We have historically grown our business through strong organic growth complemented by strategic acquisitions and partnerships, including our acquisitions of AmCo Holding Company (AmCo) and its subsidiaries, including ACIC, in April 2017, IIC in April 2016, and Family Security Holdings, LLC (FSH), including its subsidiary FSIC in February 2015, and our strategic partnership with a subsidiary of Tokio Marine Kiln Group Limited (Kiln), which formed JIC in August 2018. As a result of these transactions, along with the organic growth of premium in states in which we currently write premium, we have grown our policies in-force by 7.8% from 582,096 policies in-force at December 31, 2018 to 627,230 policies in-force at December 31, 2019.
Our business is subject to the impact of weather-related catastrophes on our loss and loss adjustment expenses (LAE). During the third quarter of 2017, Hurricane Harvey made landfall in Texas and Hurricane Irma made landfall in Florida. In 2017, we retained $83,000,000 of pre-tax catastrophe losses, net of reinsurance recoverable as a result of these hurricanes. During the years ended December 31, 2019 and 2018, we increased our loss and LAE reserves as a result of development trends from Hurricane Irma that indicated our ultimate gross loss estimate should be increased. During the third and fourth quarters of 2018, Hurricane Florence made landfall in North Carolina and Hurricane Michael made landfall in Florida. We retained $50,000,000 of pre-tax catastrophe losses, net of reinsurance recoverable, as a result of these storms. During the third quarter of 2019, Hurricane Dorian caused damage up the eastern coast of the United States, eventually making landfall in North Carolina. Additionally, we experienced losses from four other named storms in the third and fourth quarters of 2019. We retained $32,170,000 of pre-tax catastrophe losses, net of reinsurance recoverable, as a result of these storms.
Combined ratio excluding the effects of current year catastrophe losses, prior year reserve development and ceding commission income earned (underlying combined ratio) is a non-GAAP measure, which is computed by subtracting the effect of current year catastrophe losses, prior year development, and ceding commission income earned related to our quota share reinsurance agreement 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, prior year development, and ceding commission income earned. Current year catastrophe losses cause our loss trends to vary significantly between periods as a result of their incidence of occurrence and magnitude, and can have a significant impact on the combined ratio. Prior year development is caused by unexpected loss development on historical reserves. Ceding commission income compensates the Company for expenses it incurs in generating the premium ceded under our quota share reinsurance agreement. 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.
Our gross written premiums increased by $127,867,000, or 10.2%, to $1,380,268,000 for the year ended December 31, 2019, from $1,252,401,000 for the year ended December 31, 2018, primarily reflecting organic growth in new and renewal business generated in all regions. In response to the underwriting experience in the personal property lines, we continue to take rate action, as well as make changes to policy terms and conditions, which also contribute to the increase in gross written premium while reducing our exposure in select products and geographies. 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.
Expenses for the year ended December 31, 2019 increased $129,544,000, or 17.8%, to $857,841,000 for the year ended December 31, 2019, from $728,297,000 for 2018. The increase in expenses was primarily due to an increase in losses and LAE combined with an increase in policy acquisition costs. The calculations of our combined loss ratios and underlying loss ratios are shown below.
to our capitalized software systems in 2019. This was offset by increased salary costs totaling $6,484,000 related to an increase in employee headcount.
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.
Our cash and investment portfolios totaled $1,298,780,000 at December 31, 2019 compared to $1,135,956,000 at December 31, 2018.
We classify all of our investments as available-for-sale. Our investments at December 31, 2019 and 2018 consisted mainly of U.S. government and agency securities, states, municipalities and political subdivisions, mortgage-backed securities and securities of investment-grade corporate issuers. Our equity holdings consisted mainly of securities issued by companies in the energy, consumer products, financial, technology and industrial sectors. Most of the corporate bonds we hold reflected a similar diversification. At December 31, 2019, approximately 85.8% of our fixed maturities were U.S. Treasuries, or corporate bonds rated “A” or better, and 14.2% were corporate bonds rated “BBB” or “BB”.
Our reinsurance program is designed, utilizing our risk management methodology, to address our exposure to catastrophes. According to the Insurance Service Office (ISO), a catastrophe loss is defined as a single unpredictable incident or series of closely related incidents that result in $25,000,000 or more in U.S. industry-wide direct insured losses to property and that affect a significant number of policyholders and insurers (ISO catastrophes). The Company follow the same definition when evaluating events as catastrophes. In addition to ISO catastrophes, we also include as catastrophes those events (non-ISO catastrophes), which may include losses, that we believe are, or will be, material to our operations which we define as incidents that result in $1,000,000 or more in losses for multiple policyholders.
During the second quarter of 2019, we placed our reinsurance program for the 2019 hurricane season. We purchased catastrophe excess of loss reinsurance protection of $3,200,000,000. The contracts reinsure for personal and commercial lines property excess catastrophe losses caused by multiple perils including hurricanes, tropical storms, and tornadoes. The agreements were effective as of June 1, 2019, for a one-year term and incorporate the mandatory coverage required by and placed with the Florida Hurricane Catastrophe Fund (FHCF). The FHCF covers Florida risks only and we participate at 90%. The state of Florida may enact legislation altering the size and the terms and operations of the FHCF at their discretion.
Excluding our flood business, for which we cede 100% of the risk of loss, reinsurance costs for 2019 were 41.7% of gross premiums earned compared to 40.1% of gross premiums earned for 2018. The increase in this ratio was driven by the changes to our quota share agreement as described above.
Unpaid losses and LAE totaled $760,357,000 and $661,203,000 as of December 31, 2019 and 2018, respectively. The balance has increased year over year as a result of increased reserves for both weather-related and non weather-related activity during 2019 compared to 2018. In addition, during the year ended December 31, 2019, we increased our loss and LAE reserves for Hurricane Irma as a result of development trends that indicated our ultimate gross loss estimate should be increased.
See Note 10 in our Notes to Unaudited Consolidated Financial Statements for additional information regarding our losses and LAE.
During the year ended December 31, 2019 we contributed $4,000,000 and $13,000,000 to our insurance subsidiaries UPC and FSIC, respectively. During the year ended December 31, 2018, we contributed $94,000,000, including our contribution to form our new subsidiary as described below. We may make future contributions of capital to our insurance subsidiaries as circumstances require.
During the year ended December 31, 2019, several changes in operating assets and liabilities were impacted by developments in non-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 non-catastrophe claims in the near future. In addition, reinsurance recoverable on paid and unpaid losses decreased during the period. In 2018, we saw losses above our reinsurance retention thresholds and subsequent reinsurance recoverables as a result of Hurricanes Michael and Florence. 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.
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 purchases of subsidiaries. The primary liquidity concerns with respect to these cash flows are the risk of default by debtors and market disruption. During the year ended December 31, 2019, cash used in investing activities decreased $91,663,000 as the result of $109,491,000 lower net purchases of investments in 2019 when compared to 2018.
For each fixed income security in an unrealized loss position, we assess whether management, with the appropriate authority, has made the decision to sell or whether it is more likely than not we will be required to sell the security before recovery of the amortized cost basis for reasons such as liquidity, contractual or regulatory purposes. If a security meets either of these criteria, the security’s decline in fair value is considered other-than-temporary and is recorded in earnings.
If we have not made the decision to sell the fixed income security and it is not more likely than not we will be required to sell the fixed income security before recovery of its amortized cost basis, we evaluate whether we expect to receive cash flows sufficient to recover the entire amortized cost basis of the security. We use our best estimate of future cash flows expected to be collected from the fixed income security, discounted at the security’s original or current effective rate, as appropriate, to calculate a recovery value and determine whether a credit loss exists. The determination of cash flow estimates is inherently subjective and methodologies may vary depending on facts and circumstances specific to the security. All reasonably available information relevant to the collectability of the security, including past events, current conditions, and reasonable and supportable assumptions and forecasts, are considered when developing the estimate of cash flows expected to be collected. That information generally includes, but is not limited to, the remaining payment terms of the security, prepayment speeds, the financial condition and future earnings potential of the issue or issuer, expected defaults, expected recoveries, the value of underlying collateral, vintage, geographic concentration, available reserves or escrows, current subordination levels, third party guarantees and other credit enhancements. Other information, such as industry analyst reports and forecasts, sector credit ratings, financial condition of the bond insurer for insured fixed income securities, and other market data relevant to the realizability of contractual cash flows, may also be considered. The estimated fair value of collateral will be used to estimate recovery value if we determine that the security is dependent on the liquidation of collateral for ultimate settlement. If the estimated recovery value is less than the amortized cost of the security, a credit loss exists and an other-than-temporary impairment 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.
Once assumptions and estimates are made, any number of changes in facts and circumstances could cause us to subsequently determine that a fixed income security is other-than-temporarily impaired, including: (1) general economic conditions that are worse than previously forecasted or that have a greater adverse effect on a particular issue, issuer, or industry sector than originally estimated; (2) changes in the facts and circumstances related to a particular issue or issuer’s ability to meet all of its contractual obligations; and (3) changes in facts and circumstances that result in changes to management’s intent to sell or result in our assessment that it is more likely than not we will be required to sell before recovery of the amortized cost basis of a fixed income security. Changes in assumptions, facts and circumstances could result in additional charges to earnings in future periods to the extent that losses are realized. The charge to earnings, while potentially significant to net income, would not have a significant effect on stockholders’ equity, since our securities are designated as available for sale and carried at fair value and as a result, any related unrealized loss, net of taxes would already be reflected as a component of accumulated other comprehensive income (loss) in stockholders’ equity.
The determination of the amount of other-than-temporary impairment is an inherently subjective process based on periodic evaluations of the following factors: (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. Such evaluations and assessments are revised as conditions change and new information becomes available. We update our evaluations quarterly and reflect changes in other-than-temporary impairments in results of operations as such evaluations are revised. The use of different methodologies and assumptions in the determination of the amount of other-than-temporary impairments may have a material effect on the amounts presented within the consolidated financial statements.
At December 31, 2019, we did not have any off-balance-sheet arrangements.
Represents repayment of $150,000,000 senior notes payable on December 15, 2027, principal payments totaling $7,647,000 over the remaining life of the SBA note, and principal payments totaling $3,958,000 over the remaining life of the BB&T note. Additionally, all future interest payments are calculated using the current rates provided at December 31, 2019, and are included. All future payments are shown net of amortization of debt issuance costs. See Note 11 in our Notes to Consolidated Financial Statements for additional information regarding our long-term debt.
We have audited the accompanying consolidated balance sheet of United Insurance Holdings Corp. and subsidiaries (the “Company”) as of December, 31, 2019 and 2018, the related consolidated statements of comprehensive income (loss), stockholders’ equity, and cash flows, for each of the two years in the period ended December 31, 2019, and the related notes and the schedules listed in the Index at Item 15 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2019, in conformity with the accounting principles generally accepted in the United States of America.
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with the respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We have audited the accompanying consolidated statements of comprehensive income, stockholders’ equity and cash flows for the year ended December 31, 2017, and the related notes to the consolidated financial statements and schedules (collectively, the financial statements) of United Insurance Holdings Corp. and its subsidiaries (the Company). In our opinion, the financial statements present fairly, in all material respects, the results of the Company’s operations and its cash flows for the year ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.
We conduct our operations under one reportable segment, property and casualty insurance policies. Our chief operating decision maker is our Chief Executive Officer who makes decisions to allocate resources and assesses performance at the corporate level.
We reclassified certain amounts in the 2018 and 2017 financial statements to conform to the 2019 presentation, including reclassifying the presentation of “outstanding checks in excess of funds on deposit” in the financing section of the Consolidated Statements of Cash Flows to “changes in payments outstanding” in the operating section, to provide the users of the financial statements with more transparency. In addition, we also reclassified the presentation of our loss development tables. Refer to Note 10 in these Notes to Consolidated Financial Statements for additional information regarding this reclassification. These reclassifications had no impact on our results of operations or stockholders’ equity, as previously reported.
See Note 3 in our Notes to Consolidated Financial Statements for a discussion regarding the fair value measurement of our investments at December 31, 2019 and 2018.
At each reporting date, we determine whether we have a premium deficiency. A premium deficiency would result if the sum of our expected losses, deferred policy acquisition costs, reinsurance costs, and policy maintenance costs (such as costs to store records and costs incurred to collect premiums and pay commissions) exceeded our related unearned premiums plus investment income. Should we determine that a premium deficiency exists, we would write off the unrecoverable portion of deferred policy acquisition costs and record a liability to the extent the deficiency exceeded the deferred policy acquisition costs. We did not have a premium deficiency at December 31, 2019 and December 31, 2018.
See Note 7 in our Notes to Consolidated Financial Statements for a discussion of our property, equipment and capitalized software that were held during 2019 and 2018.
The discounted cash flow valuation approach requires judgments about revenues, operating earnings projections, capital market assumptions and discount rates. The key inputs, judgments and assumptions necessary in determining estimated fair value of the reporting units include projected operating earnings, current book value, the level of economic capital required to support the mix of business, long-term growth rates, comparative market multiples, control premium, the account value of in-force business, projections of new and renewal business, as well as margins on such business, the level of interest rates, credit spreads, equity market levels, and the discount rate that we believe is appropriate for the respective reporting unit.
Non-amortizing intangible assets generally represent the cost of insurance licenses acquired. Non-amortizing intangible assets are tested for impairment in the fourth quarter of each fiscal year by comparing the fair value of the licenses acquired to their carrying values. We established fair value for purposes of impairment testing using the income approach. If the carrying value of a license acquired exceeds its fair value, an impairment loss is recognized equal to that excess. For 2019 and 2018, we determined that the fair values of the intangible assets were not impaired.
We recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. We measure deferred tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which we expect to recover or settle those temporary differences. Should a change in tax rates occur, we recognize the effect on deferred tax assets and liabilities in operations in the period that includes the enactment date. For example, we reflected the impact of the Tax Cuts and Jobs Act (2017 Tax Act) in the fourth quarter of 2017, the period when the legislation was enacted. Refer to Note 13 for additional information. Realization of our deferred income tax assets depends upon our generation of sufficient future taxable income.
a geographic concentration resulting from the fact that, though we now operate in 12 states, we still write approximately 53% of our gross written premium in Florida as of December 31, 2019;
a concentration of credit risk with regard to our cash, because we choose to deposit all of our cash at five financial institutions.
Our policy fees consist of the managing general agent (MGA) fee and a pay-plan fee. We defer MGA fees as unearned revenue and recognize revenue on a pro rata basis over the term of the underlying policies. We record pay-plan fees, which are charged to all policyholders that pay premium in more than one installment, as income when collected. We report all policy-related fees as other revenue on our Consolidated Statements of Comprehensive Income (Loss).
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes (ASU 2019-12). This update enhances and simplifies various aspects of the income tax guidance, including intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. ASU 2019-12 is effective for annual reporting periods beginning after December 15, 2020, including interim periods within those fiscal years, with earlier adoption permitted. We do not intend to early adopt and are assessing the impact of adopting this new accounting standard on our consolidated financial statements and related disclosures.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments- Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13). This update is intended to replace the incurred loss impairment methodology in current GAAP with a method that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 will provide users with more useful information regarding the expected credit losses on financial instruments and other commitments to extend credit held by a
The following table details fixed maturity available-for-sale securities, by major investment category, at December 31, 2019 and 2018:
The table below summarizes our fixed maturities at December 31, 2019 by contractual maturity periods. Actual results may differ as issuers may have the right to call or prepay obligations, with or without penalties, prior to the contractual maturities of those obligations.
Our portfolio monitoring process includes a quarterly review of all fixed-income securities to identify instances where the fair value of a security compared to its cost or amortized cost is below established thresholds. The process also includes the monitoring of other impairment indicators such as ratings, ratings downgrades and payment defaults. The securities identified, in addition to other securities for which we may have a concern, are evaluated for potential other-than-temporary impairment using information relevant to the collectability or recovery of the security that is reasonably available. Inherent in our evaluation of other-than-temporary impairment for these fixed-income securities are assumptions and estimates about the financial condition and future earnings potential of the issue or issuer. Some of the factors that may be considered in evaluating whether a decline in fair value is other-than-temporary are: (1) the financial condition, near-term and long-term prospects of the issue or issuer, including relevant industry specific market conditions and trends, geographic location and implications of rating agency actions and offering prices; (2) the specific reasons that a security is in an unrealized loss position, including overall market conditions which could affect liquidity; and (3) the length of time and extent to which the fair value has been less than amortized cost or cost.
During our quarterly evaluations of our securities for impairment, we determined that none of our investments in fixed-income securities that reflected an unrealized loss position were other-than-temporarily impaired. The issuers of our debt securities continue to make interest payments on a timely basis. We do not intend to sell nor is it likely that we would be required to sell the debt securities before we recover our amortized cost basis. Due to the adoption of ASU 2016-01 as of January 1, 2018, equity securities are reported at fair value with changes in fair value recognized in the valuation of equity investments and are no longer included in impairment write-downs, change in intent write-downs and sales. During the years ended December 31, 2019, 2018, and 2017 we recorded no other-than-temporary impairment charges.
(1) Other long-term investments included in the fair value hierarchy exclude these other limited partnership interests that are measured at estimated fair value using the net asset value per share (or its equivalent) practical expedient.
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 2019, we transferred no investments between levels.
The information presented in the table below is as of December 31, 2019 and 2018:
The unaudited pro forma financial information below has been prepared as if the AmCo merger had taken place on January 1, 2017. The unaudited pro forma financial information is not necessarily indicative of the results that we would have achieved had the transaction taken place on January 1, 2017, and the unaudited pro forma information does not purport to be indicative of future financial operating results.
Basic EPS is based on the weighted average number of common shares outstanding for the period, excluding any dilutive common share equivalents. Diluted EPS reflects the potential dilution resulting from the vesting of outstanding restricted stock awards, restricted stock units, performance stock units and stock options. The following table shows the computation of basic and diluted EPS for the years ended December 31, 2019, 2018 and 2017:
(1) Includes vehicles under capital leases. See Note 12 of these Notes to Consolidated Financial Statements for further information on leases.
Depreciation and amortization expense under property and equipment was $6,305,000, $4,222,000 and $5,806,000, respectively, for the years ended December 31, 2019, 2018 and 2017. During the years ended December 31, 2019, 2018 and 2017, we incurred non-cash capitalized software write-off charges as a result of our decision to discontinue the use or development of several software projects that were previously capitalized.
We completed our most recent goodwill impairment testing during the fourth quarter of 2019 and determined that there was no impairment in the value of the asset as of December 31, 2019. No impairment loss in the value of goodwill was recognized during the years ended December 31, 2019, 2018 and 2017. Additionally, there was no accumulated impairment related to goodwill at December 31, 2019 or 2018.
The following is a summary of intangible assets excluding goodwill recorded as other assets on our Consolidated Balance Sheets at:
No impairment in the value of amortizing or non-amortizing intangible assets was recognized during the years ended December 31, 2019 and 2018.
Our reinsurance program is designed, utilizing our risk management methodology, to address our exposure to catastrophes. Our program provides reinsurance protection for catastrophes including hurricanes, tropical storms and tornadoes. These reinsurance agreements are part of our catastrophe management strategy, which is intended to provide our stockholders an acceptable return on the risks assumed in our property business, and to reduce variability of earnings, while providing protection to our policyholders. Although reinsurance agreements contractually obligate our reinsurers to reimburse us for the agreed-upon portion of our gross paid losses, they do not discharge our primary liability.
The following table depicts written premiums, earned premiums and losses, showing the effects that our reinsurance transactions have on these components of our Consolidated Statements of Comprehensive Income (Loss):
Ceded losses incurred decreased by $240,995,000 during the year ended December 31, 2019, compared to the year ended December 31, 2018, primarily as a result of the occurrence of Hurricanes Irma, Florence and Michael, which all occurred in years prior to 2019 and exceeded our retention thresholds, while the named storms occurring in 2019 did not exceed the retention threshold for the catastrophe excess-of-loss contract, resulting in fewer ceded losses. We have billed and received reinsurance recoveries for losses that we incurred on these storms and expect to receive additional recoveries during 2020.
Reserves for losses incurred but not reported (IBNR reserves) - Our IBNR reserves include true IBNR reserves plus “bulk” reserves. Bulk reserves represent additional amounts that cannot be allocated to particular claims, but which are necessary to estimate ultimate losses on reported and unreported claims. We estimate our IBNR reserves by projecting the ultimate losses using the methods discussed below and then deducting actual loss payments and case reserves from
the projected ultimate losses. We review and adjust our IBNR reserves on a quarterly basis based on information available to us at the balance sheet date.
The following is information about incurred claims development and paid claims development as of December 31, 2019, net of reinsurance, as well as cumulative claim frequency and the total of IBNR liability plus expected development on reported claims included within the net incurred claims amounts. The incurred claims development and paid claims development data reflect the acquisitions of FSIC, IIC, and AmCo in February 2015, April 2016, and April 2017, respectively, on a retrospective basis (includes FSIC, IIC and AmCo data for years prior to our acquisition of the insurance affiliates). The information about incurred claims development and paid claims development for the years ended December 31, 2010 to 2018 is presented as supplementary information.
In addition, we have revised our disclosure of the 2018 cumulative incurred and cumulative paid claims to reflect the addition of $1,380,000, $26,154,000, $27,809,000 and $16,434,000 for accident years 2012, 2013, 2014 and 2016 respectively, amounts which were incorrectly omitted from our prior period disclosure.
(1) Acquired reserves, net of reinsurance recoverables of $19,945,000 for 2017 related to our acquisition of AmCo.
On September 22, 2006, we issued a $20,000,000, 20-year note payable to the Florida State Board of Administration (the SBA Note). For the first three years of the SBA note we were required to pay interest only. On October 1, 2009, we began to repay the principal in addition to interest. The SBA Note bears an annual interest rate equivalent to the 10-year Constant Maturity Treasury rate (as defined in the SBA Note agreement), which resets quarterly.
On May 26, 2016, we issued a $5,200,000, 15-year term note payable to BB&T (the BB&T Note) with the intent to use the funds to purchase, renovate, furnish and equip our principal executive office. The BB&T Note bears interest at 1.65% in excess of the one-month LIBOR which resets monthly. LIBOR is expected to be discontinued sometime after 2021. In the event of default, BB&T, may, among other things, declare its loan immediately due and payable, require us to pledge additional collateral to the bank, and take possession of and foreclose upon our principal executive office, which has been pledged to the bank as security for the loan.
SBA Note - Our SBA Note requires that UPC maintain either a 2:1 ratio of net written premium to surplus, or net writing ratio, or a 6:1 ratio of gross written premium to surplus, or gross writing ratio, to avoid additional interest penalties. The SBA
BB&T Note - Our BB&T Note requires that, at all times while there has been no losses from our insurance subsidiaries' operations (non-recurring losses), we will maintain a minimum cash flow coverage ratio of 1.2:1. The cash flow coverage ratio is defined as the ratio of our cash flow to debt service charges. This ratio will be tested annually, based on our audited financial statements. For the one-year period following a non-recurring loss, we are required to maintain a minimum cash flow coverage ratio of 1.0:1. This covenant will only be effective if the pre non-recurring losses test is failed, and is only available and effective for one annual test period. Thereafter, the non-recurring loss cash flow coverage ratio of 1.2:1 will immediately apply. At the time of the most recent annual test period, December 31, 2019, we were not in compliance with the minimum cash flow coverage ratio covenant in the BB&T Note. As a result, the Company has obtained a waiver for the period ending December 31, 2019.
In addition, the BB&T Note requires that we establish and maintain with BB&T at all times during the term of the loan a non-interest bearing demand deposit account with a minimum balance of $500,000, and an interest-bearing account with a minimum balance of $1,500,000. In the event of default, BB&T may, among other things, declare its loan immediately due and payable, require us to pledge additional collateral to the bank, and take possession of and foreclose upon our corporate headquarters, which has been pledged to the bank as security for the loan. At December 31, 2019, we were in compliance with the remaining covenant in the BB&T Note.
We have fully funded two limited partnership investments and have committed to fund our remaining four limited partnership investments. The amount of unfunded commitments was $2,201,000 and $2,454,000 at December 31, 2019 and 2018, respectively.
A portion of our lease agreements include variable lease payments which are not recorded in the initial measurement of the lease liability and right-of-use asset balances. For our parking lot lease, base rental payments may be escalated according to annual changes in the Consumer Price Index (CPI). The escalated rental payments based on the estimated CPI at the lease commencement date are included within minimum rental payments; however, changes in CPI are considered variable in nature and are recognized as variable lease costs in the period in which the obligation is incurred. Our office equipment lease agreements may include variable payments based on usage of the equipment.
We utilized discount rates to determine the present value of the lease payments based on information available at the commencement date of the lease. We used an incremental borrowing rate based on factors such as lease term to determine the appropriate present value of future lease payments as the rate implicit in the lease is not always readily available. When determining the incremental borrowing rate, we considered the rate of interest we would pay on a secured borrowing in an amount equal to the lease payments for the underlying asset under similar terms.
At December 31, 2019, future minimum gross lease payments relating to these non-cancellable operating and finance lease agreements were as follows:
Capital lease amortization expenses are included in depreciation expense in our Consolidated Statements of Comprehensive Income (Loss). See Note 7 for information regarding depreciation expense. See Note 11 for information regarding commitments related to long-term debt, and Note 14 for commitments related to regulatory actions.
The Company files a consolidated federal income tax return with all eligible subsidiaries. Since we have less than an 80% interest in JIC, JIC is not eligible to file on a consolidated basis with UIHC.
As of December 31, 2019, we have not deemed any uncertain tax positions to be material at the consolidated level with regard to our tax returns.
The insurance industry is heavily regulated. State laws and regulations, as well as national regulatory agency requirements, govern the operations of all insurers such as our insurance subsidiaries. The various laws and regulations require that insurers
The state laws of Florida, Hawaii and New York permit an insurer to pay dividends or make distributions out of that part of statutory surplus derived from net operating profit and net realized capital gains. The state laws further provide calculations to determine the amount of dividends or distributions that can be made without the prior approval of the insurance regulatory authorities in those states and the amount of dividends or distributions that would require prior approval of the insurance regulatory authorities in those states. Statutory RBC requirements may further restrict our insurance subsidiaries’ ability to pay dividends or make distributions if the amount of the intended dividend or distribution would cause statutory surplus to fall below minimum RBC requirements.
Our insurance subsidiaries must maintain capital and surplus ratios or balances as determined by the regulatory authority of the states in which they are domiciled. At December 31, 2019, we met these requirements. The amount of surplus as regards policyholders for our regulated entities at December 31, 2019 and 2018, was $415,948,000, and $437,449,000, respectively.
AmRisc, a managing general agent, handles the underwriting, claims processing, premium collection and reinsurance review for AmCo. R. Daniel Peed, Vice Chairman of our Board of Directors, beneficially owned approximately 7.7% of AmRisc and was also the Chief Executive Officer of AmRisc during 2018. On December 31, 2018, Mr. Peed sold his interest in AmRisc and, effective January 1, 2019, became Non-Executive Vice Chairman of AmRisc. Effective December 31, 2019, Mr. Peed resigned from his position as Non-Executive Vice Chairman.
Net premiums receivable (net of commissions) of $38,921,000 were due from AmRisc as of December 31, 2019. These premiums were paid by AmRisc to our premium trust account by wire transfer within 15 days of collection pursuant to the underwriting contract with AmRisc.
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, 2019, 2018, and 2017, our contributions to the plan on behalf of the participating employees were $787,000, $861,000, and $604,000, respectively.
On November 6, 2018, ACIC and IIC paid dividends of $50,000,000 and $1,764,000, respectively, to the Company. In 2019, the Company returned the $1,764,000 paid by IIC in 2018.
We had approximately $3,560,000 of unrecognized stock compensation expense at December 31, 2019 related to non-vested stock-based compensation granted, which we expect to recognize over a weighted-average period of approximately 1.9 years. We had approximately $246,000 of unrecognized director stock-based compensation expense at December 31, 2019 related to non-vested director stock-based compensation granted, which we expect to recognize over a weighted-average period of approximately 0.4 years.
performance goals are not met. The actual number of performance stock units earned can vary from zero to 150 percent of the target for the 2018 and 2019 awards.
We granted 134,231, 174,602, and 167,622 shares of restricted common stock, which had a weighted-average grant date fair value of $16.24, $20.07, and $15.62 per share during the years ended December 31, 2019, 2018, and 2017, respectively. Additionally, during the year ended December 31, 2019, the Company granted 45,000 shares of restricted common stock, with a fair value of $15.70 per share, which is contingent upon stockholder approval of the 2020 Omnibus Incentive Plan. Stockholders will vote on this matter at our 2020 annual meeting of stockholders.
(2) Earnings per common share is calculated based on the earnings attributable to UIHC. The sum of the quarterly reported amounts may not equal the full year, as each is computed independently.
On January 24, 2020, our insurance subsidiary, IIC, paid a $12,000,000 dividend to the Company. On February 20, 2020, the Company made a $12,000,000 capital contribution to our insurance subsidiary, UPC.