We currently lease approximately 30,000 square feet of office space at 360 Central Avenue, St. Petersburg, Florida 33701, in Suites 900 and 600. During 2014, our rental payments for the 9th and 6th floors, respectively, were approximately $23.00 per square foot, and will increase each year through the final year of the lease agreement, in which we will pay rent of $25.50 and $24.92 per square foot for the 9th and 6th floors respectively, plus our percentage increase in the common area maintenance charge. Our lease agreement expires in November 2017; however, we intend to terminate the leases in connection with our move to our new corporate headquarters as discussed below.
We currently lease approximately 800 square feet of office space at 7192 Kalanianaole Highway, Honolulu, Hawaii 96825, in suite G-220. We will pay approximately $22.08 per square foot for rent in 2015 and $23.16 per square foot from December 2015 through November 2016 when the lease expires.
The following discussion highlights significant factors influencing the consolidated financial position and results of operations the Company. This discussion should be read in conjunction with the consolidated financial statements and related notes found under Part II. Item 8 contained herein.
Our combined ratio (calculated as losses and loss adjustment expenses and operating expenses less interest expense relative to net premiums earned) was 81.4% in 2014 compared to 87.7% in 2013.
Investment income was $6,795,000 in 2014 compared to $3,871,000 in 2013.
Expected Loss Cost Method - In the expected loss cost method, ultimate loss projections are based upon some prior measure of the anticipated losses, usually relative to some measure of exposure (i.e., earned house years). An expected loss cost is applied to the measure of exposure to determine estimated ultimate losses for each year. Actual losses are not considered in this calculation. This method has the advantage of stability over time, because the ultimate loss estimates do not change unless the exposures or loss costs change. However, this advantage of stability is offset by a lack of responsiveness, since this method does not consider actual loss experience as it emerges. This method is based on the assumption that the loss cost per unit of exposure is a good indication of ultimate losses. It can be entirely dependent on pricing assumptions (i.e., historical experience adjusted for loss trend).
Bornhuetter-Ferguson Method - The incurred Bornhuetter-Ferguson (B-F) method is essentially a blend of two other methods. The first method is the loss development method whereby actual incurred losses are multiplied by an expected LDF. For slow reporting coverages, the loss development method can lead to erratic and unreliable projections because a relatively small swing in early reportings can result in a large swing in ultimate projections. The second method is the expected loss method whereby the IBNR estimate equals the difference between a predetermined estimate of expected losses and actual incurred losses. The incurred B-F method combines these two methods by setting ultimate losses equal to actual incurred losses plus expected unreported losses. As an experience year matures and expected unreported losses become smaller, the initial expected loss assumption becomes gradually less important. Two parameters are needed to apply the B-F method: the initial expected loss cost and the expected reporting pattern (LDFs). This method is often used for long-tail lines and in situations where the incurred loss experience is relatively immature or lacks sufficient credibility for the application of other methods. The paid B-F method is analogous to the incurred B-F method using paid losses and development patterns in place of incurred losses and patterns.
Paid-to-Paid Development Method - In addition to the aforementioned methods, we also rely upon the paid-to-paid development method to project ultimate allocated loss adjustment expense (ALAE). Triangles of paid ALAE to paid loss ratios are compiled and LDFs are selected to project an ultimate paid-to-paid ratio. The ultimate paid-to-paid ratio is multiplied by the selected ultimate losses to calculate estimated ultimate ALAE. This puts the ALAE in context, and generally results in more stability in the ALAE projections.
There are a number of assumptions and estimates inherent in evaluating impairments of equity securities and determining if they are other than temporary, including: (1) our ability and intent to hold the investment for a period of time sufficient to allow for an anticipated recovery in value; (2) the length of time and extent to which the fair value has been less than cost; (3) the financial condition, near-term and long-term prospects of the issue or issuer, including relevant industry specific market conditions and trends, geographic location and implications of rating agency actions and offering prices; and (4) the specific reasons that a security is in an unrealized loss position, including overall market conditions which could affect liquidity.
ANALYSIS OF FINANCIAL CONDITION - DECEMBER 31, 2014 COMPARED TO DECEMBER 31, 2013
The Investment Committee of our Board of Directors reviews and approves our investment policy on a regular basis. Our cash, cash equivalents and investment portfolio totaled $443,018,000 at December 31, 2014.
During the fourth quarter of 2014, we placed our non-catastrophe reinsurance agreements, which will expire on December 31, 2015. See Note 8 in our Notes to Consolidated Financial Statements for additional information regarding our reinsurance program.
Our direct gross written premiums increased by $78,005,000, or 23%, primarily due to the strong organic growth in new and renewal business generated in all states in which we currently write policies, but especially outside Florida which represented nearly 73% of the total growth in direct written premiums. Our year-over-year growth in gross written premiums and new and renewal policies by state are shown in the tables below:
(1) All assumed premiums shown above are from policy assumptions from Citizens Property Insurance Corporation (Citizens) that are written in Florida and are shown net of opt-outs.
Losses and loss adjustment expenses increased to $118,077,000 for the year ended December 31, 2014, from $98,830,000 for the same period in 2013, primarily due to the growth in policies in-force. Prior year favorable development for the year ended December 31, 2014, was $4,037,000 compared to adverse development of $4,078,000 for the same period in 2013. Our net loss and loss adjustment expense ratio history along with the impact of reserve development and catastrophe losses is as follows:
Underlying Net Loss Ratio is a non-GAAP measure and is reconciled above to the Consolidated Net Loss Ratio, the most directly comparable GAAP measure. Additional information regarding non-GAAP financial measures presented in this document is in the "Definitions of Non-GAAP Measures" section of this document.
Overall our attritional loss experience by accident year excluding catastrophes has been trending upwards for the last two accident years due to higher overall frequency and severity of water related losses and lower premiums per unit of exposure resulting from our growth outside of Florida as shown in the following table:
As indicated above, our case loss & LAE and IBNR reserves by accident year (AY) excluding catastrophes are $29,202,000 and $22,810,000, respectively, and a reconciliation of these reserves to our total reserves is as follows:
General and administrative expenses increased $5,455,000 to $20,007,000 compared to $14,552,000 in 2013 due primarily to an increase in salaries and related expenses to support our growth.
Revenues for the year ended December 31, 2013 increased $76,846,000, or 59%, to $208,080,000, from $131,234,000 for the twelve-months ended December 31, 2012. The increase in revenues was primarily driven by a $75,410,000, or 62%, increase in net premiums earned. In 2013, our gross written premiums increased $126,443,000, or 50%, to $381,352,000, from $254,909,000 in 2012 because we wrote approximately 55,000 more new and renewal policies in 2013 compared to 2012 as we expanded our business in Florida and in other states. In addition to our organic growth, we assumed over 33,000 policies, representing $41,588,000 of assumed premiums, during 2013 from Citizens.
Our year-over-year growth in gross written premiums and new and renewal policies by state are shown below:
Expenses for the twelve months ended December 31, 2013 increased $57,589,000, or 50%, primarily due to increased losses, policy acquisition costs and general and administrative expenses. Losses and loss adjustment expenses increased to $98,830,000 for the full year ended 2013, from $58,409,000 during 2012. Prior year adverse development for the year ended December 31, 2013, was $4,078,000 compared to $670,000 for the same period in 2012. Our attritional loss experience by accident year excluding catastrophes has been stable or trending downwards for the past several years, but did increase in the 2013 accident year due to higher overall frequency and severity of water related losses and lower premiums per unit of exposure resulting from our growth outside of Florida.
See Note 3 in our Notes to Consolidated Financial Statements for a table that summarizes our fixed maturities at December 31, 2014, by contractual maturity periods.
During the year ended December 31, 2014, our financing activities provided cash of $49,051,000 compared to providing $71,000 of cash in 2013. The increase occurred primarily because we raised $54,041,000, net of stock issuance costs of $3,459,000, related to the public offering of 4,600,000 shares of common stock during the first quarter of 2014, whereas we raised $3,591,000 in January 2013 from the underwriters exercise of the over-allotment of 750,000 shares of common stock from our 2012 public offering. In addition, we paid $3,336,000 of dividends in 2014, compared to $1,944,000 paid in 2013. See Note 18 in our Notes to Consolidated Financial statements for additional information on the underwritten offering.
We believe our current capital resources, together with cash provided from our operations, will be sufficient to meet currently anticipated working capital requirements. We cannot provide assurance, however, that such will be the case in the future.
We have audited the accompanying consolidated balance sheets of United Insurance Holdings Corp. and subsidiaries (the “Company”) as of December 31, 2014 and 2013, and the related consolidated statements of comprehensive income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2014. Our audits also included the financial statement schedules of United Insurance Holdings Corp. listed in Item 15. These consolidated financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and schedules based on our audits.
United Insurance Holdings Corp. is a property and casualty insurance holding company that sources, writes, and services residential property and casualty insurance policies using a network of agents and a group of wholly-owned insurance subsidiaries. Our primary insurance subsidiary is United Property & Casualty Insurance Company, our insurance affiliate, which was formed in Florida in 1999 and has operated continuously since that time. Our other subsidiaries include United Insurance Management, L.C., our management affiliate, the managing general agent that manages substantially all aspects of our insurance affiliate's business; Skyway Claims Services, LLC, our claims adjusting affiliate, that provides services to our insurance affiliate; and UPC Re, our reinsurance affiliate, that provides a portion of the reinsurance protection purchased by our insurance affiliate. On February 3, 2015, we acquired Family Security Holdings, LLC and its two-wholly owned subsidiaries in an all-stock transaction. See Note 4 our Notes to Consolidated Financial Statements for additional information regarding this acquisition.
Our primary product is homeowners' insurance, which we currently offer in Florida, Louisiana, Massachusetts, New Jersey, North Carolina, Rhode Island, South Carolina, and Texas, under authorization from the insurance regulatory authorities in each state. We are also licensed to write property and casualty insurance in Alabama, Connecticut, Delaware, Georgia, Hawaii, Maryland, Mississippi, New Hampshire, New York and Virginia; however, we have not commenced writing in these states.
See Note 3 in our Notes to Consolidated Financial Statements for a discussion regarding the fair value measurement of our investments at December 31, 2014.
We capitalize certain direct development costs associated with internal-use software. We expect to amortize the capitalized software costs related to our new policy administration system and data warehouse over their expected five year useful lives. During the second quarter of 2014, we began amortizing the costs related to our new claims processing system over its expected five year useful life.
See Note 7 in our Notes to Consolidated Financial Statements for a discussion of our property, equipment and capitalized software, including our new property, that was purchased during 2014.
We expense all advertising costs when we incur those costs. For the years ended December 31, 2014, 2013 and 2012, we incurred advertising costs of $1,819,000, $1,801,000, and $1,395,000, respectively.
We report both basic earnings per share and diluted earnings per share. To calculate basic earnings per share, we divide net income attributable to common stockholders by the weighted-average number of common stock shares outstanding during the period. We calculate diluted earnings per share by dividing net income attributable to common stockholders by the weighted-average number of common stock shares, common stock equivalents, and restricted shares outstanding during the period.
a geographic concentration resulting from the fact that, though we now operate in eight states, we still write approximately 74% of our premium in Florida
When we sell investments, we calculate the gain or loss realized on the sale by comparing the sales price (fair value) to the cost or adjusted/amortized cost of the security sold. We determine the cost or adjusted/amortized cost of the security sold using the specific-identification method. The following tables detail our realized gains (losses) by major investment category for the years ended December 31, 2014, 2013 and 2012:
Level 1: Assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that we can access.
Any change in the estimated fair value of our securities would impact the amount of unrealized gain or loss we have recorded, which could change the amount we have recorded for our investments and other comprehensive income on our Consolidated Balance Sheets.
The carrying amounts for the following financial instrument categories approximate their fair values at December 31, 2014 and 2013 because of their short-term nature: cash and cash equivalents, accrued investment income, premiums receivable, reinsurance recoverable, reinsurance payable, and accounts payable and accrued expenses. The carrying amount of notes payable also approximates its fair value as the interest rate on the note payable is variable.
The table below presents the rollforward of Level 3 investments held at fair value during the year ended December 31, 2014:
At the end of each quarter, we determine whether we need to transfer the fair values of any securities between levels of the fair value hierarchy and, if so, we report the transfer as of the end of the quarter. During 2014, we transferred $1,971,000 from Level 1 to Level 3 because the investments in limited partnerships were fully funded, we used unobservable inputs to derive our estimated fair value for these investments and the unobservable inputs are significant to the overall fair value measurement.
We account for acquisitions under the provisions of Accounting Standards Committee (ASC) Topic 805 - “Business Combinations.”
On December 15, 2014, we announced the acquisition of Family Security Holdings, LLC, an insurance holding company with two wholly-owned subsidiaries, Family Security Insurance Company, a Hawaii-domiciled property and casualty insurer authorized in Hawaii and Louisiana, and Family Security Underwriters, LLC, a managing general agency performing administrative and marketing services for FSIC. We successfully completed this transaction on February 3, 2015.
FSH has not closed their books for the month ended January 2015, and therefore we are unable to complete the initial evaluation of the net assets acquired from this combination.
Basic earnings per share (EPS) is based on the weighted average number of common shares outstanding for the period, excluding any dilutive common share equivalents. Diluted EPS reflects the potential dilution resulting from vesting of restricted shares of common stock. The following table shows the computation of basic and diluted EPS for the years ended December 31, 2014, 2013 and 2012:
Depreciation and amortization expense under property and equipment was $731,000, $697,000 and $684,000, respectively, for the years ended December 31, 2014, 2013 and 2012.
For the 2014 hurricane season, our insurance affiliate purchased catastrophe excess of loss reinsurance protection of $1,080,200,000 excess $25,000,000 providing sufficient protection for approximately a one-in-185 year hurricane event as calculated by our licensed modeling software, AIR model version 15 using long-term event rates excluding demand surge. For a single hurricane catastrophe, we will pay, or “retain” up to $25,000,000. The catastrophe excess of loss reinsurance program provides 100% coverage for all losses in excess of $25,000,000 up to $1,105,200,000.
Our agreement with the FHCF consists of a single layer of coverage, the mandatory layer. Under the agreement, we estimate the FHCF will provide approximately $555,200,000 of aggregate coverage for covered losses in excess of $230,800,000. The initial premium for the FHCF agreement is approximately $38,594,000.
catastrophe excess of loss reinsurance agreements with unaffiliated private reinsurers provide $525,000,000 of aggregate coverage for covered losses in excess of $25,000,000. Additionally, our insurance affiliate purchased a dedicated second event cover with recovery potential in subsequent events providing 100% coverage for losses of $15,000,000 excess $10,000,000, subject to an annual aggregate deductible of $15,000,000. The total cost of the 2014 private catastrophe excess of loss reinsurance program is $90,600,000. Certain parts of the reinsurance program provide coverage for two years. All private insurers with whom our insurance affiliate contracted either carry A.M. Best financial strength ratings of A- or higher, or have fully collateralized their maximum potential obligations in dedicated trusts.
During the years ended December 31, 2014 and 2013, we realized recoveries under our reinsurance agreements totaling $2,667,000 and $2,521,000, respectively. These recoveries were primarily related to losses from Hurricane Wilma, which occurred in October 2005.
During the fourth quarter of 2014, we placed our non-catastrophe reinsurance agreements, which will expire on December 31, 2015. The first non-catastrophe reinsurance agreement provides excess-of-loss coverage for losses arising out of property business up to $3,000,000 in excess of $1,000,000 per risk. Should a loss recovery, or series of loss recoveries, exhaust the coverage provided under the agreement for losses arising out of property-only business, excluding catastrophes, two reinstatements of coverage is included at no additional premium. We also entered into a second property catastrophe excess-of-loss reinsurance agreement that provides coverage up to $25,000,000 in excess of $3,000,000. This agreement provides coverage for events that are not named hurricanes or tropical storms. Should losses for one event exceed $25,000,000, our catastrophe reinsurance agreements would provide reinsurance for the remaining losses. Reinstatements of the second property catastrophe agreement are subject to an additional premium.
Ceded losses incurred decreased by $521,000 during the year ended December 31, 2014, compared to the year ended December 31, 2013, primarily because we ceded more commercial auto and multi-peril losses in 2013 than in 2014. Our commercial auto and multi-peril line of business has been in run-off since May 2009. The losses we incurred in 2014, 2013 and 2012 related to storms that occurred in those same years but did not exceed our retained loss thresholds.
As reflected by our losses incurred related to prior years, we had a reserve deficiency in 2013 and 2012. Since we place substantial reliance on loss-development-based actuarial models when determining our estimate of ultimate losses, the deficiencies resulted from additional development on prior accident years which caused our ultimate losses to increase. The favorable development experienced in 2014 was primarily the result of losses related to the 2013 and 2012 accident years coming in better than expected.
The note payable to Florida's State Board of Administration (SBA note) requires our insurance affiliate to maintain surplus as regards policyholders at or above a calculated level, which was $31,933,000 at December 31, 2014. We monitor our insurance affiliate's surplus as regards policyholders each quarter and, for various reasons, we occasionally provide additional capital to our insurance affiliate. We contributed $30,845,000 and $15,000,000 of capital during 2014 and 2012, respectively; however, we did not contribute any capital to our insurance affiliate in 2013. We currently do not foresee a need for any material contributions of capital to our insurance affiliate; however, any future contributions of capital will depend on circumstances at the time.
The assessment resulted in a pre-tax charge to consolidated operations of $1,646,000 in the fourth quarter of 2012. The mandatory assessment was recouped through a surcharge on our insurance affiliate's Florida policies during 2013 and 2014.
The amount of restricted net assets of United Property & Casualty Insurance Company at December 31, 2014 was $111,529,000.
Our reinsurance subsidiary is domiciled in the the Cayman Islands and is subject to the regulatory authority of the Cayman Island Monetary Authority. The insurance regulations in the Cayman Islands stipulate that our reinsurance subsidiary must maintain a minimum capital requirement of $100,000. At the end of December 31, 2014 our reinsurance subsidiary's capital was $19,048,000. The amount of restricted net assets of our reinsurance subsidiary at December 31, 2014 was $100,000.
We have reported United Property & Casualty Insurance Company’s assets, liabilities and results of operations in accordance with GAAP, which varies from statutory accounting principles prescribed or permitted by state laws and regulations, as well as by general industry practices. The following items are principal differences between statutory accounting and GAAP:
At December 31, 2014, our insurance affiliate's RBC ratio was 597%.
We lease office space and office equipment under operating leases. In October 2012, we renegotiated the lease for office space for our corporate headquarters. In August 2014, we renegotiated the lease again to expand the amount of rented space on the 6th floor. Our revised lease agreement expires in November 2017; however, we expect to renovate the new purchased property and move our principal executive offices to this location before the end of 2015, at which point, we will terminate this current lease.
We have office equipment leases with various expiration dates. Lease expense amounted to $783,000, $698,000, and $560,000 for the years ended December 31, 2014, 2013, and 2012, respectively. At December 31, 2014, our minimum future lease payments under non-cancellable operating leases are:
The Agreement further provided that we would retain Mr. Cronin's services as a consultant and advisor for a period of 24 months after he ceased serving as our Chief Executive Officer. Mr. Cronin would receive an amount equal to his current base salary plus benefits, as described above, as compensation for performing such services. Mr. Cronin may terminate the Agreement for any reason upon 30 days advance written notice. We may terminate the Agreement for cause upon 30 days advance written notice. The Agreement also contains provisions restricting Mr. Cronin's ability to compete with us or solicit our employees. In December 2012, we received notice that Mr. Cronin would be unable to continue serving as a consultant and advisor and as a result of the notice we recorded an accrual in the amount of $480,000 for the remaining salary and benefits owed to Mr. Cronin for the remainder of the contract term that expired in April 2014.
We provide a 401(k) plan for substantially all of our employees. We match 100% of the first 5% of employees’ contributions to the plan. For the years ended December 31, 2014, 2013, and 2012, our contributions to the plan on behalf of the participating employees were $267,000, $180,000, and $111,000, respectively.
On July 20, 2012, our Board declared a dividend of one preferred share purchase right (Right) for each outstanding share of common stock, $0.0001 par value per share, of the Company. The dividend was payable to the stockholders of record on August 3, 2012. Each Right entitles the registered holder to purchase from the Company one one-hundredth of a share of Series
A Junior Participating Preferred Stock, $0.0001 par value (Preferred Shares), of the Company, at a price of $27.00 per one one-hundredth of a Preferred Share, subject to adjustment. The Rights are not exercisable until the distribution date, and will expire on July 20, 2022, unless the Rights are earlier redeemed or exchanged by us.
We account for stock-based compensation under the fair value recognition provisions of ASC Topic 718 - “Compensation - Stock Compensation.”
Stock-based compensation cost for restricted stock grants is measured based on the closing fair market value of our common stock on the date of grant. We recognize stock-based compensation cost over the award’s requisite service period on a straight-line basis for time-based restricted stock grants.
We have approximately $619,000 of unrecognized stock compensation expense related to non-vested stock-based compensation granted, which we expect to recognize over the next three years. We recognized $280,000, $133,000 and $55,000 of stock-based compensation expense during the twelve months ended December 31, 2014, 2013 and 2012, respectively.
On January 9, 2015, we filed a registration statement (Reg. No. 333-201425) for (i) the offering, issuance and sale by us of up to a maximum aggregate offering price of $50,000,000 of of our common stock, preferred stock, debt securities, warrants, stock purchase contracts and/or units being registered in this new registration statement and (ii) the offering, issuance and sale by us of up to a maximum aggregate offering price of $25,000,000 of our common stock, preferred stock, debt securities, warrants, stock purchase contracts and/or units registered in the prior registration statement (Registration No. 333-191472), to enable an aggregate of $75,000,000 of securities to be offered by us pursuant to the combined base prospectus.