Total revenues were $208,080,000 in 2013 compared to $131,234,000 in 2012.
Book value per diluted share (ratio of stockholders' equity to total shares outstanding and dilutive potential shares outstanding) was $6.64 at December 31, 2013, a 16% increase from $5.70 at December 31, 2012.
Return on average equity for the twelve months ended December 31, 2013 was 21%, compared to 16% for the twelve months ended December 31, 2012.
Policies in-force were 202,454 at December 31, 2013, a 50% increase from 135,297 policies in-force at December 31, 2012.
4 Underlying combined ratio, a measure that is not based on accounting principles generally accepted in the United States of America (GAAP), is reconciled above to the combined 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.
The loss-development-based methods are easy to use and comparable to industry benchmarks, but potential volatility in the calculated factors, as well as an element of subjectivity in the selected factors, slightly weakens the effectiveness of the method. The volatility arises from a number of factors such as inflation, changes in reserving practices, changes in underwriting criteria and geographic concentration.
The Bornhuetter-Ferguson method is a blend of the loss development and expected loss cost methods.
As previously noted, we evaluate several factors when exercising our judgment in the selection of the loss development factors that ultimately drive the determination of our loss reserves. The process of establishing our reserves is complex and necessarily imprecise, as it involves using judgment that is affected by many variables. We believe a reasonably-likely change
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
ANALYSIS OF FINANCIAL CONDITION - DECEMBER 31, 2013 COMPARED TO DECEMBER 31, 2012
At December 31, 2013, securities in an unrealized loss position for a period of twelve months or longer reflected unrealized losses of $336,000; approximately $319,000 of the total related to seven fixed maturities, while one equity security reflected an unrealized loss of $17,000. We currently have no plans to sell these eight securities, and we expect to fully recover our cost basis. We reviewed these securities and determined that we did not need to record impairment charges at December 31, 2013. Similarly, we did not record impairment charges at December 31, 2012.
During the second quarter of 2013, we placed our reinsurance program for the 2013 hurricane season. The contracts reinsure for personal lines property excess catastrophe losses caused by multiple perils including hurricanes, tropical storms, and tornadoes. The agreements are effective June 1, 2013, for a one-year term and incorporate the mandatory coverage required by and placed with the Florida Hurricane Catastrophe Fund (FHCF). The FHCF is a Florida State-sponsored trust fund that provides reimbursement to Florida property insurers for covered hurricane losses. UPC Insurance's total 2013-2014 catastrophe reinsurance coverage included $441,540,000 of coverage from the FHCF and $360,060,000 of coverage from private reinsurers. The contracts include provisions which are designed to protect us from losses sustained in a single event as well as losses from multiple events in a single hurricane season.
Mandatory FHCF - provides 90% of $490,600,000 of losses in excess of $187,200,000 with no reinstatement of limits.
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, primarily due to 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 54,800 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, gross written premiums increased because we assumed over 33,000 policies, representing approximately $51,578,000 of assumed premiums from Citizens Property Insurance Corporation during 2013. Our year-over-year growth in 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. Our GAAP net combined ratio improved 7.1 points for the year compared to the same period in 2012. Our underlying net combined ratio, which excludes losses from catastrophes and reserve development, also improved 7.4 points for the year signaling a significant improvement in our core operating results over the same period in 2012. Both the combined and underlying combined ratios decreased primarily due to strong premium growth and a lower ceded reinsurance premium percentage for the year compared to the prior year. As a result of these factors, net premiums earned increased $75,410,000, or 62%, to $197,378,000 for the year ended December 31, 2013, compared to $121,968,000 for the year ended December 31, 2012 as we continued to generate new policies in Florida and in other states and assumed policies from Citizens. The increase in net premiums earned was partially offset by the increase in our underlying loss costs, which increased approximately $40,421,000 during 2013 compared to the same period in 2012. The increase in underlying loss costs for the year ended December 31, 2013, was driven primarily by the growth of policies in-force and increased frequency and severity of water-related losses throughout Florida as shown below:
Losses and loss adjustment expenses increased to $98,830,000 for the year ended December 31, 2013, from $58,409,000 for the same period in 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 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 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 as shown in the following table:
2 Defined as gross earned premiums divided by earned house years.
We generate cash through premium collections, reinsurance recoveries, investment income, the sale or maturity of invested assets and the issuance of additional shares of our stock. We use our cash to pay reinsurance premiums, claims and related costs, policy acquisition costs, salaries and employee benefits, other expenses and stockholder dividends, as well as to purchase investments.
See Note 3 in our Notes to Consolidated Financial Statements for a table that summarizes our fixed maturities at December 31, 2013, by contractual maturity periods.
During the year ended December 31, 2013, our financing activities provided cash of $71,000 compared to providing $21,148,000 of cash in 2012. The decrease occurred primarily because we raised $23,947,000 from the issuance of 5,000,000 shares of common stock in December 2012, whereas we raised $3,591,000 in January 2013 from the underwriters exercise of the over-allotment. In addition, we paid $1,944,000 of dividends in 2013, compared to $982,000 paid in 2012. See Note 16 in our Notes to Consolidated Financial statements for additional information on the underwritten offering.
Our holding company has no business operations of its own and is largely dependent on liquidity from its subsidiaries. Our management affiliate's primary source of revenue and liquidity is the management fee and commissions it receives from our insurance affiliate. Our insurance affiliate is subject to extensive state regulation, including approval of any management fee it pays to our management affiliate for services rendered. In accordance with Florida law, our insurance affiliate may pay dividends or make distributions out of that part of its statutory surplus derived from its net operating profit and its net realized capital gains. Florida law further provides calculations to determine the amount of dividends or distributions that can be made without the prior approval of the insurance regulatory authority and the amount of dividends or distributions that would require prior approval of the insurance regulatory authority. The risk-based capital guidelines published by the National Association of Insurance Commissioners may further restrict our insurance affiliate’s ability to pay dividends or make distributions if the amount of the intended dividend or distribution would cause its surplus as regards policyholders to fall below minimum risk-based capital guidelines. Most states, including Florida, have adopted the NAIC requirements, and insurers having less surplus as regards policyholders than required will be subject to varying degrees of regulatory action, depending on the level of capital inadequacy. State insurance regulatory authorities could require us to cease operations in the event we fail to maintain the statutory surplus required in our insurance affiliate.
See Note 13 in our Notes to Consolidated Financial Statements for a discussion of our related party transactions, including those with Hamilton Risk Management (HRM) and 1347 Advisors, that were terminated during 2012.
United Insurance Holdings Corp. (referred to in this document as we, our, us, the Company and UPC Insurance) 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.
We currently classify all of our investments in fixed maturities and equity securities as available-for-sale, and report them at fair value. Subsequent to our acquisition of available-for-sale securities, we record changes in value through the date of disposition as unrealized holding gains and losses, net of tax effects, and include them as a component of comprehensive income. We include realized gains and losses, which we calculate using the specific-identification method for determining the cost of securities sold, in net income. We amortize any premium or discount on fixed maturities over the remaining maturity
period of the related securities using the effective interest method, and we report the amortization in net investment income. We recognize dividends and interest income when earned.
We estimate the fair value of our investments using the closing prices on the last business day of the reporting period, obtained from active markets such as the NYSE, NASDAQ, and NYSE MKT. For securities for which quoted prices in active markets are unavailable, we use observable inputs such as quoted prices in inactive markets, quoted prices in active markets for similar instruments, benchmark interest rates, broker quotes and other relevant inputs. We do not have any investments in our
Premiums receivable represents amounts due from our policyholders for billed premiums and related policy fees. We perform a policy-level evaluation to determine the extent to which the balance of premium receivable exceeds the balance of unearned premium. We then age any resulting exposure based on the last date the policy was billed to the policyholder, and we establish an allowance for credit losses for any amounts outstanding for more than 90 days. When we receive payments on amounts previously charged off, we credit bad debt expense in the period we receive the payment. The balances of our allowance for uncollectible premiums totaled $29,000 and $24,000 at December 31, 2013 and 2012, respectively.
We classify our property and equipment, which we record at cost less accumulated depreciation and amortization, within other assets on our Consolidated Balance Sheets because the total net amount ($592,000 at December 31, 2013 and $548,000 at December 31, 2012) is not material to our consolidated financial statements. We use the straight-line method of calculating depreciation over the estimated useful lives of the assets, which are three to five years. We also use the straight-line method to calculate amortization of leasehold improvements over the estimated useful lives of the assets or the term of the lease, whichever is shorter. We periodically review estimated useful lives and, where appropriate, we make changes prospectively. We charge maintenance and repair costs to expense as incurred.
Our policy fees consist of the managing general agent fee and a pay-plan fee. Regulatory authorities in Florida and Rhode Island allow managing general agents to charge policyholders a $25 fee on each policy written, while the regulatory authority in Texas allows managing general agents to charge policyholders a $25 or $75 fee, depending on the type of policy issued. We defer such fees as unearned revenue and then include them in income on a pro rata basis over the term of the underlying policies. We record our pay-plan fees, which we charge to all policyholders that pay their premium in more than one installment, as income when collected. We report all policy-related fees in other revenue on our Consolidated Statements of Comprehensive Income.
We follow industry practice of reinsuring a portion of our risks. Reinsurance involves transferring, or "ceding", all or a portion of the risk exposure on policies we write to another insurer, known as a reinsurer. To the extent that our reinsurers are unable to meet the obligations they assume under our reinsurance agreements, we remain liable for the entire insured loss.
We estimate uncollectible amounts receivable from reinsurers based on an assessment of factors including the creditworthiness of the reinsurers and the adequacy of collateral obtained, where applicable. We recorded no bad debt expense related to reinsurance during the years ended December 31, 2013, 2012 or 2011.
Where permitted by law or regulatory authority, we collect assessments imposed upon policyholders as a policy surcharge and we record the amounts collected as a liability until we remit the amounts to the regulatory agency that imposed the assessment. During 2013 we did not receive any significant assessments from the regulatory authorities in the states in which our insurance affiliate operates.
We expense all advertising costs when we incur those costs. For the years ended December 31, 2013, 2012 and 2011, we incurred advertising costs of $1,801,000, $1,395,000, and $1,041,000, respectively.
Our current operations subject us to the following concentrations of risk:
In February 2013, the FASB issued ASU 2013-02, Comprehensive Income (Topic 220): Reporting Amounts Reclassified Out of Accumulated Other Comprehensive Income, which finalizes Proposed ASU No. 2012-240, requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line in net income if the amount being reclassified is required under U.S. GAAP to be reclassified in its entirety to net income. For other amounts that are not required under GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under GAAP that provide additional detail about those amounts. The ASU is effective prospectively for reporting periods beginning after December 15, 2012, and early adoption is permitted.
For each fixed income security in an unrealized loss position, we determine if the loss is temporary or other-than-temporarily impaired. If our management decides to sell the security or determines that it is more likely than not that we will be required to sell the security before recovery of the cost or amortized cost basis for reasons such as liquidity, contractual or regulatory purposes, then the security's decline in fair value is considered other-than-temporary and is recorded in earnings.
During the years ended December 31, 2013, 2012 and 2011, we recorded other-than-temporary impairment charges of $0, $0, and $31,000, respectively, related to our equity positions. We have never recorded an OTTI charge on our debt-security investments.
The following table presents the fair value measurements of our financial instruments by level at December 31, 2013 and December 31, 2012:
For our investments in U.S. government securities that do not have prices in active markets, agency securities, state and municipal governments, and corporate bonds, we obtain the fair values from Synovus Trust Company, NA, which uses a third-party valuation service. The valuation service calculates prices for our investments in the aforementioned security types on a month-end basis by using several matrix-pricing methodologies that incorporate inputs from various sources. The model the valuation service uses to price U.S. government securities and securities of states and municipalities incorporates inputs from active market makers and inter-dealer brokers. To price corporate bonds and agency securities, the valuation service calculates
non-call yield spreads on all issuers, uses option-adjusted yield spreads to account for any early redemption features, then adds final spreads to the U.S. Treasury curve at 3 p.m. (ET) as of quarter end. Since the inputs the valuation service uses in their calculations are not quoted prices in active markets, but are observable inputs, they represent Level 2 inputs.
On September 27, 2013, we acquired an investment in a limited partnership, recorded in other assets, that is currently being accounted for at cost. Our total investment in the partnership of $1,000,000, is currently bifurcated between a capital contribution of $500,000 and a note receivable of $500,000 that will be utilized to fund our future capital contributions. We are not required to fund any additional amounts in excess of our initial $1,000,000 commitment. As the limited partnership is still in the acquisition phase, the cost basis of our investment approximated its fair value at December 31, 2013.
On February 4, 2014, UC Funding returned $500,000 of our investment as they were unable to fully utilize our investment.
Our reinsurance program is designed, utilizing our risk management methodology, to address our exposure to catastrophes. We define "catastrophe" as an event that produces a number of claims in excess of a preset, per-event threshold of average claims in a specific area, occurring within a certain amount of time following the event. Catastrophes are caused by various natural events including high winds, winter storms, tornadoes, hailstorms, wildfires, tropical storms, hurricanes, earthquakes and volcanoes. The nature and level of catastrophes in any period cannot be reliably predicted.
Below FHCF - provides coverage on $167,200,000 of losses in excess of $20,000,000 and is 100% placed. The first reinstatement of limits is prepaid and the second and final reinstatement requires additional premium.
Reinsurance recoverable at the balance sheet dates consists of the following:
During the years ended December 31, 2013 and 2012, we realized recoveries under our reinsurance agreements totaling $2,521,000 and $2,753,000, respectively. These recoveries were primarily related to losses from Hurricane Wilma, which occurred in October 2005.
During the fourth quarter of 2013, we placed our non-catastrophe reinsurance agreement, which will expire on December 31, 2014. The non-catastrophe reinsurance agreement provides excess-of-loss coverage for losses arising out of property business up to $500,000 in excess of $500,000 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, three reinstatements of the full coverage amount is included at no additional premium.
We write flood insurance under an agreement with the National Flood Insurance Program. We cede 100% of the premiums written and the related risk of loss to the federal government. We earn commissions for the issuance of flood policies based upon a fixed percentage of net written premiums and the processing of flood claims based upon a fixed percentage of incurred losses, and we can earn additional commissions by meeting certain growth targets for the number of in-force policies. We recognized commission revenue from our flood program of $570,000, $267,000, and $377,000 for the years ended December 31, 2013, 2012, and 2011, respectively.
Ceded losses incurred increased by $1,432,000 during the year ended December 31, 2013, compared to the year ended December 31, 2012, primarily because we ceded more per risk losses in 2013. The losses we incurred in 2013, 2012 and 2011 related to storms that occurred in those same years but did not exceed our retained loss thresholds.
Our long-term debt at December 31, 2013 and 2012 consisted of a note payable to the Florida State Board of Administration. As of December 31, 2013 and 2012, we owed $14,706,000 and $15,882,000, respectively, on the note and the interest rate was 2.64% and 1.66%, respectively.
The statute of limitations related to our consolidated Federal income tax returns and our Florida income tax returns expired for all tax years up to and including 2009; therefore, only the 2010 through 2013 tax years remain subject to examination by taxing authorities. No taxing authorities are currently examining any of our federal or state income 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 affiliate. The various laws and regulations require that insurers maintain minimum amounts of statutory surplus and risk-based capital, they restrict insurers' ability to pay dividends, they specify allowable investment types and investment mixes, and they subject insurers to assessments. At December 31, 2013, and during the twelve months then ended, our insurance affiliate met all regulatory requirements of the states in which it operates, and did not incur any significant assessments.
The table below summarizes the activity related to assessments levied upon our insurance affiliate:
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. The remaining $79,000 assessment will be recouped during 2014.
Florida law limits an insurer’s investment in equity instruments and also restricts investments in medium to low quality debt instruments. We were in compliance with all investment restrictions at December 31, 2013 and 2012.
Statutory accounting requires that we record certain investments at cost or amortized cost, while we record other investments at fair value; however, GAAP requires that we record investments at fair value.
Statutory accounting requires that unearned premiums and loss reserves are presented net of related reinsurance rather than on a gross basis under GAAP.
No Action Level - If RBC is greater than 200%, no further action is required.
We lease office space and office equipment under operating leases. In October of 2012, we renegotiated the lease for office space for our corporate headquarters. Our revised lease agreement expires in November 2017; however, we have two options to terminate the lease with 180 days of advance notice after completing twenty-four or thirty-six months of tenancy.
CFO, in addition to actuarial and other services. Hassan Baqar served as our interim CFO under the MSA until April 2, 2012, when he submitted his resignation effective concurrently with the termination of the MSA described in the final paragraph of this section. During the term of the MSA, Mr. Baqar served as a Managing Director of 1347 Advisors and as a Vice President of Kingsway America, Inc., a wholly-owned subsidiary of Kingsway Financial Services, Inc. In exchange for the services, we paid 1347 Advisors a monthly consulting fee of $60,000 plus any reasonable expenses. For the twelve months ended December 31, 2012, and 2011, we incurred fees of $180,000 and $240,000, respectively under the MSA.
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 expires in April 2014. As of the end of December 31, 2013, the remaining balance owed to Mr. Cronin was $121,000.
On October 1, 2013, we awarded Jay Williams, Vice President - Marketing, 2,299 shares of restricted common stock in connection with his employment with our Company.
On July 20, 2012, our Board of Directors declared a dividend of one preferred share purchase 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 granted 10,476 restricted stock awards during the twelve-month period ended December 31, 2013, which had a weighted-average grant date fair value of $7.64 per share. We granted 86,990 shares of restricted stock during the twelve-month period ended December 31, 2012, which had a weighted-average grant date fair value of $5.25.
We have approximately $347,000 of unrecognized stock compensation expense related to non-vested compensation granted, which we expect to recognize over the next three and a half years. We recognized $133,000 and $55,000 of compensation expense during the twelve months ended December 31, 2013 and 2012, respectively.