payable on premiums | $460,807 | $166,131 | | Notes payable, net | $158,340 | $158,932 | | Total Liabilities | $2,280,915 | $1,943,353 | | Total Stockholders' Equity | $549,517 | $523,865 | - Total Assets increased by $363.2 million (14.7%) to $2,830.4 million at June 30, 2020, from $2,467.2 million at December 31, 2019[9] - Total Liabilities increased by $337.6 million (17.4%) to $2,280.9 million at June 30, 2020, from $1,943.4 million at December 31, 2019[9] Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) Net income attributable to UIHC saw a significant turnaround, moving from a $2.9 million loss in Q2 2019 to a $24.3 million gain in Q2 2020 | REVENUE (in thousands) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Gross premiums written | $439,651 | $449,762 | $774,834 | $768,321 | | Net premiums earned | $185,482 | $190,404 | $377,078 | $371,126 | | Net investment income | $5,907 | $7,570 | $12,824 | $14,865 | | Net unrealized gain (loss) on equity securities | $20,552 | $2,737 | $(5,904) | $12,910 | | Total revenue | $216,397 | $204,776 | $392,701 | $407,097 | | EXPENSES (in thousands) | | | | | | Losses and loss adjustment expenses | $101,693 | $116,252 | $204,530 | $220,799 | | Policy acquisition costs | $52,573 | $61,622 | $111,448 | $116,868 | | Total expenses | $186,929 | $208,402 | $379,065 | $398,396 | | Net income (loss) attributable to UIHC | $24,274 | $(2,903) | $11,551 | $6,566 | | Basic EPS | $0.57 | $(0.07) | $0.27 | $0.15 | | Diluted EPS | $0.56 | $(0.07) | $0.27 | $0.15 | - Net income attributable to UIHC for Q2 2020 increased by $27.177 million (936.2%) to $24.274 million, from a net loss of $2.903 million in the prior year[11] - Net unrealized gain on equity securities significantly increased to $20.552 million in Q2 2020 from $2.737 million in Q2 2019[11] Condensed Consolidated Statements of Stockholders' Equity (Unaudited) Stockholders' equity statements show changes, with total equity attributable to UIHC increasing to $528.3 million by June 30, 2020 | Stockholders' Equity (in thousands) | March 31, 2020 | Net Income | Other Comprehensive Income, Net | Stock Compensation | Cash Dividends | June 30, 2020 | | :---------------------------------- | :------------- | :--------- | :------------------------------ | :----------------- | :------------- | :------------ | | Common Stock | $4 | — | — | — | — | $4 | | Additional Paid-in Capital | $392,552 | — | — | $81 | — | $392,633 | | Treasury Stock | $(431) | — | — | — | — | $(431) | | Accumulated Other Comprehensive Income | $8,493 | — | $21,034 | — | — | $29,527 | | Retained Earnings | $84,838 | $24,274 | — | — | $(2,578) | $106,534 | | Total UIHC Stockholders' Equity | $485,456 | $24,274 | $21,034 | $81 | $(2,578) | $528,267 | | Noncontrolling Interests (NCI) | $20,701 | $168 | $381 | — | — | $21,250 | | Total Stockholders' Equity | $506,157 | $24,442 | $21,415 | $81 | $(2,578) | $549,517 | - Total Stockholders' Equity attributable to UIHC increased from $503.138 million at December 31, 2019, to $528.267 million at June 30, 2020[9][14] - Accumulated Other Comprehensive Income increased significantly from $11.319 million at December 31, 2019, to $29.527 million at June 30, 2020, primarily due to changes in net unrealized gains on investments[9][14] Condensed Consolidated Statements of Cash Flows (Unaudited) Cash flow statements show a decrease in operating cash, a shift to net outflow in investing activities, and consistent financing outflows for dividends | Cash Flows (in thousands) | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--------------------------------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $139,320 | $179,278 | | Net cash provided by (used in) investing activities | $(138,896) | $5,652 | | Net cash used in financing activities | $(5,911) | $(5,901) | | Increase (decrease) in cash, cash equivalents and restricted cash | $(5,487) | $179,029 | | Cash, cash equivalents and restricted cash at end of period | $281,570 | $363,149 | - Net cash provided by operating activities decreased by $39.958 million (22.3%) to $139.320 million for the six months ended June 30, 2020[18] - Investing activities shifted from a net cash inflow of $5.652 million in 2019 to a net cash outflow of $138.896 million in 2020, primarily due to increased purchases of fixed maturities and equity securities[18] Notes to Unaudited Condensed Consolidated Financial Statements These notes provide detailed explanations and disclosures for the financial statements, covering business, accounting policies, investments, debt, and other financial aspects Note 1) ORGANIZATION, CONSOLIDATION AND PRESENTATION%20ORGANIZATION,%20CONSOLIDATION%20AND%20PRESENTATION) This note describes UPC Insurance as a property and casualty holding company, its consolidation basis, and the immaterial impact of COVID-19 on operations - UPC Insurance is a property and casualty insurance holding company operating through five insurance subsidiaries[20] - Primarily offers homeowners' insurance in 12 states and commercial residential insurance in Florida[22] - Operates under a single reportable segment: property and casualty insurance policies[23] - COVID-19 has not materially impacted business operations, financial position, or liquidity, except for investment portfolio volatility and an immaterial decline in Northeast new business premium in Q2 2020[30] Note 2) SIGNIFICANT ACCOUNTING POLICIES%20SIGNIFICANT%20ACCOUNTING%20POLICIES) This note outlines significant accounting policies, including credit loss allowances, CARES Act impact, and the adoption of new accounting pronouncements in 2020 - No changes were made to significant accounting policies, except for standards adopted in 2020[32] - The CARES Act increased federal tax recoverable by $12.513 million and decreased deferred tax asset by $7.250 million due to changes in net operating loss carryback rules[38] Allowance for Expected Credit Losses (in thousands) | Allowance for Expected Credit Losses (in thousands) | December 31, 2019 | Provision for expected credit losses | Write-offs | June 30, 2020 | | :---------------------------------- | :---------------- | :----------------------------------- | :--------- | :------------ | | Premiums Receivable | $165 | $27 | $— | $192 | | Reinsurance Recoverables | $256 | $(30) | $— | $226 | | Note Receivable | $141 | $(59) | $— | $82 | | Total | $562 | $(62) | $— | $500 | - Adopted ASU 2016-13 (Credit Losses) on January 1, 2020, resulting in a cumulative effect decrease of $262,000 to the opening balance of retained earnings[42] Note 3) INVESTMENTS%20INVESTMENTS) This note details the investment portfolio, including fixed maturities and equity securities, fair values, net investment income, and confirms no credit loss allowance for fixed-income securities Fixed Maturities, Available-for-Sale (in thousands) | Fixed Maturities, Available-for-Sale (in thousands) | June 30, 2020 Fair Value | December 31, 2019 Fair Value | | :-------------------------------------------------- | :----------------------- | :--------------------------- | | U.S. government and agency securities | $123,894 | $120,816 | | States, municipalities and political subdivisions | $133,538 | $133,751 | | Corporate securities | $348,447 | $288,872 | | Mortgage-backed securities | $290,902 | $251,903 | | Total fixed maturities | $1,015,291 | $884,861 | Equity Securities (in thousands) | Equity Securities (in thousands) | June 30, 2020 Fair Value | December 31, 2019 Fair Value | | :------------------------------- | :----------------------- | :--------------------------- | | Mutual funds | $63,019 | $65,453 | | Other common stocks | $53,647 | $44,492 | | Total equity securities | $131,003 | $116,610 | Net Investment Income (in thousands) | Net Investment Income (in thousands) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :----------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Fixed maturities | $5,592 | $5,560 | $11,062 | $11,622 | | Equity securities | $728 | $622 | $1,499 | $1,114 | | Cash and cash equivalents | $66 | $1,661 | $737 | $1,796 | | Net investment income | $5,907 | $7,570 | $12,824 | $14,865 | - No credit loss allowance was recorded for fixed-income securities at June 30, 2020, as fair value declines were not credit-related, and the company does not intend to sell them before amortized cost recovery[54] Note 4) EARNINGS PER SHARE (EPS)%20EARNINGS%20PER%20SHARE%20(EPS)) This note details basic and diluted EPS computations, showing a significant increase in Basic EPS to $0.57 in Q2 2020 from $(0.07) in Q2 2019 EPS Data | EPS Data | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income (loss) attributable to UIHC common stockholders (in thousands) | $24,274 | $(2,903) | $11,551 | $6,566 | | Weighted-average shares outstanding (Basic) | 42,860,922 | 42,762,417 | 42,833,225 | 42,729,730 | | Weighted-average diluted shares | 43,055,115 | 42,762,417 | 43,041,623 | 43,097,244 | | Basic EPS | $0.57 | $(0.07) | $0.27 | $0.15 | | Diluted EPS | $0.56 | $(0.07) | $0.27 | $0.15 | - Basic EPS for UIHC common stockholders increased from $(0.07) in Q2 2019 to $0.57 in Q2 2020[70] - Diluted EPS for UIHC common stockholders increased from $(0.07) in Q2 2019 to $0.56 in Q2 2020[70] Note 5) PROPERTY AND EQUIPMENT, NET%20PROPERTY%20AND%20EQUIPMENT,%20NET) This note breaks down property and equipment, net, showing an increase to $37.9 million by June 30, 2020, driven by computer hardware and software investments Property and Equipment, Net (in thousands) | Property and Equipment, Net (in thousands) | June 30, 2020 | December 31, 2019 | | :----------------------------------------- | :------------ | :---------------- | | Land | $2,114 | $2,114 | | Building and building improvements | $11,907 | $11,315 | | Computer hardware and software | $39,021 | $33,219 | | Office furniture and equipment | $3,204 | $3,260 | | Leasehold improvements | $739 | $20 | | Leased vehicles | $2,188 | $1,693 | | Total, at cost | $59,173 | $51,621 | | Less: accumulated depreciation and amortization | $(21,224) | $(18,893) | | Property and equipment, net | $37,949 | $32,728 | - Property and equipment, net, increased by $5.221 million (16.0%) to $37.949 million at June 30, 2020[71] - Computer hardware and software, including software in progress, increased by $5.802 million to $39.021 million[71] Note 6) GOODWILL AND INTANGIBLE ASSETS%20GOODWILL%20AND%20INTANGIBLE%20ASSETS) This note details goodwill, which remained unchanged at $73.045 million, and intangible assets, which decreased to $20.259 million due to amortization - Goodwill carrying amount remained constant at $73.045 million at June 30, 2020, with no impairment recognized[73][75] Intangible Assets (in thousands) | Intangible Assets (in thousands) | June 30, 2020 | December 31, 2019 | | :--------------------------------- | :------------ | :---------------- | | Intangible assets subject to amortization | $20,259 | $22,440 | | Indefinite-lived intangible assets | $3,639 | $3,639 | | Total | $23,898 | $26,079 | - Amortization expense for intangible assets was $1.044 million for Q2 2020 and $2.181 million for the six months ended June 30, 2020[78] Note 7) REINSURANCE%20REINSURANCE) This note describes the reinsurance program, including catastrophe protection, and details a decrease in reinsurance recoverable to $486.8 million by June 30, 2020 - The reinsurance program includes excess of loss, aggregate excess of loss, and quota share treaties to cover catastrophe losses[80][81] - Approximately $3.3 billion in catastrophe excess of loss reinsurance protection was purchased for the 2020 hurricane season, effective June 1, 2020[158] Reinsurance Recoverable (in thousands) | Reinsurance Recoverable (in thousands) | June 30, 2020 | December 31, 2019 | | :------------------------------------- | :------------ | :---------------- | | Reinsurance recoverable on unpaid losses and loss adjustment expenses | $398,369 | $482,315 | | Reinsurance recoverable on paid losses and loss adjustment expenses | $88,436 | $67,821 | | Total Reinsurance recoverable | $486,805 | $550,136 | - The company cedes 100% of flood insurance premiums and risk to the National Flood Insurance Program, earning commissions of $431,000 in Q2 2020 and $764,000 for the six months ended June 30, 2020[82] Note 8) LIABILITY FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSE (LAE)%20LIABILITY%20FOR%20UNPAID%20LOSSES%20AND%20LOSS%20ADJUSTMENT%20EXPENSE%20(LAE)) This note details the reserve for unpaid losses and LAE, which decreased to $683.5 million by June 30, 2020, with favorable prior year development Reserve for Unpaid Losses and LAE (in thousands) | Reserve for Unpaid Losses and LAE (in thousands) | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :----------------------------------------------- | :----------------------------- | :----------------------------- | | Balance at January 1 | $760,357 | $661,203 | | Less: reinsurance recoverable on unpaid losses | $482,315 | $477,870 | | Net balance at January 1 | $278,042 | $183,333 | | Total incurred | $204,530 | $220,799 | | Total paid | $197,470 | $206,185 | | Net balance at June 30 | $285,102 | $197,947 | | Plus: reinsurance recoverable on unpaid losses | $398,369 | $379,402 | | Balance at June 30 | $683,471 | $577,349 | - Total unpaid losses and LAE decreased by $76.886 million (10.1%) to $683.471 million at June 30, 2020[84] - The decrease was a result of a decrease in reinsurance recoverables on unpaid losses balance[169] - The company experienced favorable development of $(1.952) million in 2020 related to prior year losses, compared to $20.967 million in 2019[84][85] Note 9) LONG-TERM DEBT%20LONG-TERM%20DEBT) This note outlines long-term debt, which remained stable at $160.8 million by June 30, 2020, and discusses compliance with financial covenants, including a Truist Note waiver Long-Term Debt Outstanding (in thousands) | Long-Term Debt Outstanding (in thousands) | Maturity Date | Effective Interest Rate | June 30, 2020 Carrying Value | December 31, 2019 Carrying Value | | :---------------------------------------- | :--------------- | :---------------------- | :--------------------------- | :------------------------------- | | Senior Notes Payable | December 15, 2027 | 6.25% | $150,000 | $150,000 | | Florida State Board of Administration Note Payable | July 1, 2026 | 0.70% | $7,059 | $7,647 | | Truist Term Note Payable | May 26, 2031 | 1.88% | $3,784 | $3,958 | | Total long-term debt | | | $160,843 | $161,605 | - The company was in compliance with covenants for Senior Notes and the SBA Note at June 30, 2020[90][91] - The company was not in compliance with the Truist Note's minimum cash flow coverage ratio covenant at December 31, 2019, but obtained a waiver for this non-compliance[92][93] Note 10) COMMITMENTS AND CONTINGENCIES%20COMMITMENTS%20AND%20CONTINGENCIES) This note covers commitments and contingencies, including routine legal actions, $2.161 million in unfunded partnership commitments, and $2.411 million in total lease liabilities - The company is involved in routine claims-related legal actions, accruing amounts when an unfavorable outcome is probable and estimable[95] - Unfunded commitments for limited partnership investments totaled $2.161 million at June 30, 2020[97] Lease Balances (in thousands) | Lease Balances (in thousands) | June 30, 2020 | December 31, 2019 | | :------------------------------ | :------------ | :---------------- | | Operating lease assets | $2,225 | $335 | | Financing lease assets | $1,431 | $1,263 | | Total lease assets | $3,656 | $1,598 | | Operating lease liabilities | $2,369 | $324 | | Financing lease liabilities | $42 | $34 | | Total lease liabilities | $2,411 | $358 | Note 11) STATUTORY ACCOUNTING AND REGULATION%20STATUTORY%20ACCOUNTING%20AND%20REGULATION) This note discusses insurance industry regulation, requiring minimum statutory surplus and RBC, with all subsidiaries meeting requirements and combined statutory net income of $4.495 million in Q2 2020 - Insurance subsidiaries are subject to state laws and NAIC RBC guidelines, requiring minimum statutory surplus and capital[103][104] - All insurance subsidiaries met regulatory requirements at June 30, 2020, with no significant assessments received[103][109] Statutory Net Income (in thousands) | Statutory Net Income (in thousands) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :---------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Combined statutory net income (loss) | $4,495 | $1,154 | $11,703 | $(6,581) | Note 12) RELATED PARTY TRANSACTIONS%20RELATED%20PARTY%20TRANSACTIONS) This note details related party transactions, noting the termination of the relationship with AmRisc, LLC on December 31, 2019, following R. Daniel Peed's resignation - The related party relationship with AmRisc, LLC terminated on December 31, 2019, following R. Daniel Peed's resignation[110] - For the three and six months ended June 30, 2019, gross written premiums of $163.045 million and $270.663 million were recorded with AmRisc, resulting in gross fees and commissions of $46.014 million and $74.993 million[111] Note 13) ACCUMULATED OTHER COMPREHENSIVE INCOME%20ACCUMULATED%20OTHER%20COMPREHENSIVE%20INCOME) This note details AOCI components, showing a significant increase to $29.527 million by June 30, 2020, driven by changes in net unrealized gains on investments Accumulated Other Comprehensive Income (in thousands) | Accumulated Other Comprehensive Income (in thousands) | Pre-Tax Amount | Tax (Expense) Benefit | Net Amount | | :-------------------------------------------------- | :------------- | :-------------------- | :--------- | | December 31, 2019 | $14,962 | $(3,643) | $11,319 | | Changes in net unrealized gains on investments | $24,022 | $(5,830) | $18,192 | | Reclassification adjustment for realized gains | $13 | $3 | $16 | | June 30, 2020 | $38,997 | $(9,470) | $29,527 | - Accumulated other comprehensive income increased by $18.208 million to $29.527 million at June 30, 2020[113] Note 14) STOCKHOLDERS' EQUITY%20STOCKHOLDERS'%20EQUITY) This note details cash dividends of $0.06 per share and a $25 million stock repurchase plan authorized in July 2019, under which no shares were repurchased Cash Dividends Declared (in thousands, except per share) | Cash Dividends Declared (in thousands, except per share) | First Quarter 2020 | First Quarter 2019 | Second Quarter 2020 | Second Quarter 2019 | | :------------------------------------------------------- | :----------------- | :----------------- | :------------------ | :------------------ | | Per Share Amount | $0.06 | $0.06 | $0.06 | $0.06 | | Aggregate Amount | $2,571 | $2,569 | $2,578 | $2,570 | - A stock repurchase plan of up to $25 million was authorized in July 2019, but no shares had been repurchased as of June 30, 2020[114] Note 15) STOCK-BASED COMPENSATION%20STOCK-BASED%20COMPENSATION) This note details stock-based compensation, including employee and director expenses, and reports $3.043 million in unrecognized employee stock compensation expense Stock-Based Compensation Expense (in thousands) | Stock-Based Compensation Expense (in thousands) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :---------------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Employee stock-based compensation expense (Pre-tax) | $(52) | $416 | $474 | $946 | | Director stock-based compensation expense (Pre-tax) | $133 | $261 | $307 | $632 | - Unrecognized stock compensation expense totaled approximately $3.043 million for non-vested stock-based compensation and $333,000 for non-vested director stock-based compensation at June 30, 2020[119] Non-Vested Common Stock Grants Activity | Non-Vested Common Stock Grants Activity | Number of Restricted Shares | Weighted Average Grant Date Fair Value | | :-------------------------------------- | :-------------------------- | :------------------------------------- | | Outstanding as of December 31, 2019 | 214,495 | $17.49 | | Granted | 347,254 | $9.57 | | Forfeited | 165,102 | $12.95 | | Vested | 104,115 | $16.47 | | Outstanding as of June 30, 2020 | 292,532 | $11.01 | Note 16) SUBSEQUENT EVENTS%20SUBSEQUENT%20EVENTS) This note discloses subsequent events, including a $0.06 per share quarterly cash dividend and the impact of Hurricanes Hanna and Isaias - On July 28, 2020, the Board of Directors declared a $0.06 per share quarterly cash dividend, payable on August 18, 2020[126] - Hurricane Hanna (July 2020) and Hurricane Isaias (August 2020) made landfall, with total incurred losses yet to be estimated[126] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on financial condition, operations, key performance indicators, COVID-19 impact, liquidity, and non-GAAP measures EXECUTIVE SUMMARY This summary provides an overview of UPC Insurance, highlighting growth in policies in-force by 2.5% and the immaterial impact of COVID-19 on operations - UPC Insurance is a holding company primarily engaged in residential personal and commercial property and casualty insurance in the U.S[129] - Policies in-force increased by 2.5% from 615,357 at June 30, 2019, to 630,542 at June 30, 2020, driven by organic growth and strategic acquisitions[131] - COVID-19 has not materially impacted business operations, financial position, or liquidity, except for investment portfolio volatility and an immaterial decline in Northeast new business premium in Q2 2020[136] 2020 Highlights (in thousands, except per share) | 2020 Highlights (in thousands, except per share) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :----------------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Gross premiums written | $439,651 | $449,762 | $774,834 | $768,321 | | Net premiums earned | $185,482 | $190,404 | $377,078 | $371,126 | | Consolidated net income (loss) attributable to UIHC | $24,274 | $(2,903) | $11,551 | $6,566 | | Net income (loss) available to UIHC stockholders per diluted share | $0.56 | $(0.07) | $0.27 | $0.15 | | Core income (loss) | $8,816 | $(3,459) | $17,945 | $(257) | | Core income (loss) per diluted share | $0.20 | $(0.08) | $0.42 | $(0.01) | Consolidated Net Income Consolidated net income attributable to UIHC significantly improved, with the combined ratio improving to 99.4% for Q2 2020 and 99.2% for the six-month period Financial Performance (in thousands, except ratios) | Financial Performance (in thousands, except ratios) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :-------------------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income (loss) attributable to UIHC | $24,274 | $(2,903) | $11,551 | $6,566 | | Diluted EPS | $0.57 | $(0.07) | $0.27 | $0.15 | | Loss ratio, net | 54.8% | 61.1% | 54.2% | 59.5% | | Expense ratio | 44.6% | 47.1% | 45.0% | 46.5% | | Combined ratio | 99.4% | 108.2% | 99.2% | 106.0% | | Effect of current year catastrophe losses on combined ratio | 16.1% | 8.3% | 12.4% | 7.4% | | Effect of prior year development on combined ratio | (0.4)% | 8.1% | (0.5)% | 5.6% | | Underlying combined ratio | 83.7% | 91.8% | 87.3% | 93.0% | - Net income attributable to UIHC increased by $27.177 million for Q2 2020 and by $4.985 million for the six months ended June 30, 2020[140] - The combined ratio improved by 8.8 percentage points to 99.4% for Q2 2020 and by 6.8 percentage points to 99.2% for the six months ended June 30, 2020[140] Definitions of Non-GAAP Measures This section defines non-GAAP measures like underlying combined ratio, underlying loss and LAE, and core income, used to enhance performance understanding - Underlying combined ratio is a non-GAAP measure that subtracts current year catastrophe losses and prior year development from the combined ratio to highlight business trends[142] - Underlying loss and LAE is a non-GAAP measure that subtracts current year catastrophe losses and prior year reserve development from net loss and LAE to analyze loss trends[143] - Core income is a non-GAAP measure that adjusts net income by adding back amortization of intangible assets and subtracting realized/unrealized gains/losses on equity securities, net of tax, to focus on operational profitability[144] CRITICAL ACCOUNTING POLICIES AND ESTIMATES No material changes or additions were made to critical accounting policies and estimates during the period, except for standards adopted in 2020 as detailed in Note 2 - No material changes or additions were made to critical accounting policies and estimates during the three and six months ended June 30, 2020, except for standards adopted in 2020[145] RECENT ACCOUNTING STANDARDS This section refers to Note 2 for a discussion of recent accounting standards that may affect the company - Refer to Note 2 for a discussion of recent accounting standards that may affect the company[146] ANALYSIS OF FINANCIAL CONDITION - JUNE 30, 2020 COMPARED TO DECEMBER 31, 2019 This analysis compares financial condition, focusing on investments, reinsurance, and unpaid losses, with total cash and investments increasing by $141.1 million Investments The investment strategy prioritizes capital preservation and liquidity, with total cash and investments increasing to $1.44 billion by June 30, 2020 - Investment strategy focuses on capital preservation, maximizing after-tax income, liquidity, and risk minimization, primarily through debt securities and moderate equity exposure[150] - Total cash, cash equivalents, restricted cash, and investment portfolio increased by $141.094 million (10.9%) to $1.439 billion at June 30, 2020[152][153] - COVID-19 caused fluctuations in investment portfolios, resulting in an unrealized gain on equity securities of $20.552 million in Q2 2020, but a six-month unrealized loss of $5.904 million[155] Reinsurance The reinsurance program manages catastrophe exposure, with $3.3 billion in protection purchased for 2020, and reinsurance costs increasing to (46.1)% of gross earned premium in Q2 2020 - The reinsurance program includes catastrophe excess of loss, aggregate excess of loss, and quota share treaties to manage catastrophe risk[157][159] - Approximately $3.3 billion in catastrophe excess of loss reinsurance protection was purchased for the 2020 hurricane season, effective June 1, 2020[158] Reinsurance Costs as % of Gross Earned Premium | Reinsurance Costs as % of Gross Earned Premium | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--------------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Reinsurance costs as % of gross earned premium | (46.1)% | (42.3)% | (45.3)% | (42.2)% | Unpaid Losses and Loss Adjustments Unpaid losses and LAE decreased to $683.471 million by June 30, 2020, primarily due to reduced reinsurance recoverables, with estimates subject to significant judgment - Unpaid losses and LAE decreased by $76.886 million (10.1%) to $683.471 million at June 30, 2020[169] - The decrease was a result of a decrease in reinsurance recoverables on unpaid losses balance[169] - Estimating loss reserves requires significant judgment due to variables like inflation, judicial decisions, legislative changes, and claims handling procedures, with ultimate liability likely differing from estimates[170] RESULTS OF OPERATIONS - COMPARISON OF THE THREE MONTH PERIODS ENDED JUNE 30, 2020 AND 2019 Net income attributable to UIHC for Q2 2020 significantly increased to $24.274 million from a $2.903 million net loss in Q2 2019 - Net income attributable to UIHC increased by $27.177 million (936.2%) to $24.274 million for Q2 2020, from a net loss of $2.903 million in Q2 2019[173] - The increase in net income was primarily due to increased unrealized gains on equity securities, decreased loss and LAE, and decreased policy acquisition costs[173] Revenue Gross written premiums decreased by $10.111 million (2.2%) to $439.651 million for Q2 2020, primarily due to decreased assumed premiums Gross Written Premium (in thousands) | Gross Written Premium (in thousands) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Change | | :----------------------------------- | :------------------------------- | :------------------------------- | :----- | | Total gross written premium by region | $439,651 | $449,762 | $(10,111) | | Personal property | $307,965 | $286,106 | $21,859 | | Commercial property | $131,686 | $163,656 | $(31,970) | - Gross written premiums decreased by $10.111 million (2.2%) for Q2 2020, driven by a $43.032 million decrease in assumed premiums[174][175] - Direct written premium increased in Florida by $19.984 million, Gulf by $10.360 million, and Southeast by $3.202 million[175] Expenses Total expenses decreased by $21.473 million (10.3%) to $186.929 million for Q2 2020, driven by lower loss and LAE and policy acquisition costs Expenses (in thousands, except ratios) | Expenses (in thousands, except ratios) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Change | | :------------------------------------- | :------------------------------- | :------------------------------- | :----- | | Net loss and LAE | $101,693 | $116,252 | $(14,559) | | Policy acquisition costs | $52,573 | $61,622 | $(9,049) | | Operating and underwriting expenses | $13,977 | $11,199 | $2,778 | | General and administrative expenses | $16,121 | $16,802 | $(681) | | Total Operating Expenses | $82,671 | $89,623 | $(6,952) | | Net loss and LAE as % of net earned premiums | 54.8% | 61.1% | (6.3) pts | | Policy acquisition costs as % of net earned premiums | 28.3% | 32.4% | (4.1) pts | | Operating expenses as % of net earned premiums | 7.5% | 5.9% | 1.6 pts | | General and administrative expenses as % of net earned premiums | 8.7% | 8.8% | (0.1) pts | - Loss and LAE decreased by $14.559 million (12.5%) to $101.693 million, with the net loss ratio improving by 6.3 points to 54.8%[179] - Policy acquisition costs decreased by $9.049 million (14.7%) due to a net increase of $18.331 million in ceding commission income[180] RESULTS OF OPERATIONS - COMPARISON OF THE SIX MONTH PERIODS ENDED JUNE 30, 2020 AND 2019 Net earnings attributable to UIHC for the six months ended June 30, 2020, increased by $4.985 million (75.9%) to $11.551 million, primarily due to decreased loss and LAE expenses - Net earnings attributable to UIHC increased by $4.985 million (75.9%) to $11.551 million for the six months ended June 30, 2020[184] - The increase was primarily due to a decrease in loss and LAE expenses[184] Revenue Gross written premiums increased by $6.513 million (0.8%) to $774.834 million for the six months ended June 30, 2020, driven by organic growth and rate increases Gross Written Premium (in thousands) | Gross Written Premium (in thousands) | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | Change | | :----------------------------------- | :----------------------------- | :----------------------------- | :----- | | Total gross written premium by region | $774,834 | $768,321 | $6,513 | | Personal property | $532,581 | $496,787 | $35,794 | | Commercial property | $242,253 | $271,534 | $(29,281) | - Gross written premiums increased by $6.513 million (0.8%) for the six months ended June 30, 2020, primarily reflecting organic growth and rate increases[185] - Direct written premium increased by $59.236 million, while assumed premium decreased by $52.723 million[186] Expenses Total expenses decreased by $19.331 million (4.9%) to $379.065 million for the six months ended June 30, 2020, mainly due to lower loss and LAE and policy acquisition costs Expenses (in thousands, except ratios) | Expenses (in thousands, except ratios) | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | Change | | :------------------------------------- | :----------------------------- | :----------------------------- | :----- | | Net loss and LAE | $204,530 | $220,799 | $(16,269) | | Policy acquisition costs | $111,448 | $116,868 | $(5,420) | | Operating and underwriting expenses | $23,681 | $21,410 | $2,271 | | General and administrative expenses | $34,422 | $34,383 | $39 | | Total operating expenses | $169,551 | $172,661 | $(3,110) | | Net loss and LAE as % of net earned premiums | 54.2% | 59.5% | (5.3) pts | | Policy acquisition costs as % of net earned premiums | 29.6% | 31.5% | (1.9) pts | | Operating expenses as % of net earned premiums | 6.3% | 5.8% | 0.5 pts | | General and administrative expenses as % of net earned premiums | 9.1% | 9.3% | (0.2) pts | - Loss and LAE decreased by $16.269 million (7.4%) to $204.530 million, with the net loss ratio improving by 5.3 points to 54.2%[190] - Policy acquisition costs decreased by $5.420 million (4.6%) due to a $14.932 million increase in ceding commission income[191] LIQUIDITY AND CAPITAL RESOURCES This section discusses liquidity and capital resources, highlighting decreased operating cash, a shift to net investing outflow, and consistent financing activities for dividends - Cash is generated from premium collections, reinsurance recoveries, investment income, asset sales/maturities, debt issuance, and stock issuance[194] - As a holding company, liquidity relies on cash dividends or intercompany loans from management subsidiaries, which are regulated by state insurance authorities[195] - COVID-19 has not impacted access to credit and capital markets for liquidity, and the company expects to maintain financing flexibility[197] Operating Activities Net cash provided by operating activities decreased to $139.320 million for the six months ended June 30, 2020, primarily due to fewer reinsurance recoverables - Net cash provided by operating activities decreased by $39.958 million to $139.320 million for the six months ended June 30, 2020[200] - The decrease was attributed to fewer reinsurance recoverables outstanding in 2020, compared to higher balances in 2019 from Hurricanes Michael, Florence, and Irma[200] Investing Activities Investing activities shifted from a $5.652 million net cash inflow in 2019 to a $138.896 million net cash outflow in 2020 due to increased investment purchases - Net cash used in investing activities was $(138.896) million for the six months ended June 30, 2020, a significant shift from a net cash provided of $5.652 million in 2019[18] - This change was due to net purchases of investments totaling $131.280 million in 2020, compared to net sales of $11.883 million in 2019[201] Financing Activities Cash used in financing activities remained consistent at approximately $5.9 million for both periods, primarily due to dividend payments - Cash used in financing activities was consistent at $5.911 million for the six months ended June 30, 2020, compared to $5.901 million in 2019[202] - The primary outflow was due to dividend payments in the first two quarters of both years[202] OFF-BALANCE SHEET ARRANGEMENTS As of June 30, 2020, the company had no off-balance-sheet arrangements or material changes to contractual obligations - No off-balance-sheet arrangements or material changes to contractual obligations existed at June 30, 2020[203] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section discloses exposure to market risks, including interest rate, credit, and equity price risks, with no material changes during the six months ended June 30, 2020 - The company is exposed to interest rate risk, credit risk, and equity price risk[204] - No material changes in market risk occurred during the six months ended June 30, 2020[204] Item 4. Controls and Procedures This section confirms the effectiveness of disclosure controls and procedures, noting no material changes in internal control over financial reporting despite remote work - Disclosure controls and procedures were effective at the reasonable assurance level as of June 30, 2020[206][207] Changes in Internal Control over Financial Reporting Despite the shift to remote work due to COVID-19, no material changes in internal control over financial reporting occurred during the quarter - The shift to remote work environments due to COVID-19 did not impact the effectiveness of internal controls[208] - No material changes in internal control over financial reporting occurred during the quarter ended June 30, 2020[208] PART II. OTHER INFORMATION This part covers legal proceedings, updated risk factors including COVID-19 impacts, equity security sales, defaults, and a list of exhibits Item 1. Legal Proceedings The company is involved in routine claims-related legal actions, accruing amounts when probable and estimable, with no material non-claims-related actions pending - The company is involved in routine claims-related legal actions, accruing amounts when an unfavorable outcome is probable and estimable[209] - No material non-claims-related legal actions were pending at June 30, 2020[210] Item 1A. Risk Factors This section updates risk factors, focusing on potential adverse impacts of the COVID-19 pandemic, including increased defaults, regulatory challenges, and investment value declines - The COVID-19 pandemic and related economic uncertainty could adversely impact the business, results of operations, and financial condition[211] - Potential risks include increased premium defaults, challenges in meeting regulatory/debt requirements, declining premiums, operational inefficiencies from remote work, contraction of reinsurance markets, higher claims frequency/severity, investment portfolio value declines, and third-party vendor disruptions[214][216][217] - The full extent of COVID-19's impact is highly uncertain and depends on future developments[213][218] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During the three months ended June 30, 2020, the company did not sell any unregistered equity securities or repurchase its own equity securities - No unregistered equity securities were sold, and no equity securities were repurchased during the three months ended June 30, 2020[220] Item 3. Defaults Upon Senior Securities There were no defaults upon senior securities during the reporting period - No defaults upon senior securities occurred[220] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[220] Item 5. Other Information There is no other information to report under this item - No other information to report[220] Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including a Separation Agreement, executive officer certifications, and XBRL documents - Exhibits include a Separation Agreement, certifications of Principal Executive Officer and Principal Financial Officer (Sarbanes-Oxley Act Sections 302 and 906), and XBRL Instance Document, Schema, Calculation, Definition, Label, and Presentation Linkbases[222] SIGNATURES The report was duly signed on August 7, 2020, by the Chief Executive Officer and Chief Financial Officer of United Insurance Holdings Corp - Report signed on August 7, 2020, by R. Daniel Peed (CEO) and B. Bradford Martz (CFO and President)[224][225]