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UNITED INSURANCE HOLDINGS CORP. – 10-K – Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing in Part II, Item 8 of this Form 10-K. The following discussion provides an analysis of our results of operations and financial condition for 2021 as compared to 2020. Discussion regarding our results of operations and financial condition for 2020 as compared to 2019 is included in Part II, Item 7 of our Annual Report on Form 10-K for the year endedDecember 31, 2020 . This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Actual results may differ materially from those expressed or implied in these forward-looking statements as a result of certain known and unknown risks and uncertainties. See " Forward-Looking Statements ." OVERVIEWUnited Insurance Holding Corp. is a holding company primarily engaged in residential personal and commercial property and casualty insurance business with investments inthe United States . We conduct our business principally through four wholly-owned insurance subsidiaries and one majority-owned insurance subsidiary:United Property & Casualty Insurance Company (UPC);American Coastal Insurance Company (ACIC);Family Security Insurance Company, Inc. (FSIC);Interboro Insurance Company (IIC); andJourney Insurance Company (JIC). Collectively, we refer to the holding company and all our subsidiaries, including non-insurance subsidiaries, as "UPC Insurance ," which is the preferred brand identification for our Company. Our Company's primary source of revenue is generated from writing insurance inFlorida ,Louisiana ,New York andTexas . The Company also writes policies inGeorgia ,Massachusetts ,New Jersey ,North Carolina andSouth Carolina where renewal rights have been sold and all premiums and losses are ceded. EffectiveJanuary 1, 2021 , we no longer write in the state ofHawaii . EffectiveDecember 1, 2021 , we no longer write in the states ofConnecticut orRhode Island . We are also licensed to write property and casualty insurance in an additional six states; however, we have not commenced writing in these states. Our target market in such areas consists of states where the perceived threat of natural catastrophe has caused large national insurance carriers to reduce their concentration of policies. We believe an opportunity exists forUPC Insurance to write profitable business in such areas. Our Company, together with wholly-owned subsidiariesUPC and United Insurance Management, L.C. (UIM), entered into a Renewal Rights Agreement (Southeast Renewal Agreement), dated as ofDecember 30, 2021 withHomeowners Choice Property and Casualty, Inc. (HCPCI), pursuant to which our Company, UPC and UIM agreed to sell, and HCPCI agreed to purchase, the renewal rights to UPC's personal lines homeowners business inGeorgia ,South Carolina andNorth Carolina . The transfer of policies is subject to regulatory approval. The sale was consummated onDecember 30, 2021 . EffectiveDecember 31, 2021 , we entered into a quota share reinsurance agreement with HCPCI in connection with the Southeast Renewal Agreement. Under the terms of this agreement, we will cede 85% of our in-force, new, and renewal policies in the states ofGeorgia ,North Carolina andSouth Carolina . When coupled with the 15% cessions from our third-party quota share reinsurance agreement, we will no longer retain any risk associated with these states. Our Company, together with wholly-owned subsidiaries UPC and UIM, entered into a Renewal Rights Agreement (Northeast Renewal Agreement), dated as ofJanuary 18, 2021 withHCPCI and HCI Group, Inc. (HCI), pursuant to which our Company, UPC and UIM agreed to sell, and HCPCI agreed to purchase, the renewal rights to UPC's personal lines homeowners business inConnecticut ,Massachusetts ,New Jersey andRhode Island . The transfer ofMassachusetts andNew Jersey policies is subject to regulatory approval. The sale was consummated onJanuary 18, 2021 . The transfer ofRhode Island andConnecticut policies was completed as ofDecember 31, 2021 . EffectiveJune 1, 2021 , we entered into a quota share reinsurance agreement withHCPCI and TypTap Insurance Company (TypTap) in connection with the Northeast Renewal Agreement. Under the terms of this agreement, we will cede 100% of our in-force, new, and renewal policies in the states ofConnecticut ,New Jersey ,Massachusetts , andRhode Island . The cession of these policies is 50% to HCPCI and 50% to TypTap. As the transfer of each state is completed under the Northeast Renewal Agreement, the quota share coverage for the transitioned state will no longer be in effect. We have historically grown our business through strong organic growth complemented by strategic acquisitions and partnerships, including our acquisitions ofAmCo Holding Company (AmCo ) and its subsidiaries, including ACIC, inApril 2017 , IIC inApril 2016 , andFamily Security Holdings, LLC (FSH), including its subsidiary FSIC inFebruary 2015 , and our strategic partnership with a subsidiary ofTokio Marine Kiln Group Limited (Kiln), which formed JIC inAugust 2018 . During 34 -------------------------------------------------------------------------------- UNITED INSURANCE HOLDINGS CORP.
2021, our policies in-force has decreased by 25.2% from 630,991 policies
in-force at
Our business is subject to the impact of weather-related catastrophes on our loss and loss adjustment expenses (LAE). Over the last three years, the frequency of these catastrophes has increased. As a result, we have experienced increased catastrophe losses incurred during the prior three years. During the years endedDecember 31, 2021 , 2020 and 2019, seven, thirteen, and five named storms, respectively, made landfall in our geographic footprint, resulting in retained pre-tax catastrophe losses of$35,872,000 ,$208,157,000 , and$32,170,000 , respectively. In addition, during each of the three years we increased our loss and LAE reserves as a result of development trends from 2017's Hurricane Irma, that indicated our ultimate gross loss estimate should be increased. The following discussion highlights significant factors influencing the consolidated financial position and results of operations ofUPC Insurance . In evaluating our results of operations, we use premiums written and earned, policies in-force and new and renewal policies by geographic concentration. We also consider the impact of catastrophe losses and prior year development on our loss ratios, expense ratios and combined ratios. In monitoring our investments, we use credit quality, investment income, cash flows, realized gains and losses, unrealized gains and losses, asset diversification and portfolio duration. To evaluate our financial condition, we consider our liquidity, financial strength, ratings, book value per share and return on equity. 35
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UNITED INSURANCE HOLDINGS CORP.
Consolidated Net Income (Loss)
Year Ended December 31,
2021 2020 2019
REVENUE:
Gross premiums written $ 1,329,445 $ 1,456,863 $ 1,380,268
Change in gross unearned premiums 78,998 (49,883) (46,742)
Gross premiums earned 1,408,443 1,406,980 1,333,526
Ceded premiums earned (818,682) (641,317) (581,126)
Net premiums earned 589,761 765,663 752,400
Net investment income 13,772 24,125 30,145
Net realized gains 3,567 66,691 1,228
Net unrealized gains (losses) on equity securities 3,237 (27,562) 24,761
Other revenue 24,190 17,739 16,582
Total revenues 634,527 846,656 825,116
EXPENSES:
Losses and loss adjustment expenses 422,134 608,316 499,493
Policy acquisition costs 173,574 236,002 238,268
Operating expenses 56,257 52,876 44,310
General and administrative expenses 57,212 72,057 65,989
Interest expense 9,391 9,582 9,781
Total expenses 718,568 978,833 857,841
Loss before other income (84,041) (132,177) (32,725)
Other income 184 74 119
Loss before income taxes (83,857) (132,103) (32,606)
Benefit for income taxes (23,989) (36,605) (3,121)
Net loss $ (59,868) $ (95,498) $ (29,485)
Less: Net income (loss) attributable to
noncontrolling interests (1,949) 956 387
Net loss attributable to UIHC $ (57,919) $ (96,454) $ (29,872)
Net loss per diluted share $ (1.35) $ (2.25) $ (0.70)
Book value per share $ 7.20 $ 9.19 $ 11.69
Return on equity based on GAAP net loss (16.9) % (20.2) % (5.6) %
Loss ratio, net (1) 71.6 % 79.4 % 66.4 %
Expense ratio (2)(5) 48.7 % 47.1 % 46.3 %
Combined ratio (3)(5) 120.3 % 126.5 % 112.7 %
Effect of current year catastrophe losses on combined
ratio
19.3 % 38.5 % 0.385 12.9 % Effect of prior year development on combined ratio 4.7 % (0.9) % 4.4 % Underlying combined ratio(4)(5) 96.3 % 88.9 % 95.4 % (1) Loss ratio, net is calculated as losses and LAE net of losses ceded to reinsurers, relative to net premiums earned. Management uses this operating metric to analyze our loss trends and believes it is useful for investors to evaluate this component separately from our other operating expenses. (2) Expense ratio is calculated as the sum of all operating expenses less interest expense relative to net premiums earned. Management uses this operating metric to analyze our expense trends and believes it is useful for investors to evaluate these components separately from our loss expenses. (3) Combined ratio is the sum of the loss ratio, net and expense ratio. Management uses this operating metric to analyze our total expense trends and believes it is a key indicator for investors when evaluating the overall profitability of our business. (4) Underlying combined ratio, a measure that is not based on GAAP, is reconciled above to the combined ratio, the most directly comparable GAAP measure. Additional information regarding non-GAAP financial measures presented in this Form 10-K can be found in "Definitions of Non-GAAP Measures", below. (5) Included in both the expense ratio and the combined ratio is amortization expense predominately associated with theAmCo , IIC, and FSH acquisitions, which cause comparative differences among periods. 36 -------------------------------------------------------------------------------- UNITED INSURANCE HOLDINGS CORP.
DEFINITIONS OF NON-GAAP MEASURES
We believe that investors' understanding ofUPC Insurance's performance is enhanced by our disclosure of the following non-GAAP measures. Our methods for calculating these measures may differ from those used by other companies and therefore comparability may be limited. Combined ratio excluding the effects of current year catastrophe losses and prior year reserve development (underlying combined ratio) is a non-GAAP measure, that is computed by subtracting the effect of current year catastrophe losses and prior year development from the combined ratio. We believe that this ratio is useful to investors, and it is used by management to highlight the trends in our business that may be obscured by current year catastrophe losses and prior year development. Current year catastrophe losses cause our loss trends to vary significantly between periods as a result of their frequency of occurrence and magnitude, and can have a significant impact on the combined ratio. Prior year development is caused by unexpected loss development on historical reserves. We believe it is useful for investors to evaluate these components separately and in the aggregate when reviewing our performance. The most directly comparable GAAP measure is the combined ratio. The underlying combined ratio should not be considered as a substitute for the combined ratio and does not reflect the overall profitability of our business. Net loss and LAE excluding the effects of current year catastrophe losses and prior year reserve development (underlying loss and LAE) is a non-GAAP measure that is computed by subtracting the effect of current year catastrophe losses and prior year reserve development from net loss and LAE. We use underlying loss and LAE figures to analyze our loss trends that may be impacted by current year catastrophe losses and prior year development on our reserves. As discussed previously, these two items can have a significant impact on our loss trends in a given period. We believe it is useful for investors to evaluate these components both separately and in the aggregate when reviewing our performance. The most directly comparable GAAP measure is net loss and LAE. The underlying loss and LAE measure should not be considered a substitute for net loss and LAE and does not reflect the overall profitability of our business. 37
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UNITED INSURANCE HOLDINGS CORP. RESULTS OF OPERATIONS Consolidated Results Net loss attributable to UIHC for the year endedDecember 31, 2021 decreased by$38,535,000 to$57,919,000 , compared to$96,454,000 for the year endedDecember 31, 2020 . The decrease in net losses was primarily driven by a$186,182,000 decrease in loss & LAE expense for the year. This was driven by our decision to lower the retention related of our Core Catastrophe reinsurance program for the 2021-2022 hurricane season coupled with a lower frequency of catastrophic weather activity when compared to 2020 and an increase in ceded losses to our quota share reinsurance program. This was partially offset by a decrease in revenue, driven by a$127,418,000 decrease in gross written premiums as described below. In addition, the company experienced a$177,365,000 increase in ceded premium earned as the result of the changes to the Company's quota share reinsurance agreements described below, as well as a decrease in realized investments gains in 2021. Revenues Our gross written premiums decreased by$127,418,000 , or 8.7%, to$1,329,445,000 for the year endedDecember 31, 2021 , from$1,456,863,000 for the year endedDecember 31, 2020 , driven primarily by a decline in written premiums across our personal lines business, due to underwriting actions taken at the end of 2020 and throughout 2021. In addition, we experienced a decrease in assumed premiums due to the termination of a contract which included commercial property business assumed from unaffiliated insurers. The breakdown of the year-over-year changes in both direct and assumed written premiums by region and gross written premium by line of business are shown in the table below. Direct Written and Assumed Premium By Region (1) 2021 2020 Change Florida$ 852,711 $ 829,777 $ 22,934 Gulf 225,013 258,064 (33,051) Northeast 158,217 197,556 (39,339) Southeast 93,188 126,161 (32,973) Total direct written premium by region$ 1,329,129 $ 1,411,558 $ (82,429) Assumed premium (2) 316 45,305 (44,989) Total gross written premium by region$ 1,329,445
Gross Written Premium by Line of Business Personal property (3)$ 907,207 $ 1,063,599 $ (156,392) Commercial property 422,238 393,264 28,974 Total gross written premium by line of business$ 1,329,445
(1) "Gulf" is comprised ofLouisiana andTexas in 2021 andHawaii ,Louisiana , andTexas in 2020; "Northeast" is comprised ofConnecticut ,Massachusetts ,New Jersey ,New York andRhode Island ; and "Southeast" is comprised ofGeorgia ,North Carolina andSouth Carolina . As ofDecember 1, 2021 , we are no longer writing inConnecticut orRhode Island as the policies have transitioned to HCPCI. (2) Assumed premium written for 2021 and 2020 primarily included commercial property business assumed from unaffiliated insurers. (3) Includes gross written premium from flood policies. New and Renewal Policies(1) By Region(2) 2021 2020 Change Florida 212,497 264,001 (51,504) Gulf 113,983 150,748 (36,765) Northeast 122,723 147,079 (24,356) Southeast 60,406 98,086 (37,680) Total 509,609 659,914 (150,305) (1) Only includes new and renewal homeowner, commercial and dwelling fire policies written during the year. (2) "Gulf" is comprised ofLouisiana andTexas in 2021 andHawaii ,Louisiana , andTexas in 2020; "Northeast" is comprised ofConnecticut ,Massachusetts ,New Jersey ,New York andRhode Island ; and "Southeast" is comprised ofGeorgia ,North Carolina andSouth Carolina . As ofDecember 1, 2021 , we are no longer writing inConnecticut orRhode Island as the policies have transitioned to HCPCI. Ceded premiums earned increased by$177,365,000 , or 27.7%, to$818,682,000 for the year endedDecember 31, 2021 from$641,317,000 for 2020. The increase is primarily driven by a$163,713,000 increase in ceded premiums earned from our 38 -------------------------------------------------------------------------------- UNITED INSURANCE HOLDINGS CORP. quota share agreements. We entered into additional quota share reinsurance agreements effectiveDecember 31, 2020 , which increased our ceding percentage overall and was modified to provide coverage to ACIC. In addition, effectiveDecember 31, 2020 we entered into a quota share reinsurance agreement with HCPCI for our Northeast business, excludingNew York , as a part of our renewal rights agreement. Net investment income decreased by$10,353,000 , or 42.9%, to$13,772,000 for the year endedDecember 31, 2021 from$24,125,000 for 2020. The decrease is driven by a$8,905,000 decrease in income from our fixed maturity investment portfolio as a result of lower yields as well as a decrease in the size of our fixed maturity portfolio in 2021. Our equity securities have also produced lower returns during the year endedDecember 31, 2021 , driven by decreased holdings during 2021, as the result of our decision to dispose of our equity portfolio at the end of 2020, causing a$1,460,000 decrease in net investment income. Net realized investment gains and net unrealized gains (losses) on equity securities decreased by$32,325,000 , or 82.6%, to a net gain of$6,804,000 for the year endedDecember 31, 2021 from a net gain of$39,129,000 for the year endedDecember 31, 2020 , primarily driven by the disposal of our equity portfolio and the sale and reinvestment of our fixed maturity portfolio in 2020, during a favorable price environment, in efforts to mitigate potential surplus declines from market volatility for each of our insurance subsidiaries.
Expenses
Expenses for the year endedDecember 31, 2021 decreased$260,265,000 , or 26.6%, to$718,568,000 for the year endedDecember 31, 2021 , from$978,833,000 for 2020. The decrease in expenses was primarily due to a decrease in loss and LAE as a result of increased cessions in 2021 to our Core Catastrophe and quota share reinsurance programs, as well as a lower frequency of catastrophe activity during 2021. The calculations of our combined loss ratios and underlying loss ratios are shown below. Year ended ($ in thousands) December 31, 2021 2020 Change Net loss and LAE$ 422,134 $ 608,316 $ (186,182) % of Gross earned premiums 30.0 % 43.2 % (13.2) pts % of Net earned premiums 71.6 % 79.4 % (7.8) pts Less: Current year catastrophe losses$ 113,740 $ 294,537
Prior year reserve unfavorable development 27,856 (6,786)
34,642 Underlying loss and LAE (1)$ 280,538 $ 320,565 $ (40,027) % of Gross earned premiums 19.9 % 22.8 % (2.9) pts % of Net earned premiums 47.6 % 41.8 % 5.8 pts (1) Underlying loss and LAE is a non-GAAP financial measure and is reconciled above to net loss and LAE, the most directly comparable GAAP measure. Additional information regarding non-GAAP financial measures presented in this Form 10-K can be found in the "Definitions of Non-GAAP Measures" section, above.
The calculations of the Company's expense ratios are shown below.
Year ended
($ in thousands) December 31,
2021 2020 Change
Policy acquisition costs $ 173,574 $ 236,002 $ (62,428)
Operating and underwriting 56,257 52,876 3,381
General and administrative 57,212 72,057 (14,845)
Total Operating Expenses $ 287,043 $ 360,935 $ (73,892)
% of Gross earned premiums 20.4 % 25.7 % (5.3) pts
% of Net earned premiums 48.7 % 47.1 %
1.6 pts Loss and LAE decreased by$186,182,000 , or 30.6%, to$422,134,000 for the year endedDecember 31, 2021 , from$608,316,000 for the year endedDecember 31, 2020 . Loss and LAE expense as a percentage of net earned premiums 39 -------------------------------------------------------------------------------- UNITED INSURANCE HOLDINGS CORP. decreased 7.8 points to 71.6% for the year endedDecember 31, 2021 , compared to 79.4% for the year endedDecember 31, 2020 . During the year endedDecember 31, 2021 , we experienced increased non-catastrophe cessions as a result of the changes to our quota share agreements at the end of 2020 and during 2021. In addition, during the year endedDecember 31, 2020 there was a higher frequency of catastrophe events when compared to 2021. Excluding catastrophe losses and reserve development, our gross underlying loss and LAE ratio for the year endedDecember 31, 2021 would have been 19.9%, a decrease of 2.9 points from 22.8% during the year endedDecember 31, 2020 . Policy acquisition costs decreased by$62,428,000 , or 26.5%, to$173,574,000 for the year endedDecember 31, 2021 , from$236,002,000 for the year endedDecember 31, 2020 . The primary driver of the decrease in expense was an increase in ceding commission income of$63,661,000 related to our quota share reinsurance agreements. In addition, there was a$11,678,000 decrease in expenses incurred, such as premium taxes and agent commission expenses, which fluctuate in conjunction with the year over year decrease in written premium. This was partially offset by an$18,576,000 increase in external management fees incurred during 2021 as the result of an increased volume of commercial written premium year over year. Operating and underwriting expenses increased by$3,381,000 , or 6.4%, to$56,257,000 for the year endedDecember 31, 2021 , from$52,876,000 for the year endedDecember 31, 2020 , primarily due to increased expenses related to our investment in technology of$7,271,000 . This was partially offset by a$3,092,000 decrease in agent incentive costs in 2021 as we have discontinued our agent incentive program. We also experienced decreases in travel expenses of$289,000 due to the lack of company travel during 2021 as a result of the continued effects of the coronavirus pandemic and decreases in office overhead expenses of$378,000 in 2021 driven by our shift to a remote work environment. General and administrative expenses decreased by$14,845,000 , or 20.6%, to$57,212,000 for the year endedDecember 31, 2021 , from$72,057,000 for the year endedDecember 31, 2020 , primarily due to a$8,215,000 decrease in salary related expenses driven by an increase in the allocation of claims adjustment payroll related costs to loss & LAE from general and administrative expenses in 2021. In addition, in 2020 we incurred$2,763,000 in expenses related to the discontinuation of plans to build new headquarters, an expense which is non-recurring in 2021.
We experienced adverse reserve development in the current year and its
historical impact on our net loss and net underlying loss ratios is outlined in
the following table.
Historical Reserve Development
($ in thousands, except ratios) 2017 2018 2019 2020 2021
Prior year reserve favorable (unfavorable)
development $ 2,613 $ (4,318)
Development as a % of earnings before
interest and taxes
62.9 % (76.7) % 145.2 % (5.5) % 37.4 %
Consolidated net loss and LAE ratio (LR) 62.4 % 59.3 % 66.4 % 79.4 % 71.6 %
Prior year reserve unfavorable (favorable)
development on LR (0.4) % 0.6 % 4.4 % (0.9) % 4.7 %
Current year catastrophe losses on LR 19.8 % 14.6 % 12.9 % 38.5 % 19.3 %
Underlying net loss and LAE ratio(1) 43.0 % 44.1 % 49.1 % 41.8 % 47.6 %
(1) Underlying net loss and LAE Ratio is a non-GAAP measure and is reconciled
above to the Consolidated net loss and LAE Ratio, the most directly comparable
GAAP measure. Additional information regarding non-GAAP financial measures
presented in this Form 10-K can be found in the "Definitions of Non-GAAP
Measures" section, above.
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UNITED INSURANCE HOLDINGS CORP.
Personal Lines Operating Segment Results
Pretax earnings attributable to our personal lines operating segment for the year endedDecember 31, 2021 increased by$30,541,000 to a pretax loss of$104,556,000 , compared to a pretax loss of$135,097,000 for the year endedDecember 31, 2020 . The decrease in pretax net loss was primarily due to a$148,803,000 decrease in losses and LAE during 2021, driven by increased cessions to our core catastrophe reinsurance program and quota share reinsurance agreements. We also experienced a$44,350,000 decrease in policy acquisition costs year over year due to increased ceding commission income. This was partially offset by a$153,778,000 decrease in net premiums earned, driven by decreases in gross written premiums as well as increased ceded premiums earned in 2021. Revenues Our gross written premiums attributable to our personal lines operating segment decreased by$156,393,000 , or 14.7%, to$907,207,000 for the year endedDecember 31, 2021 , from$1,063,600,000 for the year endedDecember 31, 2020 , primarily reflecting the impact of our underwriting actions taken at the end of 2020 and during 2021. The breakdown of the year-over-year changes in both direct and assumed written premiums by region are shown in the table below. Direct Written and Assumed Premium By Region(1) 2021 2020 Change Florida$ 439,645 $ 485,487 $ (45,842) Gulf 217,604 255,185 (37,581) Northeast 158,217 197,556 (39,339) Southeast 91,741 125,372 (33,631) Total direct written premium by region$ 907,207 $
1,063,600
Assumed premium - - - Total gross written premium by region$ 907,207 $
1,063,600
(1) "Gulf" is comprised ofLouisiana andTexas in 2021 andHawaii ,Louisiana , andTexas in 2020; "Northeast" is comprised ofConnecticut ,Massachusetts ,New Jersey ,New York andRhode Island ; and "Southeast" is comprised ofGeorgia ,North Carolina andSouth Carolina . As ofDecember 1, 2021 , we are no longer writing inConnecticut orRhode Island as the policies have transitioned to HCPCI. New and Renewal Policies(1) By Region(2) 2021 2020 Change Florida 206,366 257,880 (51,514) Northeast 113,884 122,723 147,079 (24,356) Gulf 113,884 147,079 150,716 (36,832) Southeast 60,376 98,071 (37,695) Total 503,349 653,746 (150,397) (1) Only includes new and renewal homeowner and dwelling fire policies written during the year. (2) "Gulf" is comprised ofLouisiana andTexas in 2021 andHawaii ,Louisiana , andTexas in 2020; "Northeast" is comprised ofConnecticut ,Massachusetts ,New Jersey ,New York andRhode Island ; and "Southeast" is comprised ofGeorgia ,North Carolina andSouth Carolina . As ofDecember 1, 2021 , we are no longer writing inConnecticut orRhode Island as the policies have transitioned to HCPCI. Ceded premiums earned attributable to our personal lines operating segment increased by$134,786,000 , or 30.2%, to$581,626,000 for the year endedDecember 31, 2021 from$446,840,000 for the year endedDecember 31, 2020 . The increase is primarily driven by a$101,722,000 increase in ceded premiums earned from our quota share agreements. EffectiveDecember 31, 2020 , we modified our existing and entered into a new quota share agreement which increased our overall ceding percentage. In addition, effectiveDecember 31, 2020 we entered into a quota share reinsurance agreement with HCPCI for our northeast business, excludingNew York , as a part of our renewal rights agreement. In addition to these quota share changes, we also experienced an increase in our ceded earned premiums related to our catastrophe reinsurance agreements of$35,957,000 as we added more coverage to the program. Net investment income attributable to our personal lines operating segment decreased by$6,761,000 , or 43.0%, to$8,962,000 for the year endedDecember 31, 2021 from$15,723,000 for the year endedDecember 31, 2020 . The decrease is driven by a$6,049,000 decrease in income from our fixed maturity investment portfolio as a result of lower yields as well as a decrease in the size of our fixed maturity portfolio in 2021. In addition to this decrease we also experienced lower returns from our equity securities driven by a decrease in our holdings during 2021, causing a$946,000 decrease in net investment income. 41 -------------------------------------------------------------------------------- UNITED INSURANCE HOLDINGS CORP. Net realized investment gains and net unrealized gains (losses) on equity securities attributable to our personal lines operating segment decreased by$17,349,000 , or 76.4%, to a net gain of$5,367,000 for the year endedDecember 31, 2021 from a net gain of$22,716,000 for the year endedDecember 31, 2020 , primarily driven by the disposal of our equity portfolio and the sale and reinvestment of our fixed maturity portfolio in 2020, during a favorable price environment, in efforts to mitigate potential surplus declines from market volatility for each of our insurance subsidiaries.
Expenses
Expenses attributable to our personal lines operating segment for the year endedDecember 31, 2021 decreased$201,862,000 , or 26.5%, to$559,812,000 for the year endedDecember 31, 2021 , from$761,674,000 for the year endedDecember 31, 2020 . The decrease in expenses was primarily due to a decrease in loss and LAE of$148,803,000 , as a result of increased cessions to our core catastrophe and quota share reinsurance programs, as well as a lower frequency of catastrophe activity during 2021. The calculations of our combined loss ratios and underlying loss ratios are shown below. Year ended ($ in thousands) December 31, 2021 2020 Change Net loss and LAE$ 367,416 $ 516,219 $ (148,803) % of Gross earned premiums 36.8 % 50.8 % (14.0) pts % of Net earned premiums 88.2 % 90.5 % (2.3) pts Less: Current year catastrophe losses$ 104,210 $ 269,875 $ (165,665) Prior year reserve unfavorable (favorable) development 32,209 (7,587) 39,796 Underlying loss and LAE (1)$ 230,997 $ 253,931 $ (22,934) % of Gross earned premiums 23.1 % 25.0 % (1.9) pts % of Net earned premiums 55.5 % 44.5 % 11.0 pts (1) Underlying loss and LAE is a non-GAAP financial measure and is reconciled above to net loss and LAE, the most directly comparable GAAP measure. Additional information regarding non-GAAP financial measures presented in this Form 10-K can be found in the "Definitions of Non-GAAP Measures" section, above. The calculations of the Company's personal lines operating segment expense ratios are shown below. Year ended ($ in thousands) December 31, 2021 2020 Change Policy acquisition costs$ 93,376 $ 137,726 $ (44,350) Operating and underwriting 51,004 49,255 1,749 General and administrative 47,927 58,385 (10,458) Total Operating Expenses$ 192,307 $ 245,366 $ (53,059)
% of Gross earned premiums 19.3 % 24.1 % (4.8) pts
% of Net earned premiums 46.2 % 43.0 % 3.2 pts
Loss and LAE attributable to our personal lines operating segment decreased by
$148,803,000 , or 28.8%, to $367,416,000 for the year ended December 31, 2021 ,
from $516,219,000 for the year ended December 31, 2020 . Loss and LAE expense as
a percentage of net earned premiums decreased 2.3 points to 88.2% for the year
ended December 31, 2020 , compared to 90.5% for the year ended December 31, 2020 .
Excluding catastrophe losses and reserve development, our gross underlying loss
and LAE ratio for the year ended December 31, 2021 would have been 23.1%, a
decrease of 1.9 points from 25.0% during the year ended December 31, 2020 .
Policy acquisition costs attributable to our personal lines operating segment
decreased by $44,350,000 , or 32.2%, to $93,376,000 for the year ended
December 31, 2021 , from $137,726,000 for the year ended December 31, 2020 . The
primary driver of the decrease in costs was an increase in ceding commission
income related primarily to our quota share reinsurance agreements of
$28,507,000 . In addition, we also experienced decreases in various other
expenses such as agent commissions and policy admin fees due to decreased
written premiums year over year, as described above.
42
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UNITED INSURANCE HOLDINGS CORP.
Operating and underwriting expenses attributable to our personal lines operating
segment increased by $1,749,000 , or 3.6%, to $51,004,000 for the year ended
December 31, 2021 , from $49,255,000 for the year ended December 31, 2020 ,
primarily due to increased expenses related to our investment in technology of
$6,680,000 , partially offset by a decrease in agent costs of $3,087,000 , driven
by the discontinuation of our agent incentive program in 2021, as well as a
$2,452,000 decrease in underwriting expenses such as inspection costs and
underwriting reports, driven by the decrease in our written premiums in 2021.
General and administrative expenses attributable to our personal lines operating
segment decreased by $10,458,000 , or 17.9%, to $47,927,000 for the year ended
December 31, 2021 , from $58,385,000 for the year ended December 31, 2020 ,
primarily due to decreased salary and benefit related costs of $8,361,000 driven
by an increase in the allocation of claims adjustment payroll related costs to
loss & LAE from general and administrative expenses in 2021.
Commercial Lines Operating Segment Results
Pretax earnings attributable to our commercial lines operating segment for the year endedDecember 31, 2021 increased by$16,073,000 to pretax income of$32,021,000 , compared to pretax income of$15,948,0000 for the year endedDecember 31, 2020 . The increase in pretax earnings was primarily due to a decrease in our loss & LAE expense in 2021 of 37,379,000, driven by increased cessions to our core catastrophe reinsurance program in 2021 compared to 2020 and cessions to our quote share reinsurance agreements which were modified to include ACIC effectiveDecember 31, 2020 . In addition, we also experienced an$18,078,000 decrease in policy acquisition costs, which can be attributed to ceding commission income in 2021 from our quota share agreements. These decreases were offset by a$22,123,000 decrease in net premiums earned in 2021 driven by increased ceded premium earned year over year.
Revenues
Our gross written premiums attributable to our commercial lines operating segment increased by$28,975,000 , or 7.4%, to$422,238,000 for the year endedDecember 31, 2021 , from$393,263,000 for the year endedDecember 31, 2020 , primarily reflecting the impact of rate increases as well as organic growth in renewal business generated. These increases were partially offset by a decrease in assumed premiums of$44,989,000 or 99.3%, due to the termination of a contract which included commercial property business assumed from unaffiliated insurers. The breakdown of the year-over-year changes in both direct and assumed written premiums by state are shown in the table below. Direct Written and Assumed Premium By State 2021 2020 Change Florida$ 413,066 $ 344,289 $ 68,777 Texas 7,409 2,879 4,530 South Carolina 1,447 790 657 Total direct written premium by region$ 421,922 $
347,958
Assumed premium (1) 316
45,305 (44,989)
Total gross written premium by region $ 422,238 $
393,263
(1) Assumed premium written for 2021 and 2020 primarily included commercial
property business assumed from unaffiliated insurers.
New and Renewal Policies(1) By State 2021 2020 Change
Florida 6,131 6,121 10
Texas 99 32 67
South Carolina 30 15 15
Total 6,260 6,168 92
(1) Only includes new and renewal commercial policies written during the year.
Ceded premiums earned attributable to our commercial lines operating segment increased by$42,579,000 or 21.9%, to$237,056,000 for the year endedDecember 31, 2021 from$194,477,000 for the year endedDecember 31, 2020 . The increase is primarily driven by a$61,991,000 increase in ceded premiums earned from adding ACIC to our quota share agreements, offset by a decrease in our catastrophe reinsurance agreements ceded premiums earned of$18,050,000 . EffectiveDecember 31, 2020 , our quota share agreements were modified to increase our ceding percentage and include ACIC. In the prior year we had no ceded premium earned related to quota share reinsurance agreements. 43 -------------------------------------------------------------------------------- UNITED INSURANCE HOLDINGS CORP. Net investment income attributable to our commercial lines operating segment decreased by$3,118,000 , or 39.6%, to$4,764,000 for the year endedDecember 31, 2021 from$7,882,000 for 2020. The decrease is driven by a$2,544,000 decrease in income from our fixed maturity investment portfolio as a result of lower yields, as well as a decrease in the size of our fixed maturity portfolio in 2021. Our equity securities also produced lower returns during the year endedDecember 31, 2021 , driven by a decrease in our holdings during 2021, causing a$219,000 decrease in net investment income. Net realized investment gains and net unrealized gains (losses) on equity securities attributable to our commercial lines operating segment decreased by$12,817,000 , or 89.9%, to a net gain of$1,437,000 for the year endedDecember 31, 2021 from a net gain of$14,254,000 for 2020, primarily driven by the disposal of our equity portfolio and the sale and reinvestment of our fixed maturity portfolio in 2020, during a favorable price environment, in an effort to mitigate potential surplus declines from market volatility for each of our insurance subsidiaries. Expenses Expenses attributable to our commercial lines operating segment for the year endedDecember 31, 2021 decreased$54,138,000 , or 26.9%, to$147,388,000 for the year endedDecember 31, 2021 , from$201,526,000 for the year endedDecember 31, 2020 . The decrease in expenses was primarily due to a decrease in loss and LAE as a result of increased cessions in 2021 to our core catastrophe reinsurance program and cessions to our quote share reinsurance agreements which were modified to include ACIC effectiveDecember 31, 2020 . In addition, we also experienced a lower frequency of catastrophe activity during 2021. The calculations of our combined loss ratios and underlying loss ratios are shown below. Year ended ($ in thousands) December 31, 2021 2020 Change Net loss and LAE$ 54,718 $ 92,097 $ (37,379) % of Gross earned premiums 13.3 % 23.6 % (10.3) pts % of Net earned premiums 31.6 % 47.1 % (15.5) pts Less: Current year catastrophe losses$ 9,530 $ 24,662 $ (15,132) Prior year reserve favorable development (4,353) 801 (5,154) Underlying loss and LAE (1)$ 49,541 $ 66,634 $ (17,093) % of Gross earned premiums 12.1 % 17.1 % (5.0) pts % of Net earned premiums 28.6 % 34.1 % (5.5) pts (1) Underlying loss and LAE is a non-GAAP financial measure and is reconciled above to net loss and LAE, the most directly comparable GAAP measure. Additional information regarding non-GAAP financial measures presented in this Form 10-K can be found in the "Definitions of Non-GAAP Measures" section, above. The calculations of the Company's commercial lines operating segment expense ratios are shown below. Year ended ($ in thousands) December 31, 2021 2020 Change Policy acquisition costs$ 80,198 $ 98,276 $ (18,078) Operating and underwriting 4,873 3,440 1,433 General and administrative 7,599 7,685 (86) Total Operating Expenses$ 92,670 $ 109,401 $ (16,731) % of Gross earned premiums 22.6 % 28.1 % (5.5) pts % of Net earned premiums 53.5 % 56.0 % (2.5) pts Loss and LAE attributable to our commercial lines operating segment decreased by$37,379,000 , or 40.6%, to$54,718,000 for the year endedDecember 31, 2021 , from$92,097,000 for the year endedDecember 31, 2020 . Loss and LAE expense as a percentage of net earned premiums decreased 15.5 points to 31.6% for the year endedDecember 31, 2021 , compared to 47.1% for the year endedDecember 31, 2020 . Excluding catastrophe losses and reserve development, our gross underlying loss and LAE ratio for the year endedDecember 31, 2021 would have been 12.1%, a decrease of 5.0 points from 17.1% during the year endedDecember 31, 2020 . 44 -------------------------------------------------------------------------------- UNITED INSURANCE HOLDINGS CORP. Policy acquisition costs attributable to our commercial lines operating segment decreased by$18,078,000 , or 18.4%, to$80,198,000 for the year endedDecember 31, 2021 , from$98,276,000 for the year endedDecember 31, 2020 . The primary driver of the decrease in costs was an increase of$24,159,000 in ceding commission income related to our quota share reinsurance agreements. In addition, we experienced a decrease in ceding commission expenses related to our assumed premiums of$11,053,000 in 2021. This was offset by an increase in our external management fees paid of$18,606,000 as a result of increased written premium in 2021. Operating and underwriting expenses attributable to our commercial lines operating segment increased by$1,433,000 , or 41.7%, to$4,873,000 for the year endedDecember 31, 2021 , from$3,440,000 for the year endedDecember 31, 2020 , primarily due to increased expenses related to our investment in technology of$1,226,000 . General and administrative expenses attributable to our commercial lines operating segment remained relatively flat, decreasing by$86,000 , or 1.1%, to$7,599,000 for the year endedDecember 31, 2021 , from$7,685,000 for the year endedDecember 31, 2020 . 45
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UNITED INSURANCE HOLDINGS CORP.
ANALYSIS OF FINANCIAL CONDITION
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our accompanying consolidated
financial statements and related notes in Part II, Item 8 in this Form 10-K.
Investments
The primary goals of our investment strategy are to preserve capital, maximize after-tax investment income, maintain liquidity and minimize risk. To accomplish our goals, we purchase debt securities in sectors that represent the most attractive relative value, and we maintain a moderate equity exposure. Limiting equity exposure manages risks and helps to preserve capital for two reasons: first, bond market returns are less volatile than stock market returns, and second, should the bond issuer enter bankruptcy liquidation, bondholders generally have a higher priority than equity holders in a bankruptcy proceeding. Our investment strategy is the same for both our personal lines and commercial lines operating segments. We must comply with applicable state insurance regulations that prescribe the type, quality and concentrations of investments our insurance subsidiaries can make; therefore, our current investment policy limits investment in non-investment-grade fixed maturities and limits total investment amounts in preferred stock, common stock and mortgage notes receivable. We do not invest in derivative securities.
Two outside asset management companies, which have authority and discretion to
buy and sell securities for us, manage our investments subject to (i) the
guidelines established by our Board of Directors and (ii) the direction of
management. The Investment Committee of our Board of Directors reviews and
approves our investment policy on a regular basis.
Our cash and investment portfolios totaled
compared to
The following table summarizes our investments, by type:
December 31, 2021
Estimated Fair Percent of
Estimated Fair Percent of
Value Total Value Total
U.S. government and agency
securities $ 49,340 5.1 % $ 130,425 10.1 %
Foreign governments 3,459 0.4 % 1,516 0.1 %
States, municipalities and
political subdivisions 79,896 8.3 % 134,382 10.4 %
Public utilities 25,457 2.6 % 29,980 2.3 %
Corporate securities 244,443 25.3 % 292,329 22.4 %
Mortgage-backed securities 186,740 19.4 % 288,212 22.2 %
Asset-backed securities 70,162 7.3 % 56,657 4.4 %
Redeemable preferred stocks 4,105 0.4 % 6,510 0.5 %
Total fixed maturities 663,602 68.8 % 940,011 72.4 %
Mutual fund 33,064 3.4 % 152 - %
Non-redeemable preferred
stocks 4,894 0.5 % 7,293 0.6 %
Total equity securities 37,958 3.9 % 7,445 0.6 %
Other investments 18,006 1.9 % 47,595 3.7 %
Total investments 719,566 74.6 % 995,051 76.7 %
Cash and cash equivalents 212,024 22.0 % 239,420 18.5 %
Restricted cash 33,254 3.4 % 62,078 4.8 %
Total cash, cash equivalents,
restricted cash and
investments $ 964,844 100.0 % $ 1,296,549 100.0 %
We classify all of our investments as available-for-sale. Our investments at
December 31, 2021 and 2020 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 in 2021 and 2020 consisted mainly of securities issued by companies in
the financial, utilities and industrial sectors or mutual funds. Most of the
corporate bonds we hold reflected a similar diversification. At December 31,
2021 , approximately 83.2% of our fixed maturities were U.S. Treasuries, or
corporate bonds rated "A" or better, and 16.8% were corporate bonds rated "BBB"
or "BB".
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UNITED INSURANCE HOLDINGS CORP.
The most significant impact of COVID-19 on our business occurred during the year
ended December 31, 2020 , where we saw fluctuations in our investment portfolio
due to volatility in the equity securities markets that we were unable to
predict. During the second half of the year ended December 31, 2020 , we
decreased our equity portfolio from 9.1% of our total invested assets (including
cash, restricted cash and cash equivalents) at June 30, 2020 to 0.6% of our
total invested assets (including cash, restricted cash and cash equivalents) at
December 31, 2020 . As a result of this decrease, we experienced a decreased
impact from fluctuations in the equity securities markets on our financial
statements for the second half of the year ended December 31, 2020 . In the first
quarter of 2021, we began to increase our investments in the equities market.
Management is working closely with our investment managers to monitor the
fluctuations in the markets and the corresponding impact to our portfolios.
Reinsurance
We follow industry practice of reinsuring a portion of our risks. Reinsurance involves transferring, or "ceding", all or a portion of the risk exposure on policies we write to another insurer, known as a reinsurer. To the extent that our reinsurers are unable to meet the obligations they assume under our reinsurance agreements, we remain primarily liable for the entire insured loss under the policies we write. Our reinsurance program is designed, utilizing our risk management methodology, to address our exposure to catastrophes. According to the Insurance Service Office (ISO), a catastrophe loss is defined as a single unpredictable incident or series of closely related incidents that result in$25,000,000 or more inU.S. industry-wide direct insured losses to property and that affect a significant number of policyholders and insurers (ISO catastrophes). In addition to ISO catastrophes, we also include as catastrophes those events (non-ISO catastrophes), which may include losses, that we believe are, or will be, material to our operations which we define as incidents that result in$1,000,000 or more in losses for multiple policyholders. EffectiveDecember 31, 2021 , we entered into a structured quota share agreement. This structured quota share reinsurance agreement has a cession rate of 25% and covers UPC and FSIC's non-catastrophe losses on policies in-force on the effective date of the agreement. EffectiveDecember 31, 2021 , we entered into a quota share reinsurance agreement with HCPCI. Under the terms of this agreement, we will cede 85% of our in-force, new, and renewal policies in the states ofGeorgia ,North Carolina andSouth Carolina . As a result, our 8% quota share agreement was modified to exclude these states, effectiveDecember 31, 2021 . EffectiveDecember 13, 2021 , we renewed our all other perils (AOP) catastrophe excess of loss agreement. The agreement provides protection from catastrophe loss events other than named windstorms and earthquakes up to$110,000,000 . During the year endedDecember 31, 2021 , we ceded$91,223,000 under the contract period effectiveJanuary 1, 2021 throughDecember 31, 2021 . EffectiveJune 1, 2021 , we entered into a quote share reinsurance agreement with HCPCI and TypTap. Under the terms of this agreement, we will cede 100% of our in-force, new, and renewal policies in the states ofConnecticut ,New Jersey ,Massachusetts , andRhode Island . The cession of these policies is 50% to HCPCI and 50% to TypTap. As a result, our 15% quota share and excess of loss agreements were modified to exclude policies in these states effectiveJune 1, 2021 . As the transfer of states is completed, the quota share coverage for the transitioned state will no longer be in effect. During the second quarter of 2021, we placed our reinsurance program for the 2021 hurricane season. We purchased catastrophe excess of loss reinsurance protection of$2,900,000,000 . The treaties reinsure personal and commercial lines property excess catastrophe losses caused by multiple perils including hurricanes and tropical storms. The agreements were effective as ofJune 1, 2021 , for a one-year term and incorporate the mandatory coverage required by and placed with theFlorida Hurricane Catastrophe Fund (FHCF). The FHCF coversFlorida risks only and we participate at 90%. Under our core catastrophe excess of loss treaty and excess of loss aggregate treaty, retention on a first and second event is$15,000,000 each and retention on subsequent events total$1,000,000 , resulting in a maximum retention of$31,000,000 . Retentions for JIC are$4,000,000 for a first event and$1,000,000 for subsequent events, covering all perils. Retention for IIC is$3,000,000 per occurrence, covering all perils. EffectiveDecember 31, 2020 , we extended our quota share agreement that was set to expire onMay 31, 2021 . This quota share reinsurance agreement had a cession rate of 15% and 7.5% for all subject business and provides coverage for all catastrophe perils and attritional losses. The cession rate is comprised of a quota share cession of 15% which was renewed throughMay 31, 2022 , which covers UPC, FSIC, and ACIC, a quota share cession of 8% which was renewed effectiveDecember 31, 2021 throughDecember 31, 2022 , with the remaining 7.5% covering UPC and FSIC only, which was 47 -------------------------------------------------------------------------------- UNITED INSURANCE HOLDINGS CORP.
nonrenewed at
agreements provide ground-up protection effectively reducing our retention for
catastrophe losses.
In addition, effectiveJune 1, 2021 our quota share agreements were modified to exclude policies inNew York . This modification was made as the result of our 100% internal quota share agreement, effectiveJune 1, 2021 , which cedes 100% of UPC's in-force, new, and renewal policies in the state ofNew York to our subsidiary, IIC. EffectiveDecember 31, 2020 , we entered into a quota share reinsurance agreement with HCPCI, effective as ofDecember 31, 2020 . According to the terms of this reinsurance contract,UPC Insurance ceded and HCPCI assumed a 69.5% quota share of our personal lines homeowners business inConnecticut ,Massachusetts ,New Jersey , andRhode Island on an in-force, new and renewal basis for the period fromDecember 31, 2020 throughMay 31, 2021 . This agreement was replaced by the 100% quota share agreement with HCPCI and TypTap.
Reinsurance costs as a percent of gross earned premium during the years ended
2021 2020
Non-at-Risk (2.1) % (2.4) %
Quota Share (24.8) % (13.1) %
All Other (31.3) % (30.1) %
Total Ceding Ratio (58.2) % (45.6) %
Reinsurance costs as a percent of gross earned premium for our commercial lines
and personal lines operating segments during the years ended December 31, 2021
and 2020 were as follows:
Personal Commercial
2021 2020 2021 2020
Non-at-Risk (2.9) % (3.1) % (0.2) % (0.6) %
Quota Share (28.7) % (18.2) % (15.1) % - %
All Other (26.7) % (22.6) % (42.5) % (49.3) %
Total Ceding Ratio (58.3) % (43.9) % (57.8) % (49.9) %
Please note that the sum of the percentages above will not reconcile to the
consolidated percentages as they are calculated using each operating segments'
gross earned premium rather than our consolidated gross earned premium.
We amortize our ceded unearned premiums over the annual agreement period, and we
record that amortization in ceded premiums earned on our Consolidated Statements
of Comprehensive Loss. The table below summarizes the amounts of our ceded
premiums written under the various types of agreements, as well as the
amortization of ceded unearned premiums:
Year Ended December 31,
2021 2020 2019
Quota Share $ (294,570) $ (306,331) $ (174,147)
Excess-of-loss (545,128) (412,220) (424,622)
Equipment, identity theft, and cyber security
(1) (1,562)
(13,801) (13,379)
Flood and inland flood (1) (23,465)
(23,517) (21,127)
Ceded premiums written$ (864,725)
Change in ceded unearned premiums 46,043
114,552 52,149
Ceded premiums earned$ (818,682)
(1) We began writing cyber security and inland flood policies in 2020.
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UNITED INSURANCE HOLDINGS CORP.
The breakdown of our ceded premiums written under the various types of
agreements, as well as the amortization of ceded unearned premiums for our
commercial lines and personal lines operating segments can be seen in the tables
below. These values can be reconciled to the table above.
Personal Lines Operating Segment
Year Ended December 31,
2021 2020 2019
Quota Share $ (219,293) $ (284,886) $ (174,147)
Excess-of-loss (373,419) (222,107) (233,575)
Equipment, identity theft, and cyber security (1) (811) (11,724) (11,036)
Flood and inland flood (1) (23,465) (23,517) (21,128)
Ceded premiums written
Change in ceded unearned premiums
35,362 95,394 35,614 Ceded premiums earned
(1) We began writing cyber security and inland flood policies in 2020.
Commercial Lines Operating Segment Impact
Year Ended December 31,
2021 2020 2019
Quota Share $ (75,277) $ (21,445) $ -
Excess-of-loss (171,709) (190,113) (191,047)
Equipment, identity theft, and cyber security (1) (751) (2,077) (2,342)
Ceded premiums written
Change in ceded unearned premiums
10,681 19,158 16,535 Ceded premiums earned
(1) We began writing cyber security in 2020.
49
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UNITED INSURANCE HOLDINGS CORP.
Current year catastrophe losses disaggregated between named and numbered storms
and all other catastrophe loss events are shown in the following table.
Incurred Loss and
Loss adjustment
Number of Events expense (LAE) (1) Combined Ratio Impact
December 31, 2021
Current period catastrophe losses
incurred
Named and numbered storms 7 $ 35,872 6.1 %
All other catastrophe loss events 40 77,868 13.2 %
Total 47 $ 113,740 19.3 %
December 31, 2020
Current period catastrophe losses
incurred
Named and numbered storms 13 $ 208,157 27.2 %
All other catastrophe loss events 35 86,380 11.3 %
Total 48 $ 294,537 38.5 %
December 31, 2019
Current period catastrophe losses
incurred
Named and numbered storms 5 $ 32,170 4.3 %
All other catastrophe loss events 32 64,705 8.6 %
Total 37 $ 96,875 12.9 %
(1) Incurred loss and LAE is equal to losses and LAE paid plus the change in
case and incurred but not reported reserves. Shown net of losses ceded to
reinsurers. Incurred loss and LAE and number of events includes the development
on storms during the year in which it occurred.
The impact of the current year catastrophes to our commercial lines and personal
lines operating segments can be seen in the table below. Please note that the
catastrophe events may have impacted both operating segments. As a result, the
sum of the number of events in the tables below will not reconcile to the
consolidated number of events above. In addition, the combined ratio impact is
calculated and sum of the ratios in the tables below will not reconcile to the
ratios above.
50
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UNITED INSURANCE HOLDINGS CORP.
Personal Lines Operating Segment Impact
Incurred Loss and
Loss adjustment
Number of Events expense (LAE) (1) Combined Ratio Impact
December 31, 2021
Current period catastrophe losses
incurred
Named and numbered storms 7 $ 35,715 8.6 %
All other catastrophe loss events 40 68,495 16.4 %
Total 47 $ 104,210 25.0 %
December 31, 2020
Current period catastrophe losses
incurred
Named and numbered storms 13 $ 191,473 33.6 %
All other catastrophe loss events 33 78,402 13.7 %
Total 46 $ 269,875 47.3 %
December 31, 2019
Current period catastrophe losses
incurred
Named and numbered storms 5 $ 29,477 5.5 %
All other catastrophe loss events 32 48,217 9.1 %
Total 37 $ 77,694 14.6 %
(1) Incurred loss and LAE is equal to losses and LAE paid plus the change in
case and incurred but not reported reserves. Shown net of losses ceded to
reinsurers. Incurred loss and LAE and number of events includes the development
on storms during the year in which it occurred.
51
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UNITED INSURANCE HOLDINGS CORP.
Commercial Lines Operating Segment Impact
Incurred Loss and Loss
adjustment expense
Number of Events (LAE) (1) Combined Ratio Impact
December 31, 2021
Current period catastrophe losses
incurred
Named and numbered storms 4 $ 158 0.1 %
All other catastrophe loss events 4 9,372 5.4 %
Total 8 $ 9,530 5.5 %
December 31, 2020
Current period catastrophe losses
incurred
Named and numbered storms 8 $ 16,684 8.5 %
All other catastrophe loss events 9 7,978 4.1 %
Total 17 $ 24,662 12.6 %
December 31, 2019
Current period catastrophe losses
incurred
Named and numbered storms 1 $ 2,693 1.2 %
All other catastrophe loss events 3 16,488 7.5 %
Total 4 $ 19,181 8.7 %
(1) Incurred loss and LAE is equal to losses and LAE paid plus the change in
case and incurred but not reported reserves. Shown net of losses ceded to
reinsurers. Incurred loss and LAE and number of events includes the development
on storms during the year in which it occurred.
See Note 9 in our Notes to Consolidated Financial Statements for additional
information regarding our reinsurance program.
Unpaid Losses and Loss Adjustments
We generally use the term "loss(es)" to collectively refer to both loss and LAE. We establish reserves for both reported and unreported unpaid losses that have occurred at or before the balance sheet date for amounts we estimate we will be required to pay in the future, including provisions for claims that have been reported but are unpaid at the balance sheet date and for obligations on claims that have been incurred but not reported at the balance sheet date. Our policy is to establish these loss reserves after considering all information known to us at each reporting period. At any given point in time, our loss reserve represents our best estimate of the ultimate settlement and administration costs of our insured claims incurred and unpaid. Unpaid losses and LAE totaled$1,084,450,000 and$1,089,966,000 as ofDecember 31, 2021 and 2020, respectively. Of this total,$230,377,000 and$349,882,000 is related to our commercial lines operating segment, respectively. The remaining$854,073,000 and$740,084,000 is related to our personal lines operating segment, respectively. On a consolidated basis, this balance has remained relatively flat year over year, despite decreased current year catastrophe losses incurred in 2021, driven by a decrease in the frequency of catastrophe activity in 2021. This decrease in activity is offset by the increase in severity of current year losses, driven primarily by Hurricane Ida which made landfall in the third quarter of 2021. Despite unpaid losses and LAE remaining flat year over year, we have seen an increase in our reinsurance recoverables year over year due to the decrease in our core catastrophe reinsurance program's retention levels in 2021 and our increase in quota share cessions in 2021.. Since the process of estimating loss reserves requires significant judgment due to a number of variables, such as fluctuations in inflation, judicial decisions, legislative changes and changes in claims handling procedures, our ultimate liability will likely differ from these estimates. We revise our reserve for unpaid losses as additional information becomes available, and reflect adjustments, if any, in our earnings in the periods in which we determine the adjustments as necessary.
See Note 10 in our Notes to Consolidated Financial Statements for additional
information regarding our losses and LAE.
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UNITED INSURANCE HOLDINGS CORP.
LIQUIDITY AND CAPITAL RESOURCES
We generate cash through premium collections, reinsurance recoveries, investment income, the sale or maturity of invested assets, the issuance of debt and the issuance of additional shares of our stock. We use our cash to pay reinsurance premiums, claims and related costs, policy acquisition costs, salaries and employee benefits, other expenses and stockholder dividends, acquire subsidiaries and pay associated costs, as well as to repay debts and purchase investments. As a holding company, we do not conduct any business operations of our own and, as a result, we rely on cash dividends or intercompany loans from our management subsidiaries to pay our general and administrative expenses. Insurance regulatory authorities heavily regulate our insurance subsidiaries, including restricting any dividends paid by our insurance subsidiaries and requiring approval of any management fees our insurance subsidiaries pay to our management subsidiaries for services rendered; however, nothing restricts our non-insurance company subsidiaries from paying us dividends other than state corporate laws regarding solvency. Our management subsidiaries pay us dividends primarily using cash from the collection of management fees from our insurance subsidiaries, pursuant to the management agreements in effect between those entities. In accordance with state laws, our insurance subsidiaries may pay dividends or make distributions out of that part of their statutory surplus derived from their net operating profit and their net realized capital gains. The RBC guidelines published by the NAIC may further restrict our insurance subsidiaries' ability to pay dividends or make distributions if the amount of the intended dividend or distribution would cause their respective surplus as it regards policyholders to fall below minimum RBC guidelines. See Note 15 in our Notes to Consolidated Financial Statements and Part II, Item 5 for additional information. During the year endedDecember 31, 2021 , we contributed$17,000,000 ,$8,000,000 and$17,500,000 to our insurance subsidiaries, UPC, FSIC, and ACIC, respectively. During the year endedDecember 31, 2020 , we contributed$12,000,000 and$3,000,000 to our insurance subsidiary, UPC, and reinsurance subsidiary, UPC Re, respectively. We may make future contributions of capital to our insurance subsidiaries as circumstances require. DuringFebruary 2021 , we received a dividend of$3,500,000 from IIC. DuringFebruary 2020 , we received a dividend of$12,000,000 from IIC. DuringAugust 2019 , we received a dividend of$13,579,000 from our insurance subsidiary ACIC. In 2019, the$1,764,000 dividend paid by IIC in 2018 was returned by UIHC. OnDecember 13, 2017 , we issued$150,000,000 of senior notes (Senior Notes) that will mature onDecember 15, 2027 and bear interest at a rate equal to 6.25% per annum payable semi-annually on eachJune 15 andDecember 15 , commencingJune 15, 2018 . The Senior Notes are senior unsecured obligations of the Company. We may redeem the Senior Notes at our option, at any time and from time to time in whole or in part, at a redemption price equal to the greater of (i) 100% of the principal amount of the Senior Notes to be redeemed and (ii) the sum of the present values of the remaining scheduled payments of principal and interest thereon from the date of redemption to the date that is three months prior to maturity. On and after that date, we may redeem the Senior Notes at par. As a result of claim activity from the current and prior years, we have an obligation related to the unpaid policyholder losses and unpaid loss adjustment expenses associated with the settling of these claims. As ofDecember 31, 2021 , our total obligation related to these claim payments was$1,084,450,000 , of which we estimate$608,615,000 to be short-term in nature (due in less than twelve months), based upon our cumulative claims paid over the last 21 years. While we believe that historical performance of loss payment patterns is a reasonable source for projecting future claim payments, there is inherent uncertainty in this estimated projected settlement, and as a result these estimates will differ, perhaps significantly, from actual future payments. In addition to our unpaid loss and loss adjustment expenses, as ofDecember 31, 2021 we have outstanding debt obligations related to our notes payable totaling$158,559,000 . This is exclusive of interest costs, which we estimate will total$65,629,000 over the life of the debt, based on the current fixed and variable interest rates of these notes. Our short-term obligation related to these notes payable total$1,523,000 in principal payments and$9,506,000 in estimated interest payments. For more information regarding these outstanding notes, please see Note 11 . In connection with entering into contracts with our outside vendors, we have minimum obligations due to our vendors over the life of the contracts. Our main vendor obligations are related to underwriting tools, claims and policy administration systems, and software used by our information technology department in their daily operations. Our total obligation related to these three categories of obligations are$2,370,000 ,$8,031,000 , and$6,250,000 , respectively. Of these obligations,$1,257,000 ,$5,940,000 , and$1,250,000 , respectively are short-term in nature. 53 --------------------------------------------------------------------------------
UNITED INSURANCE HOLDINGS CORP.
Cash Flows for the Year Ended
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Operating Activities
The principal cash inflows from our operating activities come from premium collections, reinsurance recoveries and investment income. The principal cash outflows from our operating activities are the result of claims and related costs, reinsurance premiums, policy acquisition costs and salaries and employee benefits. A primary liquidity concern with respect to these cash flows is the risk of large magnitude catastrophe events. During the year endedDecember 31, 2021 , several balance sheet items were impacted by our increased reinsurance coverage entered into at the end of 2020 and in 2021. Reinsurance recoverable on paid and unpaid losses increased during the period, driven by our increased ceding on catastrophe losses related primarily to Hurricane Ida and increased quota share cessions. Ceded unearned premiums also increased, driven by the increase in ceded written premiums associated with these additional agreements. In addition to these items, we also saw a decrease in our unearned premium balance atDecember 31, 2021 , driven by our decreased personal lines written premium in 2021 as the result of underwriting actions taken by the Company at the end of 2020 and throughout 2021.
Investing Activities
The principal cash inflows from our investing activities come from repayments of principal, proceeds from maturities and sales of investments. We closely monitor and manage these risks through our comprehensive investment risk management process. The principal cash outflows relate to purchases of investments and cost of property, equipment and capitalized software acquired. Additional cash outflows relate to the purchase of fixed assets. The primary liquidity concerns with respect to these cash flows are the risk of default by debtors and market disruption. During the year endedDecember 31, 2021 , cash provided by investing activities increased$214,811,000 as the result of net sales of investments totaling$256,648,000 in 2021, compared to$47,414,000 in 2020.
Financing Activities
The principal cash inflows from our financing activities come from issuances of debt and other securities. The principal cash outflows come from repayments of debt and payments of dividends. The primary liquidity concern with respect to these cash flows is market disruption in the cost and availability of credit. We believe our current capital resources, together with cash provided from our operations, are sufficient to meet currently anticipated working capital requirements. During the year endedDecember 31, 2021 , cash used in financing activities increased by$552,000 due to a$588,000 increase year over year in cash outflows related to our repayment of our outstanding debt, offset by a$73,000 decrease year over year in our tax withholding payments related to the net settlement of equity awards. 54 -------------------------------------------------------------------------------- UNITED INSURANCE HOLDINGS CORP.
RECENT ACCOUNTING STANDARDS
Please refer to Note 2(v) in our Notes to Consolidated Financial Statements
for a discussion of recent accounting standards that may affect us.
APPLICATION OF CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with GAAP requires
management to adopt accounting policies and make estimates and assumptions that
affect amounts reported in the consolidated financial statements. The most
critical estimates include those used in determining:
•reserves for unpaid losses,
•fair value of investments,
•investment portfolio credit allowances, and
•goodwill.
In making these determinations, management makes subjective and complex judgments that frequently require estimates about matters that are inherently uncertain. Many of these policies, estimates and related judgments are common in the insurance industry. It is reasonably likely that changes in these estimates could occur from time to time and result in a material impact on our consolidated financial statements. In addition, the preparation of our financial statements in accordance with GAAP prescribes when we may reserve for particular risks, including litigation exposures. Accordingly, our results for a given reporting period could be significantly affected if and when we establish a reserve for a major contingency. Therefore, the results we report in certain accounting periods may appear to be volatile and past results may not be indicative of results in future periods.
Reserves for Unpaid Losses and LAE
Reserves for unpaid losses and LAE represent the most significant accounting estimate inherent in the preparation of our financial statements. These reserves represent management's best estimate of the amount we will ultimately pay for losses and we base the amount upon the application of various actuarial reserve estimation techniques as well as considering other material facts and circumstances known at the balance sheet date. As discussed in Note 10 in our Notes to Consolidated Financial Statements, we determine our ultimate losses by using multiple actuarial methods to determine an actuarial estimate within a relevant range of indications that we calculate using generally accepted actuarial techniques. Our selection of the actuarial estimate is influenced by the analysis of our historical loss and claims experience since inception. For each accident year, we estimate the ultimate incurred losses for both reported and unreported claims. In establishing this estimate, we reviewed the results of various actuarial methods discussed in Note 10 in our Notes to Consolidated Financial Statements.
Fair Value of Investments
Fair value is defined as the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market
participants at the measurement date. We are responsible for the determination
of fair value of financial assets and the supporting assumptions and
methodologies. We use quoted prices from active markets and we use an
independent third-party valuation service to assist us in determining fair
value. We obtain only one single quote or price for each financial instrument.
As discussed in Note 4 in our Notes to Consolidated Financial
Statements, we value our investments at fair value using quoted prices from
active markets, to the extent available. For securities for which quoted prices
in active markets are unavailable, we use observable inputs such as quoted
prices in inactive markets, quoted prices in active markets for similar
instruments, benchmark interest rates, broker quotes and other relevant inputs.
We also have investments in limited partnerships that require us to use the net
asset value per share method of valuation to determine fair value.
See "Item 7a. Quantitative and Qualitative Disclosures about Market Risk" for
more information regarding the sensitivity of our fixed maturity portfolio to
changes in interest rates.
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UNITED INSURANCE HOLDINGS CORP.
Investment Portfolio Credit Allowances
For investments classified as available for sale, the difference between fair value and cost or amortized cost for fixed income securities is reported as a component of accumulated other comprehensive income (loss) on our Consolidated Balance Sheet and is not reflected in our net income (loss) of any period until reclassified to net income (loss) upon the consummation of a transaction with an unrelated third party. We have a portfolio monitoring process to identify and evaluate each fixed income security whose carrying value may be impaired as the result of a credit loss. For each fixed-income security in an unrealized loss position, if we determine that we intend to sell the security or that it is more likely than not that we will be required to sell the security before recovery of the cost or amortized cost basis for reasons such as liquidity needs, contractual or regulatory requirements, the security's entire decline in fair value is recorded in earnings. If our management decides not to sell the fixed-income security and it is more likely than not that we will not be required to sell the fixed-income security before recovery of its amortized cost basis, we evaluate whether the decline in fair value has resulted from credit losses or other factors. This is typically indicated by a change in the rating of the security assigned by a rating agency, and any adverse conditions specifically related to the security or industry, among other factors. If the assessment indicates that a credit loss may exist, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses will be recorded in earnings. Credit loss is limited to the difference between a security's amortized cost basis and its fair value. Any additional impairment not recorded through an allowance for credit losses is recognized in other comprehensive income. If the estimated recovery value is less than the amortized cost of the security, a credit loss exists and an allowance for the difference between the estimated recovery value and amortized cost is recorded in earnings. The portion of the unrealized loss related to factors other than credit remains classified in accumulated other comprehensive income (loss). If we determine that the fixed income security does not have sufficient cash flow or other information to estimate a recovery value for the security, we may conclude that the entire decline in fair value is deemed to be credit related and the loss is recorded in earnings. Due to the adoption of Accounting Standards Update (ASU) 2016-01 (ASU 2016-01) as ofJanuary 1, 2018 , equity securities are reported at fair value with changes in fair value, including impairment write-downs, being recognized in the revenue section of our Consolidated Statements of Comprehensive Loss.
See Note 2(b) in our Notes to Consolidated Financial Statements for further
information regarding our credit loss testing.
Measurement of
Goodwill is the excess of cost over the estimated fair value of net assets acquired.Goodwill is not amortized but is tested for impairment at least annually or more frequently if events or circumstances, such as adverse changes in the business climate, indicate that there may be justification for conducting an interim test. We test goodwill for impairment by performing a qualitative assessment. If the assessment indicates that an impairment may exist, a quantitative assessment is performed.Goodwill is impaired when it is determined that the carrying value of a reporting unit is in excess of the fair value of that reporting unit. The valuation methodologies utilized are subject to key judgments and assumptions that are sensitive to change. Estimates of fair value are inherently uncertain and represent only management's reasonable expectation regarding future developments.
Please refer to Note 2(k) and Note 8 in our Notes to Consolidated
Financial Statements for further information regarding our measurement of
RELATED PARTY TRANSACTIONS
Please refer to Note 16 in our Notes to Consolidated Financial Statements
for a discussion of our related party transactions.
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UNITED INSURANCE HOLDINGS CORP.
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